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Impact of the Black Sea Conflict on Markets and Exports
25 February 2022IHS Markit Agribusiness Expert
There is currently a tremendous amount of uncertainty injected
into the market due to the ongoing conflict in Ukraine. Here we
have outlined the broad market implications of Russia's actions.
Additionally, we have outlined two scenarios regarding exports from
the region along with the confidence level. Lastly, we have
outlined two scenarios for markets going forward and the market
implications. Keep a finger on the pulse with the IHS Markit Crop Commodities Market
Insights and Forecasting.
Bullish Crude Oil
Our IHS Markit Energy team has outlined multiple scenarios for
the crude oil price, with the most bullish pointing to sustained
prices in the $116-$120 per barrel level. If this scenario or
similar is realized, it will be bullish ag crops, starting with
those most closely linked to motor fuels (sugar, corn, veg oils)
but eventually filtering through to other crops. Moreover, this
will adversely impact feed costs for livestock feeders. The
strength of the bullishness and duration of the rally will likely
be determined by the effectiveness of sanctions against Russia.
(Confidence: High)
Investors Flight to Safety
We expect the US dollar to benefit from global risk-off trade as
investors brace for more volatility and uncertainty. This typically
means demand for US short-term treasuries and the strong US dollar
in the coming weeks. In time, we believe this will lead to stronger
currencies of large commodity exporters with stable governments
(Brazil, Australia, Canada, etc.). This is under the presumption
commodity prices will remain strong with sanctions isolating Russia
from world trade.
(Confidence: Very High on USD, Moderate on other currencies, and
dependent on sanction effectiveness)
Rotational Trade Accelerates
For a few months now, money managers have been reducing their
exposure to equities and increasing their exposure to commodities.
The recent events should increase this trend. Commodities,
including ag commodities, have outperformed equities. Moreover,
Russia and Ukraine are significant exporters of raw commodities to
the world. The action in Ukraine will no doubt interrupt exports
out of the country for an undetermined period. Additionally, the
coming sanctions on Russia are likely to curtail their exports.
This will likely increase the bullish bias in commodities and asset
allocation.
(Confidence: Moderate)
Scenario #1
Military actions in Ukraine will cause wheat, corn, and
sunflower oil exports to be significantly reduced in the next three
months due to disruption to logistics, damaged roads and ports, a
lack of workers due to safety, and instability of the banking
system. After that, Ukrainian exports will stabilize. Moreover,
sanctions against Russia do not materially cut them off from world
commodities trade. This would mean the rally in ag commodities will
be reasonably short-lived, less than six months.
(Confidence: High)
Scenario #2
This includes scenario #1 but sanctions against Russia
materially reduce their ability to export wheat, sunflower, and
crude oil. Under this scenario, prices continue to move higher and
maintain themselves at high levels for a sustained period.
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