Fallout From the Russia-Ukraine War: One Year Later

The global economic rebound from COVID-19 was disrupted in February 2022 when Russia invaded Ukraine. The invasion sparked a humanitarian crisis and generated heightened volatility across the energy and commodity markets. Sanctions levied against Russia caused a rapid increase in oil and natural gas prices. Commodity markets were also shaken as Ukraine and Russia are key global suppliers of wheat, sunflowers, and many other agricultural commodities. One year later, commodity prices remain elevated, but a realignment in global trade flows has helped reduce volatility.
May 04, 2023

Disrupted Grain Production

Ukraine emerged over the last several decades as a key global supplier of food and agricultural commodities. Before Russia’s invasion, the agricultural sector employed over 14% of Ukraine’s population and accounted for over 41% of Ukrainian exports. Fertile soil and numerous ports positioned Ukrainian farmers well to compete in agricultural export markets. However, Russia’s invasion in March 2022 derailed decades of development within this sector.

Ukrainian grain production declined sharply last year. Historically, nearly 62% of the 102 million arable acres in Ukraine have been utilized for commercial crop production. This dropped to 46% in 2022 as the Russian invasion disrupted growers. The decline was most pronounced in regions that became conflict zones between Russia and Ukraine. However, grain production also declined in other regions as farmers were forced to ration crop inputs and fuel across the country.

Among the 16 million acre decline in Ukraine’s harvested farmland in 2022, wheat and sunflowers dropped the most. The decline among these crops reflects the geographic regions most impacted by the war thus far. Sunflower production is concentrated in the northeast and central-eastern region of Ukraine, while wheat is concentrated in the east and south. All of these areas saw intense fighting in the last year, and the continued fighting in these regions will likely prevent a significant rebound in the country’s grain production in the near term.

Impact on Prices

The war in Ukraine continues to have an outsized impact on global energy and agricultural prices. Commodity prices initially spiked in 2022 as global trade flows were disrupted. Then wheat, sunflower oil, and natural gas prices all rose over 50% in the weeks following the invasion. Prices for most commodities remain elevated today but have retreated from the historic levels of 2022. The figure below displays the change in price since last year’s peak for numerous commodities affected by the war. Wheat futures prices have dropped 40% from the peak, while corn and soybeans prices have declined 17% and 12%, respectively. The larger decline in U.S. wheat prices is attributable to a record harvest in Australia and a general decline in U.S. wheat export market share over time. Still, high global commodity prices led to a broad increase in U.S. farm revenues in 2022.

For energy prices, the war in Ukraine only added to the volatility of the last several years. Prior to February 2022, energy prices had trended consistently higher after bottoming out during the COVID-19 pandemic. Russia’s invasion of Ukraine accelerated the increase in energy prices, with natural gas prices soaring to record levels. Farmers felt the pinch as fertilizer and fuel prices also spiked. Diesel prices eventually approached $6 per gallon in mid-summer as fears over shortages mounted.

Luckily for U.S. growers, energy prices have slumped ahead of the 2023 growing seasons. Concerns about possible diesel fuel shortages have largely abated. Meanwhile, natural gas shortages predicted for Europe this winter were never realized due to an unseasonably warm winter and sharply higher imports.

After rising during the pandemic, natural gas prices have declined more than 75% since August 2022. This has helped drive down nitrogen fertilizer prices, for which natural gas is a key component. The benchmark New Orleans nitrogen fertilizer price has declined more than 60% since the spring of 2022. Lower fertilizer prices this growing season are helping offset increases among other production costs such as seed and rental rates.

Commodity Prices Relative to 2022 Peak

Outlook for Ukranian Grain Exports

Despite ongoing hostilities, Ukrainian grain continues to flow to global markets via railroads to the west and ships in the Black Sea to the south. The United Nations and Turkey, along with other countries, helped broker a trade agreement between Russia and Ukraine in July 2022 that allowed Ukrainian grain to be exported from certain Black Sea ports. The deal was originally set to expire in November but has since been extended twice and is now authorized into May.

The grain deal has helped alleviate a growing food crisis, but Ukrainian grain exports remain a fraction of pre-invasion volumes. The figure below compares Ukrainian grain export volumes for the 2022/23 crop to the previous 5 growing seasons. Exports of sunflower oil and wheat are projected to be 31% and 25% lower this marketing year due to both reduced grain production and logistical challenges associated with the war.

Notwithstanding the trade agreement, Russia continues to try to obstruct and impede the resumption of Ukrainian grain exports. By repeatedly attacking electrical infrastructure and port facilities, Russia has limited the pace of export loading capacity. This has led to a backlog of ships, which at times wait weeks to be loaded with Ukrainian grain. Among ships that are eventually loaded, Russia has continuously delayed the certification process that is required before the grain can then be delivered to export destinations. All told, the impact of Russia’s actions has been reduced grain supplies for global markets. The current dynamic for Ukraine’s grain exports is unlikely to change in the near future, and global grain prices will remain elevated as a result. U.S. grain producers could continue to see elevated prices and high incomes to continue in 2023, albeit at lower levels than in 2022.

Ukraine Exports