The Impact of the Ukraine Invasion on Global Agriculture
On February 24th, the Russian government led by President Vladimir Putin launched an attack on its neighbor Ukraine, seeking to bring that country back into the Russian sphere of influence by force. The conflict is now in its second week, with the Russian army having captured a handful of cities in the south-eastern corner of Ukraine but their offensive has evidently stalled in much of the rest of the country. The final outcome of this conflict is still in doubt, with significant casualty counts on both sides being realized, but it has already disrupted three global markets that are important to agriculture—trade in natural gas and oil, fertilizer, and grains.
Other underlying factors had already driven prices in all three markets higher prior to the late February invasion. Due to persistent problems with the global supply chain rising from the COVID-19 pandemic, the West Texas Intermediate (WTI) crude oil price per barrel increased by about 40 percent between December 2021 and mid-February 2022, up to $91/barrel. Uncertainty about whether or not the Russian government would follow through with its threats against Ukraine likely also played a role in that pre-war price increase. Since the war started, the WTI price has jumped another $28/barrel, closing at $119 per barrel on March 7th.
Several major multinational petroleum companies, such as Exon, Shell, and BP, have severed their business relationships with Russian companies, such as Rosneft, a step which is likely to hamper continued Russian output, as these companies relied heavily on their Western partners for technical expertise. On March 8th, President Joe Biden announced that the United States would be banning imports of Russian energy products, both petroleum and LNG, effective immediately. No other oil-importing country seems prepared to follow the U.S. example at this time, although British Prime Minister Boris Johnson indicated that his country would phase out its Russian oil imports by the end of the year. As of 2021, about eight percent of U.S. imported oil came from the Russian Federation, amounting to less than three percent of U.S. consumption. Biden’s action came after broad bipartisan support for legislation mandating such a ban has emerged in recent days.
As the world’s second largest oil exporter, if either Russia’s production or trade flows are further disrupted, oil and oil product prices, such as gasoline and diesel, are likely to continue to rise.
On the fertilizer front, Russia is the top exporter of this product, exporting about $7 billion of this product in value terms in 2020, representing about 13 percent of total export sales in that year. These exports include both urea (nitrogen), made from natural gas, and potash. Last week, the Russian Ministry of Industry and Trade asked its fertilizer companies to halt their product exports. Fertilizer prices had already increased significantly over the last several months, prior to the Russian invasion of Ukraine, with the fertilizer price index having more than doubled over the course of 2021.
The third major global market that has already been disrupted by the invasion is the world grain market, in which Russia and Ukraine combined account for about 25 percent of global wheat exports, and Ukraine also provides about 13 percent of the world’s corn exports. Ukrainian farmers are estimated to have planted about 6 million hectares (14 million acres) of winter wheat late last year, but the bulk of that area is found in the southern part of the country, where the Russian advance has met with the most success. Unless the conflict is resolved relatively quickly, which most analysts now view as unlikely, it will be difficult for that crop to be fully harvested later this summer. In normal times, farmers in both Russia and Ukraine would be expecting to plant their spring wheat and corn respectively over the next several weeks, and those efforts are likely to be stalled at the very least, and stymied for many farmers due to lack of inputs such as seed and fertilizer. While Russia’s bombing campaign has focused on urban areas, that effort has disrupted the Ukrainian supply chain for such inputs. As a result of these concerns, U.S. wheat price futures have risen up to their daily price limits on most days since the invasion started. As of March 7th, the winter wheat future price (for May delivery) sat at $12.94 per bushel, approaching the record high level last set in 2008.
On February 24th, USDA announced its projected U.S. planted acreage figures for the major row crops for the 2022/23 crop year, just hours before Russia launched its invasion of its neighbor, at their annual Agricultural Outlook Forum. They forecast that U.S. farmers would plant 92 million acres of corn, 88 million acres of soybeans, and 48 million acres of wheat.
As a result of the market price surges described above, any or all of these estimates could shift significantly, depending on how farmers weigh using higher priced fertilizer to plant more corn and wheat with the prospect of significantly higher prices for those crops, as opposed to planting more soybeans, which does not require nitrogen fertilizer, but whose prices have been elevated less by the Ukraine conflict so far. The next opportunity for USDA to weigh in publicly on those estimates will come with the publication of their annual Prospective Plantings report, due out on March 31st.
There have been some policy proposals as to steps that could be taken to free up additional cropland for cultivation. Professor Scott Irwin, an agricultural economist at the University of Illinois, has suggested that farmers be allowed to raise crops on some of the land currently under contracts for the Conservation Reserve Program (CRP), an idea that was also shared in a letter by the ranking member of the Senate Agriculture Committee, Senator John Boozman (R, AR). Boozman’s letter also suggested suspending the current effort to attract additional cropland into the CRP, a general signup which closes on March 11. There is very little time for USDA to make any decisions on these proposals, as the deadline for signing up for crop insurance coverage for spring planted crops is a week away, on March 15th.
