Commodities Shuttle: Ukraine-Russia deal eases price, but ‘heat apocalypse’ worries

The increased pressure from agricultural commodity prices has passed, and current values ​​are far from the peak recorded a few weeks ago.

The drop occurs due to factors external to agriculture, which still has a series of problems to be solved during this 2022/23 harvest.

The fall in the prices of agricultural products had already occurred due to macroeconomic factors, which could lead the world economy to a recession. The agreement for the release of products from Ukraine, although already in jeopardy due to Russian attacks on Ukrainian ports, may inhibit, for now, new highs.

Lesser concern about food shortages will support more accommodating prices. On the agricultural side, however, it is not just Ukraine that causes food supply to be unbalanced, but a number of other factors.

World stocks are at 583 million tonnes, the lowest in seven years. The consumption ratio, which is 2.28 billion tons, drops to 26% in this 2022/23 harvest. This recomposition may be hampered by the so-called “heat apocalypse” that affects much of the planet.

Some European Union countries, such as Italy, France, Portugal and Spain, already have a drop in production due to the worst drought in the last 70 years in the region.

Data from climate monitoring institutes indicate that 46% of the European Union has a drought alert level. In 11% of this region, the alert is of high level.

Other major producers, such as the United States, Australia, the United Kingdom and countries in South America, also experience heat waves.

The USDA (United States Department of Agriculture) should review the productivity potential of the country’s crops next month. An eventual cut will further deplete Americans’ commodity inventories, which are already low.

The USA, like Brazil, are important global suppliers of soy and corn. Americans still supply wheat. This year, however, they will have a cereal crop 7% lower than the average of the last five years.

A smaller share of Brazil and the USA in the world grain market reduces the world balance. Brazil had, this year, a production of soybeans 20 million tons below the predicted potential. Last year, the fall had occurred in corn.

The agreement to release Ukrainian stockpiles for 120 days, if fulfilled, could ease the market a little, especially in countries in North Africa and South Asia.

The ravages of war, however, will persist. Ukrainians’ grain harvest reached 105 million tons in 2021/22. The 2022/23 production should drop to 60 million tons, according to the government. Market analysts predict an even lower volume.

Ukrainians are strong in exports of wheat, corn and vegetable oils, mainly from sunflower.

A greater difficulty in the world supply of agricultural inputs was expected in this 2022/23 harvest. There was no shortage of products, but prices soared.

For Ukrainian producers, the scenario is worse. In addition to the costs, the delivery of the product in the country was interrupted, and the uncertainties brought about by the war inhibit planting.

With so many difficulties, the most pessimistic estimates indicate a reduction of up to 75% in the planted area in Ukraine. This greatly limits the country’s presence in the foreign market next year.

USDA estimates indicate that Ukraine’s wheat export potential will fall to just 10 million tonnes in the 2022/23 crop, well below the 17 million tonnes in the 2021/22 period, which has already been affected by the war.

The European Union, USA and Canada, important world suppliers of wheat, will also have a reduction in supply, due to the drought.

Russia, with good crop conditions, will increase exports to 40 million tons. Crimea also puts more wheat on the foreign market. It goes from 8,000 to 500,000 tons.

Consulting analyzes indicate that this increase is possible because the cereal would have been stolen from Ukraine.

After the price spike due to the war in Ukraine and Russia, commodity prices fall. Wheat, the most affected product in this period, is 41% lower than the peak recorded during the conflict. Corn and soy oil are down 26%, while milk and soy are 18% and 16% cheaper, respectively, from their highest since February.

In addition to the geopolitical factors, which make it difficult to produce and transport food, the nightmare of droughts increasingly torments. They are stronger, longer lasting and more devastating.