Macro commentary by eToro analyst for Romania, Bogdan Maioreanu
While markets are looking at wheat prices reaching the highest level in history, the conflict in Ukraine might start to brew a food crisis. Corn and sunflower seeds and oil are more concerning to Europe now. And the price rising in fertilizers and fuels like diesel is threatening farmers with higher costs for the agricultural works that eventually will be reflected in the price of the crops. However, Romania is in a privileged position as the world’s 8th largest exporter of wheat and 7th largest exporter of maize.
In 2021, the Russian Federation and Ukraine ranked amongst the top three global exporters of wheat, maize, rapeseed, sunflower seeds and sunflower oil, while the Russian Federation also stood as the world’s top exporter of nitrogen fertilizers and the second leading supplier of both potassic and phosphorous fertilizers. FAO – Food and Agriculture Organization of the United Nations published last week a report highlighting the risks that the Ukraine conflict brings to the global agricultural markets. FAO’s simulations taking into consideration the sudden and steep reduction in grain and sunflower seed exports by Ukraine and Russia indicate that these could only be partially compensated by alternative origins during the 2022/23 season. The global supply gap could push up international food and feed prices by 8 to 22 percent above their already elevated levels. And global elevated prices are strong drivers for inflation.
In Romania, the yearly inflation rate was 8.5% in February this year. The food products are already driving inflation up more than 8.8% year on year, with edible oil up 26% in the last 12 months, flour more than 16%, corn flour 19%. Farmers are concerned about fuels that have already increased 27% year on year and will increase their costs and are asking the government to decrease VAT for the agricultural sector used fuels
Ukraine exports most of its wheat in the Middle East, Northern Africa and Asia. Therefore from the wheat supply point of view it looks that there will be little disruption in Europe. However, the prices might rise further because all suppliers will tend to capitalize on Russia and Ukraine impossibility of export. The largest European producers of wheat are France and Germany. Romania accounts for a good 9% of Europe’s production. So, the pain point now in Europe is not wheat. It is corn. The corn is used for feeding animals and the lack of corn can create an issue in the cattle and meat industries. Ukraine is the third largest corn exporter in the world after the United States and Argentina. It exports big quantities to the Netherlands, Spain, Italy, Portugal and Germany. Spain’s agriculture minister is trying to push the European Commission to waive import controls on corn for animal feed on concerns about the supply of corn from Ukraine. Spain asked EC for flexibility to buy corn from third countries, particularly Argentina, the world’s second-largest corn exporter. The reason is the rapid depletion of stocks that forces Spain to make purchases within the next 60 days to maintain its supply while other countries have already moved forward. Ukraine is an important supplier of cattle feed. Since the Russian invasion, these buyers have turned to other European Union corn producers, particularly Romania, Bulgaria and France, to plug the gaps and are now looking further afield to lock in supplies.
Another pain point in Europe is coming from sunflower seeds and sunflower oil. The Ukraine crisis has the potential to disrupt the farming activities with fights taking place in some of the major seed producing regions like Kharkiv and Luhansk, seeds stored in those regions will no longer be accessible for seeds crushers and for export. Main storage facilities are close to the Black Sea ports and military actions in the region are preventing any normal exports. Key shipping ports are closed and the loading of sunflower oil onto vessels stopped. This creates nervousness in the market.
There are additional issues for Ukrainian farmers that, according to the agricultural calendar, should have already started to plough the fields for corn but from the TV pictures we have seen tractors only towing tanks. For the sunflower, ploughing and sowing should start at the beginning of April while harvesting is usually in September. Also fertilizers are an issue now in Ukraine. All this creates a grim picture of this year’s crops with roads blocked or under fire, with fields occupied by the military and farmers that cannot start planting. With the Ukrainian conflict showing that there is no end in sight this is raising a lot of issues and most likely it drives prices up for a lot of agricultural commodities. With wheat prices at historical maximums, corn close to the max, oil and fuels reaching high levels at every worrisome news from the conflict, fertilizers prices soaring on worries of supply, factories and consumers are watching with concern at another inflationary driver running amok.
Bogdan Maioreanu, eToro analyst and markets commentator, has over 20 years of experience in financial services and investments and a strong background in journalism. He held different Corporate Banking management positions in both Raiffeisen Bank and OTP Bank, before moving to business consultancy roles working for IBM Romania among others. Bogdan is an Executive MBA from Asebuss and Washington University.
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