Here's Why the Russia-Ukraine Crisis Creates a Realignment of World Trade
Dan Basse Ukraine with Tyne Morgan
The war of words turned into an escalating situation Thursday as Russia invaded Ukraine. The news sent wheat prices skyrocketing 50 cents higher, with corn up 30 cents at one point Thursday. Crude oil also soared above $100 per barrel, hitting the highest level since 2014.
Dan Basse of AgResource Company says the situation fueled commodities, as two major grain producers were thrown into chaos and uncertainty. And as that happened, it elevated the U.S.
"It's really a realignment of world trade," says Basse. "What we don't know about, of course, is the sanctions. The Russians have also threatened that if another country were to blockade the Bosphorus (the Strait of Istanbul), which is the feeder of all the grain coming down, that they would take actions against that country. So there's a lot we don't know yet. But when you think about 31% of world wheat trade being domiciled in Ukraine and Russia, 30% of world barley trade, and then somewhere around 29% of 'sunoil' trade, it's a really big deal."
President Joe Biden addressed the U.S. on Thursday, saying new economic measures would "limit Russia's ability to do business in dollars, euros, pounds and yen and be part of the global economy."
Basse says even with the uncertainty, more demand could flow to the U.S.
"The U.S. farmer's prominence has really stepped forward today regarding his position to feed the world. And a Chicago Board of Trade is reflecting that with new rally highs. But if we looked at China, a new record high last night in corn and soy meal, palm oil has shot up to new record highs. So all of this is occurring at a time when the world is already looking at tight stocks, and this just exacerbates it," Basse adds.
Basse says a worst-case scenario would be an extended conflict that lasts months. He says if that happens, it could hinder Ukraine's ability to plant the upcoming crop.
"This would be the worst-case scenario in a world where stock use ratio of the major exporters are sitting at record lows," says Basse. "The best-case scenario would be, let's say, that the Russians have gone in, and in a matter of a week, they kind of tidy things up, and the Ukrainians say, 'Okay, we've done this before, you know, it's only some 20 years ago that you were our leaders, and we'll kind of accept you for now.' But I think there will still be these skirmishes, but that would be the best case. And then at that point, you know, the Russians may come back and say, 'Okay, to get back our customers in the world, we're really going to drop our corn, wheat and soy prices, such that we buy back demand.' That would have a very big impact on the market."
Basse points out the geopolitical back and forth will be at the forefront, which is why the situation fueled commodity prices overnight.
So, what's Basse's advice for farmers right now who are experiencing the extreme price volatility?
"I want them to take an exhale for the moment and just kind of breathe normally," says Basse. "And then I want them to look at their revenue insurance price, which will be calculated as of Monday. And that will be a baseline that will give you comfort to the downside. We're hoping that revenue insurance for corn and soybeans in particular will be record high. So you know, participate in that probably to the fullest degree. Then, I want to look at maybe marketing strategies like buying puts or something that gives you some opportunity to still command the upside. Because sometimes in the farming business, we need to maximize profits. And this appears, as I said, to be one of those years where the American farmer's profile has just taken a big leap on the world stage. We need to feed the world."
Basse says producers can protect the downside through revenue insurance, as well as put options. He says the key is to not limit the upside potential. The veteran market analyst says the markets are navigating uncharted waters with the situation at hand.
"When I go back and think about the collective farming system in Russia back when it collapsed in the '70s, and they came forward with their gold bars, that's the closest I can find to where we are today," says Basse. "And then American farmers, you know, really leapt into prominence during that time frame. Now remember, back then soybeans rallied almost to the teens, and back in the '70s that was like seen as unbelievable. The same in corn, making it to $4 and wheat up close to $9. So, if there was a U.S. weather problem this year, I don't know how high is high. But at the same point we as farmers have to manage our risk and manage profitability, and so I'm trying to find marketing tools that will allow us to do that without limiting our upside risk. Because if we do have a U.S. weather problem, these markets are gonna stay very heated. This is not a one and done."
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