Russia’s invasion of Ukraine has wreaked havoc on the global economy, with the toll being felt across a wide range of industries. As Russia and Ukraine are major players in some key agricultural and energy markets, the agricultural sector was one of the hardest-hit industries at the beginning of the war. As shown in Figure 1, the two countries are major producers and exporters of crude oil, natural gas, fertilizers, wheat, corn and oilseeds.
Sanctions against Russia and disruptions of Ukraine exports have led to skyrocketing prices in these commodities. Prices for soft red winter wheat, for instance, jumped from less than $9 per bushel before the war to almost $13 per bushel by the beginning of March. Crude oil, the most important commodity globally, witnessed its price hitting the highest level since the 2008 financial crisis a few days after the invasion (Figure 2).
Skyrocketing commodity prices have added further inflationary pressures to the economy, which was already pushed to high levels due to supply chain disruptions before the war.
Without question, the agricultural sector in Idaho will feel the effects of this war. In the short term, higher wheat prices mean producers can expect higher revenues. However, soaring input prices (on fertilizer in particular) will cut into these profits. Fertilizer prices had already experienced record-high levels during the pandemic. After the start of the war, export bans and sanctions further tightened the global fertilizer supply, pushing prices even higher. While winter wheat can be fertilized with the entire nitrogen amount in the fall, some farmers may have opted to apply a portion of fertilizers in the spring. Those producers, as well as those growing spring wheat and potatoes, would have to pay more for fertilizer if they had not already locked in fertilizer prices before the war. Similarly, soaring fuel prices will significantly dampen producers’ revenues, as about 10% of the wheat production cost is directly linked to petroleum products.
Another concern is a strengthening U.S. dollar. In 2021, the total value of Idaho agricultural exports reached $1.02 billion, which is over 40% of the estimated total net farm income in Idaho, according to numbers from the University of Idaho Extension. The war has significantly driven up global uncertainty – and in response, investors have poured money into safer assets, such as U.S. dollars. While a stronger U.S. dollar means the U.S. can import goods more cheaply from other countries, Idaho’s agricultural exports will be dampened, as buyers in foreign nations will have to pay more in their domestic currency for goods produced in Idaho.
We use a simple model to examine how the Russia-Ukraine war could affect the revenues of Idaho wheat producers in 2022-23. We focus on the projected inventory levels, which measure the tightness between the market supply and demand. A lower inventory level, all else equal, correlates with higher prices, as users and inventory owners are willing to pay a surcharge for immediate access to the physical commodities to prevent a stock-out. Following research in 2016, we estimate the following regression model for U.S. wheat prices:
Wheat price = f (income, interest rates, exchange rates, ending inventory level, energy prices, manufacturing good prices, time trend).
In addition to exchange rates, inventories and energy prices discussed earlier, we include income, which measures the general demand for agricultural goods, and interest rates, which determine the cost of interest payment for farm loans. Manufacturing good prices and a time trend are also included. We use annual data from 1960 to 2021 to estimate the parameters associated with each factor.
Estimation results (Table 1) show that a 1% increase in oil prices on average will lead to a 0.15% increase in U.S. wheat prices, whereas a 1% exchange rate increase in the U.S. dollar lowers wheat prices by 0.71%. Meanwhile, a 1% increase in ending stocks decreases wheat prices by 0.32%. Other variables that are statistically significant include GDP, manufacturing prices and time trend.
Russia and Ukraine combined accounted for nearly 30% of the global wheat exports in 2019-21. In February 2022 (before the war), the USDA projected the 2021-22 global ending stocks to be around 278.21 million metric tons and exports from Russia and Ukraine to reach 35 and 24 million metric tons, respectively. Assuming wheat exports from Russia and Ukraine are reduced by 50% in 2022-23, the global ending stocks, excluding Russia’s inventory, would decrease by 14.44%, leading to a 4.67% increase in average wheat prices. A loss of all wheat exports from Russia and Ukraine would increase U.S. average wheat prices by 8.11%, due to a reduction of 25.03% in global ending stocks.
Exchange rates also greatly affect wheat prices. All else equal, if the U.S. dollars appreciate by 10%, average wheat prices would decrease by 7.1%. This magnitude of price reduction could pose significant downward pressure on Idaho producers’ revenues. Meanwhile, a 20% increase in oil prices, which was surpassed just one week into the war, would increase wheat prices by a little over 3%. However, the combined effects of these possible changes are uncertain, given the myriad other factors that could shape wheat prices.
Overall, the Russia-Ukraine war has resulted in significant uncertainties in the agricultural sector. While producers in Idaho benefit from higher output prices, their revenues could be negatively affected by weaker demand caused by a stronger U.S. dollar and soaring input prices caused by skyrocketing energy prices. Meanwhile, they are also faced with heightened volatility in output prices. Given such rapidly changing economic conditions, it is essential for producers to develop a solid marketing plan to help them make sound decisions, minimize price risks and improve returns.
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