Russia and Ukraine collectively represent the largest bloc of the world wheat trade at a 28% share. They also account for ~17.75% of global corn exports and ~30% of world barley sales, as well as being the largest regional area of the physical seed oils trade (e.g. sunflower oil (75%), rapeseed oil (15%)).
Some 85-90% of Ukraine food/agriculture exports ship through its Southern ports of Chornomorsk, Mykolayiv, Yuzhny and Odessa, which remain closed.
Ukraine has instituted a broad export ban covering key foodstuffs and introduced licenses for corn and wheat sales, which might temper foreign trade in 2Q even if logistics were to ease. Moreover, tight seed availability and a weak 2022 harvest could prompt a short-crop in 2023/24 as well. As a result, the country’s ~15% share of world corn exports could fall to 8-10% or even less over the next year.
Russia is also restricting grain exports to the EU/EEA and restricting exports to ~11mmt quota to other countries through June 30 (with the potential to extend in 3Q), although flows started to slow in Jan/Feb as tensions escalated.
MENA region wheat consumer import share across origins
2019 % share
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Source: OEC, Citi Research
Average staple crop prices are set to be higher and more volatile in 2022 versus 2021. But 2023/24 holds the potential to be deflationary.
The conflict has put upward pressure on food inflation globally. This is a key risk for importing EM consumers in North Africa and the Middle East, which are the economies most sensitive to shut-in Black Sea agriculture trade. Yet other net exporters of staple cereals may benefit from higher volumes including India, Australia, Brazil, Western EU, and possibly the US.
Robust cash grain and soybean prices and steep old-crop/new-crop inversion across CBOT grains/oilseed futures curves point to elevated supply risks and concerns about inventory cushions (which for wheat are highly concentrated in China). Producers/users still need clarity on Northern Hemisphere sowing, the South American row crop (crops that can be planted in rows wide enough to be cultivated using machinery) export program, and the summer weather outlook. Citi analysts expect world food price inflation—especially food-at-home CPI—to spike in 2Q and likely normalize in a higher range over the next 4-8 months.
Will US farmers step-up as the traditional global bread and feed basket? Elevated crop prices provide a significant incentive for US farmers to increase grain acreage, even in fringe areas. Citi’s multi-factor regression analysis projects that U.S. farmers will increase sowing area for the four primary field crops (corn, beans, wheat, cotton) by ~4.8million acres in 2022, or up ~2% y/y, to a total of 243.1mn acres.
Winter wheat, which is 60% of total wheat production, is already planted in the fall at an estimated 2% increase y/y per USDA statistics. Spring and Durum wheat, ~30% of total production, are planted in March-May and are expected to see a larger increase in sowing area because of elevated prices.
The recent rally in corn prices and low soy/corn price ratio also provide an incentive to rotate out of soy into corn, likely leading to a decrease in soybean plantings and a jump in US corn.
High fertilizer prices remain a wildcard
Although farmers in the US have already sourced all the fertilizer (especially, Nitrogen) required for the 2022/23 season (albeit at higher prices), timely supply amid the ongoing conflict poses a tangible risk for yields and thus lower harvest efficiency is possible. This is especially so in Europe, where inputs can be down 20-50% in some economies.
The spring and particularly Northern Hemisphere summer (July/August) weather is especially critical for 2022/23 to achieve trend yields (e.g. July for corn pollination, 1H August for soybean development, and the overall winter wheat harvest).
For the full Citi Research, click on the following link: Global Multi-Asset Strategy - Farm to Fork: Global Grains Price Shock
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