Tom Hall, Senior Agronomist, Rooster Strategic Solutions

According to a recent poll, only one-third of Americans can correctly point out Ukraine on a world map. I’m sure this number would be higher in Rural America, reflecting both the intelligence of American farmers as well as the impact this war is causing, particularly on two fronts: Fertilizer scarcity and demand for wheat exports.

The “Breadbasket of Europe” is under attack. Thanks to its rich, black soil and long history of agricultural production, Ukraine has traditionally been one of the world’s leading exporters of wheat. In fact, the International Food Policy Research Institute reports that exports from Ukraine and Russia typically represent 12 percent of all the food calories traded in the world, and the two countries typically produce 30 percent of global wheat exports.

This year, obviously, will be different. Ukraine and its local allies still hope to ship out 60 percent of the 10 million metric tons they normally export, but they face significant challenges. Many of the farm’s workers have been called into battle duty. Fuel for combines is scarce. Extensive damage to the country’s railway system has significantly reduced grain transportation. And even if a farmer could get grain to a seaport, all the seaports are shut down.

There is a trickle of grain being exported overland by rails and truck through neighboring Poland. However, it’s a gigantic struggle to keep this export path open because of Russian missile strikes and equipment shortages. The Wall Street Journal reported that Poland and Lithuania have offered the use of their ports to move Ukrainian grain to world markets and are developing a plan to coordinate shipments to countries with the greatest need. Unfortunately, many global shipping companies are reluctant to send vessels into what is essentially a war zone.

Get ready for higher prices and new players. Food prices on the FAO Index have jumped nearly 40 percent in the last two years (see chart), a result of the global pandemic and the war in Ukraine. World leaders have made some token efforts to help increase wheat exports and drive down food prices. For instance, farmers in Europe are being allowed to grow crops on conservation easements and are discussing measures to divert grain from biofuels; in the U.S., the Biden Administration is asking Congress to adjust farm programs to encourage wheat production. This will have little to no effect on 2022 farm cropping plans, however, because the profit potential of corn and soybeans is even higher. The USDA projects that spring wheat acreage will increase by only 2 percent, and winter wheat, by 1 percent.

This global demand for grain will incentivize other countries to increase their production and enter global markets. India, for example, sees this as a golden opportunity to enter the world grain trade in a big way. The country is hampered by infrastructure problems. Few railways connect the wheat-producing areas with coastal grain terminals, and modern grain-handling facilities are nonexistent – grain is moved in bags to coastal warehouses, dumped by hand, and then conveyed on to the ships. Despite these hindrances, India’s wheat exports reached an all-time high of 7.85 million metric tons this year, compared to 2.1 last year, with plans to increase their output to 11 million tons next year.

Fertilizer prices aren’t going down anytime soon. Even before the war in Ukraine, farmers in the U.S. faced skyrocketing costs for fertilizer. Thanks to Russia’s dominant role in export nitrogen and potash (see chart), these costs will likely continue their upward trajectory. Because much of the ammonia fertilizer made in Europe relies on embargoed Russian natural gas, production was slowed or shut down entirely. Embargoes and related sanctions disrupted fertilizer supplies from Russia, causing prices to more than double.

Some countries have found ways around global sanctions. Brazil, for instance, has worked with banks that were excluded from sanctions to keep supplies of Russian fertilizer moving, according to a report from the New York Times. And, in a stunning turnaround, the U.S. government created a “carve-out” on its sanctions against Russia to allow farmers to purchase Russian fertilizer. It’s certainly not business as normal, though. Moving exports out of Russia is complicated by existing financial sanctions, as well as meeting Russian terms for payments. To date, the newly reported sanction relief has had little to no effect on fertilizer pricing. In our view, markets are waiting to see how much President Putin wants to weaponize his exports of natural gas, food, and fertilizer.