Impact of the Black Sea Conflict on Markets and Exports

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.

(Confidence: Below Average)