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The Grain Drain: Ukraine war disrupts US grain and oilseed market
29 Apr 2022“The war in Ukraine has seemingly changed everything,” says RaboResearch in a report that explores the grain and oilseed outlook in the US over the next ten years and the expected impact on fertilisers, production, exports and pricing.
The intelligence arm of Rabobank, RaboResearch, was finalising its grain and oilseed outlook for the US when the war in Ukraine broke out. As a result, as part of its report, the company examined the significance the war is having on the country’s grain and oilseed landscape and its potential impact on its future.
“The war in Ukraine has seemingly changed everything from energy, crop input, and commodity prices, to global commodity trade flows,” RaboResearch’s report, The Grain Drain After Ukraine: Rabobank’s Ten-year US G&O Outlook, states in its introduction.
“Given the significance of the Black Sea region to global agricultural exports, the situation could not go unnoticed as corn and wheat are two important commodities for human and animal consumption,” says Andrick Payen, RaboResearch food and agribusiness analyst for grains and oilseeds (G&O) and author of the recent RaboResearch report, The Grain Drain After Ukraine: Rabobank’s Ten-year US G&O Outlook.
The reality, Payen says, is that there are only a few countries that have excess supplies to export to global markets and the US is one of them. If the war impacts Ukraine or Russia’s ability to export corn and wheat, Payen adds, “global demand will impact US prices”.
The grain and oilseed landscape before the war
Before the Ukraine war broke out on 24 February 2022, global supplies of grain and oilseed were “already tight”, and “demand continues to increase”, Payen says. In addition, challenges in the fertiliser landscape have also made planting decisions “somewhat difficult”.
Other global events, such as soybean production declining due to unfavourable weather in Brazil, have contributed to the sharp increase in commodity prices, Payen says.
The immediate impact of war on production
In the initial months since the war began, grain and oilseed production has suffered several key disruptive and detrimental changes.
The first impact, Payen says, was the lack of exports coming out of the Black Sea region, which is bordered by Ukraine to the north and Russia to the northeast, along with Turkey, Georgia, Bulgaria and Romania. Limited amounts of corn, wheat and sunflower oil have caused some regions to have shortages of these commodities.
Secondly, the sanctions imposed on Russia have had a global impact on fertilisers, especially in countries that are highly dependent on potash imports from Russia, such as Brazil, Payen says.
Lastly, the planting season in Ukraine is underway and given the situation in that region, not much production is expected, Payen says. “Keep in mind that much of that production is likely to stay in Ukraine for their own food security,” says Payen. “If less corn and wheat is planted and little comes out, the burden will be passed to other countries to fill the gap,” Payen adds.
Knock-on effect on US production, operations and pricing
“The war has pushed US commodity prices higher,” Payen says. The expectation that global demand will be strong and the possibility of seeing the US increase exports of corn and wheat commodities have led to this increase in prices, Payen details. “Operations will likely see more market volatility as the war continues,” Payen says.
Aside from the war, in 2022, the US is seeing little impact on production as most US producers were able to get farm inputs on time, Payen says. However, drought continues to be a major concern, with the RaboResearch report detailing that estimates show more than 70% of the US is currently suffering from the natural disaster.
Planting intentions from the United States Department of Agriculture (USDA) report, Prospective Plantings, released on 31 March 2022, indicate that wheat is not increasing in acreage other than the 2% increase the US saw from winter wheat and corn acreage saw a decline, “which is in line with our expectations”. The big increase in soybean was driven by favourable prices and increased demand domestically, Payen says.
Looking ahead to the next ten years
In RaboResearch’s report, the company identified several insights and expectations into the grain and oilseed environment over the next decade from its research.
Notably, the authors determined that the planted area in the US is reaching “almost record levels” seen in the 1980s, and further area expansion is not likely to happen. However, demand “continues to be strong” despite higher prices, regardless of whether demand comes from animal protein, exports or domestic consumption.
The US market will see the grain and oilseed stocks rebuild, but at a lower rate than what it saw in the last ten years, Payen says. In addition, the report found that corn, soybean and wheat prices will remain at a higher level compared to the last ten years due to higher export and domestic demand, while production or land expansion is relatively limited.
Forecasting the future impact of the Ukraine war on grains and oilseed
As part of its report, RaboResearch explored the short, mid and longer-term implications of the war in Ukraine on the factors surrounding the grain and oilseed landscape in the US.
In the next two years, the authors relay that the biggest challenge will be fertiliser prices. To date, in 2022, producers have been able to get farm inputs on time, Payen notes. “If the war extends to the fall months of this year, farmers will have to make decisions on what to plant based on fertiliser prices and availability,” says Payen.
The war has the potential for countries to adjust their production based on global demand, Payen says. The report details that global supplies and the US ending stocks are lower than they have been in the last ten years.
“The longer the war prolongs, the greater the need for major exporters to supply regions that depended on the Black Sea for their grains and oilseeds,” says Payen.
While Payen says the resulting higher prices would usually adjust production toward these commodities, biofuel demand will push for more soybeans in the US, and this demand is likely to “dominate acreage signals” in the US over the next five years.
Over 20% of increased soybean crush capacity will be online during the span of three to four years, Payen notes, and the need to increase domestic production will likely require more planted space for soybeans.
The report’s authors have not included the war as a factor in its analysis for the full ten-year span, with Payen commenting: “Hopefully, we don’t have to.”