Commodity prices, including wheat, corn and soybeans were soaring Thursday following Russia’s attack on Ukraine, stoking fears of a shock to a global economy already struggling with persistent inflation. Those moves were in addition to a surge in crude oil prices, which saw both the U.S. and global benchmarks top $100 a barrel for the first time since 2014 early Thursday and sent natural-gas prices soaring in Europe. “Of course, given Russia’s role as a commodity superstore, the economic impact of this crisis could extend well beyond oil and exacerbate the current global inflationary dynamics,” said analysts led by Helima Croft, head of global commodity strategy at RBC Capital Markets, in a Thursday note (see chart below). May wheat was up 5.7%, or the 50-cent daily limit, to a nine-year high at $9.3475 a bushel on the Chicago Board of Trade. May corn rose 29.5 cents, or 4.3%
“As Russia and Ukraine combined account for 25% of global wheat exports and Ukraine alone for 13% of corn exports, the food price inflation risk stemming from this conflict appears acute,” the analysts wrote. The worry is that Russia’s naval deployments in the Black Sea could make Ukraine’s ports inoperable, they said, noting that around 90% of the country’s grain exports are transported by sea. In addition, Russia is the largest producer of ammonium nitrate, a critical component in fertilizer, and has already moved to curtail exports of the product, ostensibly to support the domestic agricultural sector, the analysts noted. The fear is that Russia “could well retaliate to the extensive sanctions that are anticipated by reducing its oil and gas shipments,” said Carsten Fritsch, commodity analyst at Commerzbank, in a note. There’s also the risk that should sanctions “affect payment transactions, Russian banks and possibly also the insurance that covers Russian oil and gas deliveries, supply outages cannot be excluded,” he said.
West Texas Intermediate crude for April delivery remained up 5.7% at $97.33 a barrel on the New York Mercantile Exchange after trading as high as $100.54. Brent crude, the global benchmark, was up 5.9% at $99.60 after hitting a high of $102.26. Crude prices have surged by around 30% since the beginning of the year in response to tight supplies that have made the market particularly sensitive to potential supply disruptions. Russian tanks and troops rolled across the border early Thursday, Ukraine’s government said, accusing Moscow of launching a “full-scale war” after Russian President Vladimir Putin announced a “special military operation” after a months-long military buildup on the country’s borders. U.S. stocks suffered sharp losses, with the Dow Jones Industrial Average off session lows but still down 580 points, or 1.8%, while the S&P 500 was off 1%. Investors piled into traditional havens, sending Treasury yields TMUBMUSD10Y, 1.945% tumbling as gold jumped to its highest in more than a year and the U.S. dollar rallied.
While many equity analysts have played down the lasting effects of war, citing past quick rebounds from geopolitical events, others have noted the potential for war between Russia and Ukraine to stoke fears of a stagflation environment — a combination of persistent inflation and slowing, or stagnating, economic growth — and complicate efforts by central bankers to tighten monetary policy. The RBC analysts, meanwhile, warned against assumptions that Moscow would be reluctant to weaponise commodity exports out of fear of losing market share. They noted that rising commodity prices and fiscal reforms have allowed Russia to build a substantial foreign exchange and sovereign-wealth fund war chest, with international reserves at an all-time high of more than $630 billion, insulating the country against Western sanctions.
“Some market participants contend that Russia would not want to risk their position as a reliable supplier, but since they have just plunged Europe into the gravest security crisis since WW2, we do not think we should be naïve about the willingness of the Russian leader to play the commodity export card in pursuit of his revanchist agenda,” the analysts wrote. MW
