Rapidly Rising Grain Prices

The Russian navy has completelyblockaded the Black Sea preventing maritime vessels from entering or departingthrough which 90% of Ukraine’s agricultural products are shipped through itsvarious ports. This present-day nightmare scenario was articulated in my SAarticle entitled BuyOpportunities with Tightening Global Agriculture Marketspublished on 19 February 2022 less than a week before the Russian invasion andbefore grain prices rose dramatically. Furthermore, according to the IMF andwell before the Russian invasion in late February, wheat prices had already increasedby 80% from April 2020 through December 2021.

Undervalued Grain Prices |Buying Opportunities Still Abound

For those investors who may besuffering the condition of “fear of missing out” (FOMO) of not purchasing farlower pre-invasion grain prices, I believe that the the bull run has just begunand that there is considerable near-to-medium term upward movement as theRussians intensify their “all in” invasion efforts.

The Russo-Ukrainian war hasprofoundly impacted energy prices because Russia is a major energy provider toEurope. However natural gas supplies continue to flow to European countries throughRussian and Ukrainian pipelines with increasing energy prices reflecting therisk of supply reductions.

On the other hand,agricultural exports from Ukraine have been shutdown entirely with Russia’sblockade of the Black Sea while draconian sanctions against Russia prevent thepurchase and export of Russian agricultural products.

Since the start of theinvasion the rise in energy and grain prices have generally moved in tandem. HoweverI believe that grain prices are lagging far behind the actual risk and presenta brief buying opportunity window.

Major containercompanies, notably the largest ones like A.P. Moller Maersk and MediterraneanShipping, have temporarily suspended service to Russian and Ukrainian ports. Russia’sinvasion of Ukraine’s southern region has resulted in damage to portinfrastructure. Furthermore, maritime freight and insurance rates haveincreased as several vessels came under attack by Russian naval fire creatingan economically unviable hot zone.

With respect to wheat, TeucriumWheat ETF (WEAT) has provided robust returns since the start of the war andcontinues to provide an excellent investment opportunity.

The Global Food SecurityPerspective

This section will review thepresent-day and near-future dynamics with respect to an ever-shrinking globalinventory and crop yield for grains.

According to the US Departmentof Agriculture the total grain exports of Russia and Ukraine represent 30% ofglobal exports. The following chart entitled UkraineCrisis Likely to Push Up Wheat Prices provided by the UN ComtradeDatabase presents a visual with respect to the world’s largest wheat exporters.

China’s Insatiable GrainPurchases

An important fact to consideris that China and India, each with a population of 1.4 billion, are the leadinggrain producers yet most of these grains are consumed domestically.

The enormity of China’sproduction is articulated in the following chart entitled Kingof Crops: China’s Gigantic Agricultural Productionprovided by the US Department of Agriculture.

According to Reuters, in 2019Ukraine surpassed Russia in becoming China’s trading partner with an 80%increase from 2013, the largest importer of barley and purchaser of 30% of itscorn production.

Despite China’s prodigiousproduction they face two huge threats that have degraded their ability to feedtheir population through domestic crop production which is directly correlatedlike most emerging countries to internal security controls.

Michael Beckley, author of theupcoming book “Danger Zone: The Coming Conflict with China,” describes twothreats that explains China’s increasing needs for grain imports:

1.   Thefirst threat is the rampant commercial development and poor environmental planningover the decades that has eliminated 40% of China’s arable land.

2.   The secondthreat is that China is severely water-stressed and present-day has a percapita freshwater availability equal to that of Saudi Arabia.

2022 Projections | DecliningInventory & Crop Yields

Data from S&P GlobalPlatts provides a sobering trend that forecasts a dramatically tighteningagricultural market.

Production for Exports 2022

 According to the US Departmentof Agriculture (USDA) February 2022 reports for 2019/2020, US and world wheatproduction was 296.54 metric tons. Their projection for 2022 is 278.21 metrictons, a decline of 6.2% which did not factor in the Russian invasion of Ukrainewhich took place later in the month. Underscoring the criticality of the sourceof agricultural products, the US’ exports are less than half of Russia andUkraine. This means that the US (and its allies) are unable to come close inmaking up the shortfall to highly dependent clients of Russian and Ukrainiangrain exports.

Another measure of upcomingseverity of a global grin shortage is provided by the Food and AgricultureOrganization whose “stocks-to-use ratio” 2022 forecast for wheat demand is28.7% vs. 31.9%. 4 years ago.

According to the USDA “to calculate the stocks-to-use ratio, takethe ending stock number, and then divide that by the total demand usage number whichcan then be expressed as a percentage.” Each crop has its established normalstocks-to-ratio level. For wheat the normal stock to ratio is 35%.

Furthermorea “stocks-to-ratio” of 20% is the equivalent of 75 days global inventory ofwheat. This means that the 2022 forecasted inventory is just over 107 days vsthe normal inventory of 131 days, a difference of 3½ weeks.

The alarming medium tolong-term trends impacting future crops and inventory in addition to the BlackSea blockade as provided by S&P Global Platts are the following:

1.   Russiahas prohibited the export of fertilizer until April. As the world’s largestexporter of fertilizer, global crop yields will be diminished.

2.   Withrespect to Ukraine, wheat is planted in September/October and harvested in July.If pesticides and fertilizers are unavailable under war conditions theestimated crop yield could decrease as much as 33%.

3.   Theglobal wheat “carry-over” (inventory) from past crops is at its lowest since2008 at only 16.9 million metric tons.

Global grain supply is in aprecarious position as, unlike energy, agricultural production is highlydependent on environmental factors with generous technical assistance such asfertilizer and pesticides, both of which are in short supply and quiteexpensive.

Radioactive Risk to Crops

In a world where theimpossible is now the plausible, another potential risk to the global foodsupply is radiation leaks from Ukraine’s nuclear power plants, all of which arein combat zones. Already the Zaporizhzhia nuclear plant, Europe’s largest and locatedin the Ukrainian agricultural heartland, suffered a fire after a Russian bombardment.The fluidity of war has not allowed a definitive answer as to the extent of thedamage and whether there was any radiation leakage. Any radioactive soilcontamination represents a long-term major threat to grain production.

The following chart entitled Ukraine’sNuclear Power Plants provided by Statista research, an online informationfirm, presents the names and locations of Ukraine’s nuclear power plants.

Conclusion

The meteoritic rise in agricultureprices will continue to rise aggressively because of present-day logistical,near-term production and medium-to-long term environmental factors, each ofwhich provide a solid price floor.

For the aforementioned reasonsI believe that the rising grain prices are under-valued compared to theirenergy counterparts. This represents an enormous opportunity for investments ingrains, specifically wheat, which is classified by the USDA as a strategicgrain.

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The Cerulean Council is aNYC-based think-tank that provides prescient, beyond-the-horizon, contrarianperspectives and risk assessments on geopolitical dynamics and global urbansecurity.