As Ukraine continues to fight against Russian forces, what are economic experts saying about potential fallout and impacts for the US agriculture industry and food supply chain?
Ukrainian tractors pulling Russian tanks through villages. Farmers fabricating metal to puncture Russian tank tires. Russians hiding tanks in Ukraine silage pits. While Illinois farmers face the typical uncertainty around spring planting driven by Mother Nature’s fickle sun to snow flipchanging, Ukrainian farmers struggle with the unprecedented swirl of uncertainty war has brought their farms. And the world wonders what it means for agriculture as Putin’s forces have made family farms a prime target, seeking to wipe out Ukraine’s most vital resources that fuel their economy and food supply chains across the globe.
Ukrainian farmer Kohctahtuh Xomehko, on a call with Macon County Farm Bureau farmers and ag industry stakeholders, reported plowing has made it harder for Russian tanks to traverse farm fields without getting stuck, but “no area is 100% safe.” And unlike American farmers, for Ukrainian producers, spring is actually the lesser of their concerns.
“One of the things many people have got wrong is the impact on planting of wheat in Ukraine,” says Vince Smith, Director of Agricultural Policy Studies for the American Enterprise Institute and professor of economics in the College of Agriculture at Montana State University. “The majority of Ukraine’s crop is winter wheat planted in the fall. Only 5% of Ukraine’s total acreage is left to plant in spring wheat.”
Added to that, says Smith, the yields on spring wheat are substantially lower than winter wheat, making the real issue not planting but cultivation and harvest of the winter crop – if those crops survive to maturity and harvest readiness. “We don’t know if they’ll be able to cultivate. We don’t know how much they will be able to combine and move to storage, and then move out of their Black Sea ports.”
What Does the War Mean for American Farmers?
U.S. officials point to Russian attacks on grain export terminal facilities in the eastern Ukraine port of Mariupol, as well as blocked shipping routes and civilian ship bombings, as examples of Putin’s efforts to kink the food supply chain. As the world’s fourth largest grain exporter, Ukraine stands to seriously impact world food supply and in turn, the agriculture economy. The question is how, and what does this mean for American farmers?
Experts are only beginning to estimate the potential total losses, Mariia Bogonos, PhD, agricultural and trade policies impact analyst and coordinator of the Center for Food and Land Use Research of Kyiv School of Economics in Ukraine, said on a recent webinar hosted by The Netherlands’ Wageningen University.
If Ukraine were not able to harvest 30% of its current planted area (areas with current battles, missile strikes, occupied territories), production losses for wheat and corn would be projected at nearly 30% each as well, with exports dropping by slightly more, she says.
Ukrainian farmer Kees Huizinga, speaking in the Wageningen webinar as air raid sirens sounded nearby, agrees, adding that “the rest of the fields will be planted, but they will have lower yields because there’s less fertilizer available. In our company we are saving on fertilizer because we can’t get it, so we will get lower yields.”
He tells stories of bombed supermarket distribution centers his farms now can’t supply, and confirms reports of storage facilities bombed. “Some of their grain handling facilities at Mariupol are damaged,” adds Smith. “It will take a while to get up and running, regardless of when the hostilities end. So far, [one of Ukraine’s largest southwestern ports] Odessa, as a grain handling facility, can function.”
But that, says Smith, is simply one part of the equation. “People focus myopically on exports from Black Sea ports for Ukraine and Russia to African countries,” he explains. In fact, Ukraine sends 70% of its exports to Middle Eastern and African countries, according to FAOSTAT. “Africa still got wheat; they just got it from other countries. The issue is not that they won’t get it; the issue is what will be the price.”
Can people living on $2 to $3 a day afford to pay double what they did? This is where the world watches and waits. How far will aid budgets go if wheat is doubled over a normal year? Currently, we have more questions than answers, Smith admits.
Even if Ukraine exports are impacted, the fact remains that Russia still has wheat. “While we have no clue about what will happen with Putin’s vile war and unconscionable invasion of Ukraine, what we do know is that Russian wheat is not affected,” Smith says. “But we don’t know where they will export it to – maybe India or China. But China has large stocks of wheat, and it’s very unusual for China to go into the world market, even if they have a large shortfall in the country.”
Focusing on Operational and Cost Efficiency
On our side of the world, while it’s too late for the majority of American farmers to pivot on production strategy, adjustments can be made.
“What they can do is tried and true things that have benefited for decades. First and foremost, build up your balance sheets. Focus on operational and cost efficiency. Be ready for opportunities,” says Brian Briggeman, Professor and Director, Arthur Capper Cooperative Center at Kansas State University. “Fixed-rate financing options are pretty attractive. Even with high fertilizer prices, they could lock in nice profit margins.”
In addition, producers’ marketing strategies could and should be tweaked with an eye toward the conflict, Smith says. Taking it all into account, growers should be concerned about prices moderating. “If we are at or above the five-year average, which is the cautiously qualified USDA forecast, and if corn and soybeans have a good year, particularly in Brazil and the U.S., these prices are going to drop. If there’s a resolution to the war in Ukraine, the U.S. and E.U. are going to come in and provide opportunities for the Ukraine market.”
Paul Mitchell, Director of the Renk Agribusiness Institute and professor in the University of Wisconsin-Madison Department of Agricultural and Applied Economics, agrees, adding, “The point I will emphasize is that the current high prices for November 2022 soybeans are based partially on a lot of unknowns about what will happen in Ukraine in the next few weeks. Prices could drop a lot if the war settles down, and the ports open up, and we find out that the winter wheat crop is in good shape (not wrecked by tanks/armies), and they can plant corn and oilseeds.”
Economists Weigh In
This uncertainty leads economists to suggest that growers move proactively, even if the market, as Smith says, is taking a conservative approach. “If growers in the U.S. have any concern about prices moderating, growers should be locking in prices using options and paying the option fee and biting the bullet,” he explains. “Even if they lock in their forward contracts through county elevators, their crop insurance will come in.”
While producers will raise concerns of rising prices for fertilizer and fuel, economists say the specter of high input prices doesn’t mitigate the impact market risk protection will have in a global climate like ours. Without the proverbial crystal ball telling us how harvest will bear out in Australia, the European Union, Argentina, Poland or China, too much unknown remains for American producers to do nothing.
“Options, forward contracts, even direct futures contracts – get yourself out of the production risk environment,” Smith encourages. “You can pretty much guarantee that whatever crop you raise will do well. If you’re getting $14 for your soybeans, that pays for a lot of your nitrogen.”
While global fertilizer supply impact stands as another unknown, Russia’s moves in that arena could also land a further hit to markets. “[Prices could drop] even more if it seems Russia can export fertilizer more aggressively to places like India,” Mitchell says. “If things get worse and the conflict spreads, we get into a world we have not seen in decades, and all bets are off for what that means for prices.”
Learn more about the lofty fertilizer price environment and anticipated trends in this article.