Rapidly Rising Grain Prices
Arriving and departing commercial shipping in the Black Sea has come to a halt due to Russian military operations in port cities through which 90% of Ukraine’s agricultural products are shipped. This present-day nightmare scenario was articulated in my SA article entitled Buy Opportunities with Tightening Global Agriculture Markets published on 19 February 2022 less than a week before the Russian invasion and before grain prices rose dramatically. Furthermore, according to the IMF and well before the Russian invasion in late February, wheat prices had already increased by 80% from April 2020 through December 2021.
Undervalued Grain Prices | Buying Opportunities Still Abound
For those investors who may be suffering the condition of “fear of missing out” of not purchasing far lower pre-invasion grain prices, I believe that the bull run has just begun and that there is considerable near-to-medium term upward movement as the Russians intensify their “all in” invasion efforts.
The Russo-Ukrainian war has profoundly impacted energy prices because Russia is a major energy provider to Europe. However natural gas supplies continue to flow to European countries through Russian and Ukrainian pipelines with increasing energy prices reflecting the risk of supply reductions.
On the other hand, agricultural maritime exports from Ukraine through the Black Sea have halted while draconian sanctions against Russia prevent the purchase and export of Russian agricultural products.
Since the start of the invasion the rise in energy and grain prices have generally moved in tandem. However I believe that grain prices are lagging far behind the actual risk and present a brief buying opportunity window.
Major container companies, notably the largest ones like A.P. Moller Maersk and Mediterranean Shipping, have temporarily suspended service to Russian and Ukrainian ports. Russia’s invasion of Ukraine’s southern region has resulted in damage to port infrastructure. Furthermore, maritime freight and insurance rates have increased as several vessels came under attack by Russian naval fire creating an economically unviable hot zone.
With respect to wheat, Teucrium Wheat ETF (WEAT) has provided robust returns since the start of the war and continues to provide an excellent investment opportunity.
The Global Food Security Perspective
This section will review the present-day and near-future dynamics with respect to an ever-shrinking global inventory and crop yield for grains.
According to Reuters the total grain exports of Russia and Ukraine represent 29% of global exports. The following chart entitled Ukraine Crisis Likely to Push Up Wheat Prices provided by the UN Comtrade Database presents a visual with respect to the world’s largest wheat exporters.
China’s Insatiable Grain Purchases
An important fact to consider is that China and India, each with a population of 1.4 billion, are the leading grain producers yet most of these grains are consumed domestically.
The enormity of China’s production is articulated in the following chart entitled King of Crops: China’s Gigantic Agricultural Production provided by the US Department of Agriculture.
According to Reuters, in 2019 Ukraine surpassed Russia in becoming China’s trading partner with an 80% increase from 2013, the largest importer of barley and purchaser of 30% of its corn production.
Despite China’s prodigious production they face two huge threats that have degraded their ability to feed their population through domestic crop production which is directly correlated like most emerging countries to internal security controls.
Michael Beckley, author of the upcoming book “Danger Zone: The Coming Conflict with China,” describes two threats that explains China’s increasing needs for grain imports:
- The first threat is the rampant commercial development and poor environmental planning over the decades that has eliminated 40% of China’s arable land.
- The second threat is that China is severely water-stressed and present-day has a per capita freshwater availability equal to that of Saudi Arabia.
2022 Projections | Declining Inventory & Crop Yields
Data from S&P Global Platts provides a sobering trend that forecasts a dramatically tightening agricultural market.
Production for Exports 2022
(in metric tons)
Russia and Ukraine
According to the US Department of Agriculture (USDA) February 2022 reports for 2019/2020, in the section entitled World and US Supply Use for Grains, US and world wheat ending stocks (the remaining inventory after a crop year) was 296.54 metric tons. Their projection for 2022 is 278.21 metric tons, a decline of 6.2% which did not factor in the Russian invasion of Ukraine which took place later in the month.
Underscoring the criticality of the source of agricultural products, the US exports are less than half of Russia and Ukraine. This means that the US (and its allies) are unable to come close in making up the shortfall to highly dependent clients of Russian and Ukrainian grain exports.
Another measure of upcoming severity of a global grin shortage is provided by the Food and Agriculture Organization whose “stocks-to-use ratio” 2022 forecast for wheat demand is 28.7% vs. 31.9%. 4 years ago.
The agricultural industry stocks-to-use formula uses data provided by the USDA to calculate the stocks-to-use ratio; “take the ending stock number, and then divide that by the total demand usage number which can then be expressed as a percentage.”
Each crop has its established normal stocks-to-ratio level. For wheat the normal stock to ratio is 35%. Furthermore a “stocks-to-ratio” of 20% is the equivalent of 75 days global inventory of wheat. This means that the 2022 forecasted inventory is just over 107 days vs the normal inventory of 131 days, a difference of 3½ weeks.
The alarming medium to long-term trends impacting future crops and inventory in addition to the Black Sea blockade as provided by S&P Global Platts are the following:
- Russia has prohibited the export of fertilizer until April. As the world’s largest exporter of fertilizer, global crop yields will be diminished.
- With respect to Ukraine, wheat is planted in September/October and harvested in July. If pesticides and fertilizers are unavailable under war conditions the estimated crop yield could decrease as much as 33%.
- The global wheat “carry-over” (inventory) from past crops is at its lowest since 2008 at only 16.9 million metric tons.
Global grain supply is in a precarious position as, unlike energy, agricultural production is highly dependent on environmental factors with generous technical assistance such as fertilizer and pesticides, both of which are in short supply and quite expensive.
Radioactive Risk to Crops
In a world where the impossible is now the plausible, another potential risk to the global food supply is radiation leaks from Ukraine’s nuclear power plants, all of which are in combat zones. Already the Zaporizhzhia nuclear plant, Europe’s largest and located in the Ukrainian agricultural heartland, suffered a fire after a Russian bombardment. The fluidity of war has not allowed a definitive answer as to the extent of the damage and whether there was any radiation leakage. Any radioactive soil contamination represents a long-term major threat to grain production.
The following chart entitled Ukraine’s Nuclear Power Plants provided by Statista research, an online information firm, presents the names and locations of Ukraine’s nuclear power plants.
The meteoritic rise in agriculture prices will continue to rise aggressively because of present-day logistical, near-term production and medium-to-long term environmental factors, each of which provide a solid price floor.
For the aforementioned reasons I believe that the rising grain prices are under-valued compared to their energy counterparts. This represents an enormous opportunity for investments in grains, specifically wheat, which is classified by the USDA as a strategic grain.