Russian “Farm to Table” Domination of World Agriculture

As Russia’s military is at the cusp of conducting ahostile takeover of Ukraine, energy and gold prices are soaring as I forecastin my SA article published 16 January 2022 Energy and Gold Prices toSoar After Likely Russian Invasion, global food prices will rise as dramatically astheir energy & gold counterparts as Russia controls Europe’s breadbasket.It remains to be seen whether Ukrainian agribusiness will be able to plant,harvest and sell their agricultural products for export.

Logistically Russia’s navy controls the Black Sea andeffectively blockades five critical Ukrainian ports utilized for grain exports:Odessa, Mykolaiv, Kherson, Mariupol and Berdyansk.

Ukrainian Agricultural Overview

The importance of Ukrainian grainproduction and exports cannot be overstated. The 2022 agricultural yield forecastsa considerable increase from previous years. Ukraine’s average annual yield isthree times its domestic needs making them one of the world’s largestagricultural exporters.

The following data are particulars for each cropprovided by the World Data Center forGeoinformatics and Sustainable Development:

·       Ukraine’s grain output consists of wheat, corn, barley and rye.

·       4^th largest exporter of corn (eastern and southern Ukraine),planted in April/May, harvested in September, and barley (eastern Ukraine),planted in April and harvested in August.

·       6^th largest exporter of wheat (south and south-centralUkraine). It’s a winter wheat planted in fall and harvested the followingsummer.

·       7^th largest exporter of soybeans.

·       World’s leading sunflower seed oil exporter (southern and easternregions), planted in April harvested in September. It’s their most profitablecrop because of low production costs and high demand.

·       Most exports are shipped to Spain and Italy,North Africa, the Middle East and East Asia (China, Japan, Korea).

·       Russian and Ukrainian grain production represents 30% of theworld inventory, a market share that doubled since 2014.

Global Food Supply & Prices

For the aforementioned reasons, there is greatuncertainty after a Russian invasion and occupation as to what extent Ukraine willbe permitted to continue agricultural operations and whether exports will belimited or even restricted.

World food prices began ascending dramatically in2021 and will accelerate in 2022. The pre-war market factors are as follows:

·       Higher prices for pesticides.

·       Higher prices for fertilizers.

·       Severe meteorological events such as floods & droughts haveadversely impacted crop yields.

·       Labor shortage in logistical and agricultural services.

·       Global supply chain disruptions.

Finally the food export restriction policy of evensmall countries impacts global food prices as illustrated on the following linkcalled the exponential domino effect in which a seemingly smalland insignificant factor becomes a powerful multiplier effect that triggers anoutsized crisis far beyond its domestic borders.

One such example is that in 2021 Russia placedexport taxes on their grain crop to keep more inventory homebound. For thisreason countries that purchased Russian grains were forced to search foralternative sources such as nearby Ukraine.

The following chart entitled Food and AgriculturalOrganization of the United Nations (FAO) food price index indicates an explosiveprice increase in major food categories. These food prices will skyrocket when warrages in Ukraine.

Russia & Ukraine Do Swimmingly Well in a Water StressedWorld

Russian and Ukrainian agricultural production haveenjoyed a stunning success of bountiful crops and whose harvest regions haveavoided, by default or design, becoming water-stressed. As most other countriesstruggle with grain production in the future, Russia and Ukrainian grainproduction will be robust giving them increased market share and greaterpricing leverage.

The following chart entitled Where Water Street Will Bethe Highest in 2040 provided by the World Sources Institute via the Economist IntelligenceUnit. The UN defines “water stress” as when a country withdraws least 25% ofits renewable freshwater supply.

Agricultural Investment Opportunities

For the aforementioned reasons, I believe there’sstrong immediate to long-term bullish prices in the agricultural sector, investmentopportunities with ETFs and ETNs.

As a refresher with respect to their basicdifferences, an ETF one invests in a fund of the asset that it tracks while anETN is like a bond, an unsecured debt note issued by an institution.

A comprehensive listing and description of theseagricultural ETFs and ETNs are in the ETF database entitled DefinitiveList of Agricultural Commodities. Each type investment provides a comprehensivedescription of the fund and level of risk. 

With respect to grains, the titles and links to thesecategories are as follows:

Agricultural Fund

Agricultural Sub-Index

Wheat

Corn

Grains

Grains Extra index

Grains Sub-Index

Commodity Index

 Despite the rise in global agricultural indices I don’tbelieve the market has fully priced in the war risk whether it be a temporary blockadeor long-term limit or restriction of Ukrainian exports.

Conclusion

A Russian invasion and occupation will furthersqueeze an already tightening food market since many governments have, officiallyand unofficially, limited or even banned outright export of domesticagricultural products. This has been done for the purposes of food security andmaintaining affordable food prices to avoid socio-political instability.

For all the aforementioned reasons I forecast dramaticallyrising agricultural prices and recommend a “buy” on the above agriculturalinvestments.

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The Cerulean Council is a NYC-based think-tank that provides prescient,beyond-the-horizon, contrarian perspectives and risk assessments ongeopolitical dynamics and global urban security.