Perspective: Morning Commentary for February 28

By: Arlan Suderman, Chief Commodities Economist

Mon, 28 Feb 2022, 14:20

Perspective: Morning Commentary

Arlan Suderman

Chief Commodities Economist

February 28 – Ceasefire talks began today on the Ukraine-Belarus border, but confidence is low that meaningful progress will be achieved. Rather, the markets are pricing in the weekend’s escalated tensions that rose to a new level in Russia’s fight to take over Ukraine. The VIX is trading near 32 on the escalating tensions, while the dollar is trading near 96.8. Yields on 10-year Treasuries are trading lower near 1.89% as money flows into the safe-haven assets. Crude oil prices are trading 4% higher above $95 per barrel after spiking above $99 overnight. The Ags are sharply higher on risks that a significant amount of global trade has been taken off the global market for this year, and possibly the next. We are rapidly moving toward the point where spring crops will not be planted in Ukraine due to a number of different factors that could keep Ukraine’s vast production capacity offline over the coming year. Furthermore, revised production estimates should come out of drought-stricken Brazil this week as well.

Russia is rapidly being isolated, but Russia’s President Putin remains resolute to move forward – seemingly even more defiant as the problems build for his push to take Ukraine. The stakes were increased over the weekend as the West stepped up sanctions, Putin became frustrated with the lack of progress by his army, and as more countries stepped up their criticism of Russia. Russian troops continue to advance through Ukraine, but they’ve encountered significant resistance from Ukrainian citizens fighting alongside the Ukrainian army. The citizens of Ukraine are determined to remain free at all costs.

European leaders reversed their position on Saturday to allow a partial exclusion of Russian banks from the Swift banking system based in Brussels. This eliminates these banks from transferring funds necessary for Russia to do business with nearly every other country other than China. They didn’t go all the way, as Western leaders are not yet willing to pay the price of higher energy prices to block banks funneling funds to Russia for the crude oil and natural gas that it sells to the West, but it’s the strongest step that they’ve taken to this point. Regardless, the steps taken are expected to disrupt some energy movement. It’s believed that President Putin has roughly $640 billion of reserves to live off of for a while, although attempts are being taken to isolate him from those funds.

Flow of many of the other commodities out of Russia had already begun to stop. Those commodities needing to flow through the Black Sea face large insurance premiums to move through the troubled waters after several ships were hit by missiles last week. That all but stopped the flow of corn, wheat, and fertilizer through the Black Sea, especially anything flowing from Russia and Ukraine. That potentially removes 29% of the world’s exportable wheat from the global market, along with 16% of the corn and 15 – 30% of the fertilizer needed for the Northern Hemisphere growing season and roughly three-fourths of the sunflower oil.

President Putin is said to be angered by the slow progress of his army across Ukraine as it encounters resistance, while also being upset with the West’s response. As such, he upped the ante on Sunday by raising the alert status of his nuclear defense forces. Whether he believes it, or is simply saying it to justify his actions, Putin’s statements suggest that he sees Russia as the victim in the is conflict with all the West out to get him. In all likelihood, raising the alert status is merely an attempt to step up pressure on the West to back down, but in reality, it requires that the West raise its alertness as well. That ratchets up the risk that a misunderstanding or miscommunication turns into a dangerous nuclear conflict. The U.S. State Department warned Americans currently living in Russia to leave immediately as tensions mount. There are now reports that the European Union has offered Ukraine fighter jets to use in its defense, which suggests that Europe sees an increased urgency in getting Russia stopped.

There’s another risk not getting much attention at this point. Will we see any crops planted in Ukraine in 2022, beyond the winter wheat currently growing? And how much of that will be harvested. Ukraine is at risk of falling to Putin’s armies. Will he allow landowners to retain ownership of their ground? What incentive will they have for planting crops, especially since many of them live out of the country? Will there be enough seed and other crop inputs available to grow a crop? How will it be financed with the current financial networks disrupted? Will they be able to find parts for equipment? Ukraine is responsible for nearly 12% of the world’s wheat exports each year and more than 16% of its corn exports. That’s a lot of grain that could be lost from the world balance sheet over the next year or two. This is far from over, even if the fighting ends soon.

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