Invasion’s impact on oil, grain markets

KANSAS CITY, Mo. — Russia’s invasion of Ukraine has had swift and substantial effects on commodity markets that could be long-lasting, according to Federal Reserve Bank researchers.

Federal Reserve Bank of Kansas City researchers Cortney Cowley, senior economist; David Rodziewicz, senior economist specialist; and Thomas R. Cook, data scientist, released their findings May 23.

“Disruptions associated with the invasion have contributed to increases in commodity prices, which could support commodity-producing regions and businesses. However, higher prices for agricultural inputs, energy and food have created additional challenges for net-importing regions, supply chains and consumers,” the researchers stated.

The report was issued following the U.S. Department of Agriculture’s world supply and demand estimates that included a look at the potential impact of war in Ukraine to production and trade.

USDA reduced Ukraine corn exports by 550 million bushels. Ukrainian wheat production is forecast at 21.5 million tons in 2022-2023, 11.5 million lower than last year due to the ongoing war.

Ukraine’s wheat export forecast is 10 million tons, down sharply from last year’s 19 million tons on reduced production and significant logistical constraints for exports.

Here are highlights of the research.

Historical monthly oil, wheat price movements: The average price of oil increased 18% from February to March, which was one of the more significant monthly increases on record.

The surge in the price of wheat was perhaps even more historically significant. Wheat prices increased 29% in March, which was among the highest price increases over the past century.

Other price escalations of this magnitude had not occurred since the oil embargo and Russian grain deal of the 1970s or the Dust Bowl of the 1930s.

Oil, farm production expenses: Although costs associated with extracting oil rose sharply in 2021, the pace of increase accelerated in 2022, rising almost 60% through the first quarter.

Other costs associated with oil production, such as parts and equipment, well services and wages, were stagnant or declining in the previous four years, but rose in the first quarter of 2022.

Farm production expenses, which had already been on the rise, increased even more sharply in the first quarter. Most notably, fertilizer and diesel expenses rose 90% and 60%, respectively, from the previous year in February. Feed expenses also climbed 15% alongside higher prices for grains and oilseeds.

Profit opportunities for U.S. producers: Although the costs of producing crude oil rose from $48 a barrel in 2020 to $62 a barrel in the first quarter of 2022, oil prices rose faster, creating wider profit margins for energy producers.

Unlike in 2020, in the first months of 2022, the average price of oil was $95 a barrel., or 53% higher than the profitable price.

Similarly, although production expenses for wheat farmers have increased, prices producers receive for their wheat were higher than the costs of production, creating better opportunities for positive profit margins.

Consumer prices: Inflation in several energy and food categories in the first four months of 2022 was well above longer-term trends. In particular, prices increased in major categories like gasoline and cereals, but also in smaller categories like home heating and pet food.

Gasoline and food account for 15% to 21% of total household expenditures in the United States. Consumers purchase gasoline and food more often than other goods, and price increases in these products can have a significant effect on household budgets and inflation expectations.

Futures prices: Futures markets suggest commodity prices may remain high even toward the end of 2022. In less than two weeks following Russia’s invasion of Ukraine, futures prices for crude oil and wheat rose 23% and 36%, respectively.

Although futures prices for these commodities declined slightly through April, they are still elevated compared with pre-invasion.

Additionally, forecasts for energy and agricultural commodities in 2022 also increased, suggesting higher prices through the end of the year.

Global inventories: Limited inventories of energy and ag products prior to the conflict also contributed to the recent surge in prices. Inventories provide a buffer to supply shocks, so commodity markets are less able to absorb the disruption emanating from the Ukrainian conflict while inventories are low or declining.

Entering 2022, world petroleum and wheat inventories were almost 10% below the previous five-year average.

Declining global petroleum inventories have been driven by underinvestment in global oil production during the pandemic and a resurgence of demand as economies recover and reopen.

Lower wheat inventories were driven by strong global demand, lower planted area in the United States and adverse weather conditions in other parts of the world, which limited production.

Commodity production, exports: Russia is the world’s third largest producer of crude oil and second largest producer of natural gas, accounting for 11% of global oil production and almost 18% of natural gas production.

Although Ukraine is not a major producer of energy commodities, Russia and Ukraine produce and export large quantities of agricultural products, such as wheat and corn.

Russia and Ukraine combined are the second largest producers of wheat in the world, after China, and export more wheat globally than any other country, accounting for about 29% of global wheat exports.

Global commodity price increases: Countries with direct trade exposures to Russia and Ukraine have experienced the most substantial increases in prices in the immediate aftermath of the invasion.

For example, natural gas prices in the European Union have increased 665% from the previous year in March, whereas U.S. natural gas prices have increased about 85%.

Although natural gas production is distributed across the globe, markets are primarily regional. For example, more than 70% of Russian gas exports go to Europe, and Russian imports make up roughly 40% of the EU’s consumption.

In addition, 90% of Russian wheat exports and about 55% of wheat exports from Ukraine are typically destined for countries in Africa, the Middle East, or the EU.

Therefore, wheat prices in the EU and in countries such as South Africa and Turkey rose even more sharply than wheat prices in the United States, which does not traditionally trade agricultural commodities with Russia or Ukraine.