This is part four of four of the Black swan in the Black Sea series.
The top four products in the global edible oils market — palm, soybean, rapeseed (canola) and sunflower — were tight before the war. To that end, the political incentive to keep Russian sunflower oil supplies off the market was not viable for India, a top global edible oil importer.
Indian banks began opening letters of credit for traders looking to buy Russian ag products and providing other loopholes to allow for Russian ag products to be accessed by Indian buyers in late March. Also, Russian and Indian governments are working to coordinate a payment system denominated in rupees and rubles to circumvent banking sanctions.
“Indian buyers are paying in dollars. Indian insurance companies are providing cover to vessels bringing sunoil from Russia,” a New Delhi-based dealer with a global trading firm told Reuters in late March.
Ukraine produced over 43% of the world’s exportable sunflower oil supplies in the 2021/22 marketing year. Ukrainian sunflower oil exports are projected to fall 13% in 2022/23 as small-grain crops take precedence over more costly (and difficult to export) grain and oilseed crops in Ukraine this spring.
Sunflower from Argentina met India’s demand for a few weeks, but it’s not a sustainable strategy.
“Even after the imports from Russia and Argentina, there would be a shortfall of sunoil. Nobody can replace Ukraine’s shipments,” Sandeep Bajoria, CEO of Sunvin Group, a vegetable oil brokerage firm, told Reuters in late March. “Sunflower oil is very expensive. This is forcing price-sensitive buyers to shift to other oils.”
Annual export forecasts for U.S. soy oil shipments increased by 21% with the war’s onset, to 1.73 billion pounds expected to be shipped in 2021/22. That, of course, is a bullish sign for U.S. soybean producers and crushers as soybean oil is substituted for sunflower oil. But there are more significant dynamics at play here.
First, the transaction signals to markets those supplies remain accessible to global buyers if they’re willing to buy from Russia. Second, sanctions may have a sticker-shock effect that provides a temporary deterrence from buying Russian supplies. But the reality is that in an era of tight global feed and food supplies, Russia’s ag products will not likely stay away from the market for long.
Hostile trade relationships ahead?
The world is adjusting to Ukraine’s waning presence in the global grain and oilseed markets, and Russia’s fertilizer export ban. Even if Russia spontaneously evacuates Ukraine — which was highly unlikely as of late May — the damage inflicted upon Ukraine’s food production and transportation infrastructure will take years to repair.
Following the money trail in the oil industry helps to envision how future trade alliances may pan out. In late May, China entered into talks with Russia to purchase oil to replenish state reserves. Russian oil is currently trading at a discount to global prices as economic sanctions limit its viability on the market.
Despite complete U.S. and U.K. bans on Russian oil purchases, as well as looming measures expected from the European Union, Russia continues to sell its discounted oil to buyers in India and China who are willing to circumnavigate the financial institutions sanctioned by the West.
For anyone following the Black Sea conflict over the past few months, this development should not be surprising. China and India have wasted little time in passing up the opportunity to access cheap Russian energy supplies. This likely foreshadows future trade alliances in the post-Ukrainian war world that may be less influenced by market pricing than strategic relationships.
As evidenced by its dealings with India and China, Russia is not likely to remain a quiet player on the world grains stage, despite sanctions. Food, feed and fertilizer supplies are simply too tight to forgo Russian stocks altogether, particularly in more impoverished countries in Africa, Central Asia, and the Middle East.
Even so, price will remain an issue for these buyers — likely for the foreseeable future. Demand has largely outpaced production gains in the global food market over the past 20 years, especially in the wheat and soybean markets.
That leaves more countries reliant on international grain, oilseed and fertilizer flows to ensure supplies. Top buyer China is likely to be the early adopter to any further trade flow adjustments, so following its direction could help markets better determine future price discovery mechanisms.
Maintaining strong relationships between global entities has allowed U.S. farmers to farm at profitable levels over the past two decades.
But as those alliances deteriorated leading up to and amid the Russia-Ukraine war, a new era of higher production and crop prices, plus more competitive — and potentially hostile — trade relationships, may be on the horizon.
A murky outlook
Many unprecedented factors vexed the agricultural commodity and fertilizer space before late February, constricting global supplies and pressuring prices higher. Russia’s invasion into Ukraine was another unwelcome headache for global food producers.
But there is a silver lining — for now. Crop prices accelerated more rapidly than fertilizer costs following the war’s onset. That dynamic could change as demand heats up this fall for 2023 inputs, which are likely to be in high demand as growers seek to offload cash reserves before Uncle Sam comes calling.
While more price highs may appear in this volatile environment, don’t miss out on the unprecedented revenue opportunities the war is providing growers. It might be a while before input prices go down, but crop prices will inevitably drop first. And when they do, make sure you have the cash reserves on hand to adjust to what will certainly be another unprecedented market environment.
This is part four of four of the Black swan in the Black Sea series. For more, read: