Now that Russia’s invasion of Ukraine has begun, world markets are concerned about its impact on wheat and energy.
At this writing, Ukraine has closed its ports. Wheat futures prices jumped at the news. According to the U.S. Department of Agriculture, Ukraine and Russia together account for about 23 percent of global wheat exports through the Black Sea. Russia alone accounts for 18 percent. Both are key suppliers of wheat to Europe and the Middle East, where food prices could rise if Black Sea wheat exports are interrupted. European nations and the U.S. have slapped sanctions on Russia, its state-owned companies and on individual members of its ruling elite. Germany has stopped certification of the Nord Stream 2 pipeline, which was completed in September of last year but was awaiting final permission. It’s probably no coincidence that Russian President Vladimir Putin chose winter, the time of peak energy demand in Germany, to make his moves against Ukraine. The Nord Stream 2 project was important to Russia because most other pipelines to its western European customers go through Ukraine, and it’s unknown what measure that country may take to halt them.
U.S. food prices are less likely to be directly affected. Asked repeatedly about Ukraine during a press conference at the 2022 USDA Agricultural Outlook Forum, U.S. Secretary of Agriculture Tom Vilsack said it was too early to project, but he didn’t expect major impacts to U.S. food prices. “If I were a European consumer, I might feel very differently,” he added.
Oil jumped to $105 a barrel in the wake of Russia’s invasion of Ukraine—the first time in more than seven years that the price hit more than $100 a barrel. Supplies were already tight around the world.
The OPEC countries (including Saudi Arabia and Russia, the two biggest members) have agreed among themselves to keep restricting supplies to build up reserves and get prices up and because they are cautious in the face of any more possible COVID restrictions that could lower world demand. However, it looks as though COVID restrictions may finally be easing for good worldwide..
According to the U.S. Energy Information Administration, U.S. crude oil production reached almost 11.8 million barrels per day in November 2021, the most in any month since April 2020. The EIA forecast (before the Ukraine news) that production would rise to an average of 12.0 million barrels per day in 2022 and 12.6 million in 2023, which would be record-high production on an annual-average basis. The previous annual average record of 12.3 million barrels per day was set in 2019.
Demand from Europe for natural gas and oil from the U.S. was already high. The EIA estimated that U.S. LNG exports averaged 11.2 billion cubic feet per day in January 2022, up from 10.4 billion in the fourth quarter of 2021, supported by large price differences between the Henry Hub price in the United States and spot prices in Europe and Asia. Inventories in Europe remain much lower than their five-year averages and are contributing to strong demand for LNG imports. EIA said it expects high levels of U.S. LNG exports to continue into 2022, averaging 11.3 billion cubic feet per day for the year, a 16 percent percent increase from 2021.
Again, EIA made this forecast before the invasion of Ukraine threw markets into turmoil. According to one analysis in the U.S. financial press, U.S. producers haven’t turned on the production spigot as much as they could, even in the face of high gasoline prices and increased demand. It’s not necessarily because of caution about renewed COVID restrictions, but in response to demands from oil company shareholders for more profitability and dividends after years of uncertainty and price swings.
No one can tell what will happen or what sanctions against Russia might remain in the long term that might affect wheat and energy markets. While events in Ukraine are capturing the attention of the world, the direct effects to grain and energy markets are likely to affect our allies more than ourselves. Be that as it may, in the face of increased uncertainties about the availability of wheat and energy, U.S. transportation networks will be relied upon even more in the coming months to be more efficient and reliable to get our products to world markets.