Russia’s invasion of Ukraine has created turmoil in all markets, together with agriculture. As Midwest farmers strategy key choice factors, together with the March 15 deadline for 2022 crop insurance coverage and commodity title selections, we briefly overview the Russian-Ukraine battle.
General, the warfare probably will trigger corn returns to extend relative to soybeans, however nitrogen fertilizer prices and provide will proceed to be points. Sustaining longer-termed rotations appear prudent. Increased worth volatility suggests sustaining excessive protection ranges for crop insurance coverage. Maintaining insurance policies with a assure enhance, similar to Income Safety (RP), appears prudent. The battle has little impression on Commodity Title selections.
Table of Contents
State of affairs
Ukraine has 102.5 million agricultural acres, a bit greater than double the mixed acres of Illinois and Iowa. With fertile soils and a local weather akin to Kansas, Ukraine is a significant wheat exporter, with a ten% share of world exports from 2017 to 2021. Ukraine has a notable share of world exports for different commodities, together with corn (15%), barley (15%), and sunflower oil (50%).
The warfare has largely halted agricultural exports from Ukraine, inflicting spikes in some agricultural costs, most notably in wheat. How lengthy Ukraine’s exports are shut down is unknown.
The warfare probably will disrupt spring planting progress in Ukraine. To what diploma planting disruptions will happen is unknown. Ukraine’s winter wheat crop was planted final fall and is reported in good situation. How disruptive the warfare will likely be on the wheat harvest is unknown.
Western nations have positioned monetary sanctions on Russia, trying to isolate Russia. These sanctions are reported to have vital impacts on the Russian financial system and will cripple the nation (see Monetary Statements Will Create Vast-Ranging Affect).
Relying on their effectiveness, these monetary sanctions might provoke responses from Russia. Financial and commerce sanctions on Russia and their responses might have extra impression on world agricultural commerce than the direct impacts on manufacturing in and exports from Ukraine.
Whereas the warfare doesn’t hamper agricultural operations in Russia, western sanctions can have vital impacts on agricultural commerce. Collectively, Russia and Ukraine signify almost 30% of worldwide wheat exports. Wheat exports probably will likely be re-routed due to the battle. Bigger flows from Russia and Ukraine must be anticipated to nations extra pleasant with Russia, similar to China and Pakistan. International locations much less pleasant to Russia must depend on wheat from different sources.
Disruption in all Russian commerce flows must be anticipated, together with in crude oil, pure gasoline, and fertilizers. Crude oil costs have elevated already, hitting ranges of $120 per barrel as bans on Russian oil are thought of.
Russia is a significant pure gasoline provider to Europe, offering 40% of Europe’s pure gasoline wants (see Can the US Provide Sufficient Pure Gasoline To Neutralize Russia’s Power Leverage Over Europe?). European nations probably will attempt to cut back reliance on pure gasoline from Russia, with strategies for a way this may very well be achieved already introduced.
Europe will try to rely extra closely on pure gasoline from different sources, together with importing liquid pure gasoline from the US. Nonetheless, these efforts will likely be hampered by a scarcity of infrastructure to totally offset Russian pure gasoline, together with ships to hold liquified pure gasoline and ports to unload the gasoline.
Russian fertilizer producers have been requested to droop fertilizer exports. Russia is a significant exporter of fertilizer, accounting for 23% of ammonia exports, 14% of urea exports, 10% of processed phosphate exports, and 21% of potash exports.
Due to this fact, the suspension of Russian fertilizer exports will trigger fertilizer shortages and better fertilizer costs. Whereas an export ban will impression US producers, most certainly by rising fertilizer costs, European and Brazilian farmers will really feel extra of the impression, as these nations rely extra closely on fertilizer coming from Russia.
State of affairs Abstract
Based mostly on the above description, the next abstract factors consequence:
- The Russian-Ukraine battle probably will positively impression agricultural commodity costs. Wheat would be the commodity most instantly affected, with massive will increase in wheat costs already occurring. Corn and soybean costs might rise as nicely. On condition that corn is a substitute feed grain for wheat, corn costs may very well be extra impacted by the battle than soybeans.
- At this level, assuming massive unfavorable impacts on 2022 Ukraine manufacturing appear untimely. The warfare can have unfavorable implications for progress, however one shouldn’t underestimate the resourcefulness of farmers in continuing with farming operations. Ukraine farmers have survived in lower than best situations up to now. The dimensions of planting disruptions will impression costs, and proof of great planting disruptions in Ukraine might result in a lot greater costs.
- The battle will elevate uncertainties in fertilizer markets, probably rising costs and inflicting fertilizer shortages. Because of this, fertilizer issues can have vital unfavorable impacts on fertilizer markets, with extra of the impression being felt outdoors the US than in the US.
- Sanctions on Russia probably can have longer-run impacts than the precise battle in Ukraine. Whereas preliminary commodity worth responses are constructive from the Ukraine battle, situations might be constructed with a lot decrease costs, probably ensuing from attendant worth inflation and financial recessions.
Corn and Soybean Returns
Corn and soybean costs have been on an upward trajectory since December 2021, as might be noticed in Determine 1. Determine 1 exhibits the settlements of the December 2022 corn contract traded on the Chicago Mercantile Change and the November 2002 CME soybean contract.
These contracts had been used to set 2022 projected costs on crop insurance coverage contracts within the Midwest. The projected worth for corn is $5.90 per bushel, the second-highest ever. The projected worth for soybeans is also a file excessive degree at $14.30 per bushel.
Settlement costs of these CME contracts on March 4 had been $6.29 for corn, and $14.50 for soybeans, above the projected costs, set based mostly on common settlement costs throughout February.
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Present 2022 fall supply bids in Illinois are $6.00 per bushel for corn and $14.00 for soybeans. Budgets for 4 areas had been up to date utilizing these costs and are proven in Desk 1.
These budgets even have greater fertilizer prices, and crop insurance coverage prices had been elevated to mirror greater crop insurance coverage premiums. These budgets mirror the returns assuming that not a lot of the crop has been priced and little nitrogen has been utilized or priced.
As might be seen in Desk 1, corn is projected to be extra worthwhile than soybeans by $102 per acre in northern Illinois, $77 on high-productivity farmland in central Illinois, $99 per acre on low productiveness farmland in central Illinois, and $71 per acre in southern Illinois. When 2022 budgets had been first launched in August 2021, corn was projected to be extra worthwhile than soybeans.
Nonetheless, costs in late January and early February instructed soybeans could be extra worthwhile than corn. Arguably, the Ukraine-Russia battle has extra of a constructive impression on corn than soybeans, as Ukraine is a significant exporter of corn and wheat, with each corn and wheat being feed grains and substitutes.
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A significant concern is nitrogen fertilizer provide, main some farmers to modify to extra soybeans. Nitrogen fertilizer provide is a matter, and prospects of fertilizer worth declines have diminished. Nonetheless, sourcing nitrogen fertilizer will likely be extra vital outdoors the US.
The US doesn’t instantly depend on exports of nitrogen fertilizer from Russia whereas slicing off Russian provides will instantly impression European and Brazilian farmers. Because of this, changes could also be extra pronounced outdoors the US, resulting in greater costs for crops that depend on the nitrogen fertilizer.
At this level, most Midwest farmers probably have solidified their 2022 planting plans. Corn is projected to be extra worthwhile than soybeans, as has been the case by way of a lot of the planning season. Sustaining rotations based mostly on longer-term expectations probably will likely be a prudent follow.
Crop Insurance coverage Choices
For Midwest states, the projected costs are $5.90 per bushel for corn and $14.33 per bushel. Volatilities used to set premiums additionally had been at excessive ranges: .22 for corn and .19 for soybeans. General, costs and volatilities had been set in a heightened danger setting, probably reflecting issues over the potential of a Russia-Ukraine battle.
Now the battle has began, eliminating any hope of battle avoidance. Russia’s advances into Ukraine have been very gradual, suggesting that preventing is not going to finish quickly and will disrupt spring planting and wheat harvesting. Western nations have proven resolve to oppose Russia, resulting in longer termed sanctions in opposition to Russia.
General, the worth state of affairs has develop into extra unstable, as evidenced by greater volatilities out there, with March 5 implied volatiles being .30 for corn and .21 for soybeans.
The elevated volatility means the potential for even greater costs exists, notably if there are vital disruptions to Ukraine’s spring planting and harvest. Such disruptions, mixed with a drought or yield shortfalls within the US, might result in explosive costs.
Additionally doable are decrease costs, attributable to a mixture of 1) a faster finish to the Ukraine battle and a couple of) a recession within the US or Western Europe which might result in decrease demand for meat.
Most Illinois farmers have taken Income Safety (RP) on the excessive protection degree in previous years. A continuation of use of RP at excessive protection ranges appears prudent this 12 months. Combining this technique with the Enhanced Protection Choice (ECO) and Supplemental Protection Choices (SCO) might additional safety at greater crop insurance coverage premium ranges.
For these involved with premium prices, now we have mentioned the choice of utilizing RP with the harvest worth exclusion (RPhpe) and ECO. Given current preventing in Ukraine, the potential of greater harvest costs is elevated, thereby rising the worth of the worth assure facet of RP.
The RPhpe technique should have attraction so long as one realizes that the assure is not going to enhance. When utilizing RPhpe, ahead pricing of grain must be restricted.
General, no matter coverage alternative, using excessive protection ranges appears warranted.
Commodity Title Decisions
Earlier evaluation of commodity title decisions suggests little likelihood of commodity title funds for the 2022 crop. If something, the Russia-Ukraine battle has elevated worth prospects, resulting in even decrease likelihoods of commodity program help.
Abstract
The Russia-Ukraine battle has heightened worth volatility and, at the very least initially, to cost will increase. At this level, corn is projected to be extra worthwhile than soybeans in all areas of Illinois, as has been the case all through a lot of the planning season for the 2022 crop. Sustaining corn acreages at ranges in keeping with long-term rotations appears prudent.
Use of crop insurance coverage at excessive protection ranges is warranted. Worth volatility suggests higher worth in sustaining insurance policies with the assure enhance, similar to RP.
Gary Schnitkey, Nick Paulson, Krista Swanson, and Carl Zulauf