Crimea and cold US weather boost agricultural commodities and potash
Over the past weekend, Russia completed its annexation of Crimea, occupying the majority of Ukrainian military and naval bases. So far, despite thundering to the contrary by President Obama at the G7 Leaders’ Summit in Rome, western sanctions have been limited to targeting individual figures close to the Russian Government. However, while Russia proceeds with the integration of Crimea within the Russian Federation – with little or no resistance, the West now fears possible Russian ambitions over parts of eastern Ukraine and even parts of former Soviet Republics such as Moldova. The West intends to persuade Russia, through sanctions, that it has committed a ‘diplomatic own goal’ and any retaliation will remain within the diplomatic sphere. Nevertheless, until such time as the Russian clearly commits to waiving territorial claims in Ukraine proper, the crisis could escalate. As far as the markets are concerned, most industrial stocks are at risk but the prices of agricultural commodities are set to increase. Indeed, corn, soybeans and wheat performed very well in Chicago.
The price of European wheat – mostly Russian, Romanian and Ukrainian – reached such high prices that even Egypt, decided found US wheat more competitive despite the much higher shipping charges (as much as USD$ 16/ton extra). The situation in Ukraine has certainly helped increase wheat prices because of its role as one of the world’s largest wheat exporters and producers; it is also a major corn and barley producer (some 30% of these crops grown in Crimea). The tensions in Ukraine have also sent jitters in Russia itself. The weakening Ruble and the prospect of further devaluations due to sanctions and other Western economic retaliatory measures, have led farmers to save their wheat rather than sell it at below market value – as a hedge, resulting in higher Russian wheat prices.
The cold and prolonged winter season in North America has also played a role in supporting crop prices. The late spring suggest farmers can expect a delayed planting season and yields later in the summer. Similarly, in Argentina, farmers have been hoarding soybeans as they hedge against a declining Peso. Soybeans have also increased in price in South America due to poor weather in Brazil and Argentina (two of the world’s largest producers). Soybean exports from the US have increased – mostly destined for China. This means that US soybean reserves have dropped faster than expected, suggesting prices will increase.
The favorable crop market (at least insofar as the prices of wheat, corn and soybeans are affected) should translate to higher prices for mineral fertilizers such as potash, phosphate and nitrogen. This pattern started in late 2013 where in central Europe, sales of nitrogen (and phosphate) fertilizer to the agricultural sector has almost doubled in the fourth quarter of 2013 (compared to the previous year). Last week, meanwhile, the UN reiterated that the demand for agricultural commodities will be a major driving factor for prices in the next few decades. The UN predicts an increase in the world population from the current 7.2 billion people to 9.6 billion by the year 2050, improving fundamentals of the mineral fertilizer industry.
The combination of long term demand for agricultural commodities and current price increase due to weather and geopolitical events suggest, if not confirm, that the USD 305/ton contract that China signed with Russia’s Uralkali and the North American CANPOTEX members (PotashCorp, Agrium, Mosaic) is the new bottom and that a recovery may already be underway. Moreover, prices of pork and beef have also increased. The cattle population has declined since the 70s. This environment should also be positive for the poultry sector, which should also see higher demand. Potash intensive corn is the main feed for farm animals. The higher margins for farmers overall should encourage more use of mineral fertilizers, the market fundamentals of which continue to improve.
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