Putin Seeds Grain Bull Market

Western ignorance has fostered unfettered dependence upon Russia’s food exports. Putin knew that in the short term, Europe and the world could not replace the Oil, Natural Gas, Uranium and Wheat exports he needed to help fund his military campaign in Ukraine and beyond. Russia has drastically cut its export of grains through mid-year, tapping over half of its grain stockpile to reduce its domestic food inflation as well as support their currency. As the world’s largest exporter of Wheat and a major supplier of fertilizer, it’s understandable that crop prices have soared this year. It’s also increasingly clear that Ukraine, the world’s number 5 Wheat exporter and a major Corn producer, is unlikely to export much of its crops this year. If the US was being proactive, it would offer incentives to farmers as well as remove environmental payment in kind programs restricting our use of croplands during this period of extreme food inflation.  Somalia, Laos and Egypt are almost totally dependent upon Russia’s Wheat. Riots in 3rd world countries over food and fuel have already begun with no respite likely this year.

While alternatives exist for Sunflower Oil, Ukraine was the world’s largest exporter.

Similar to Oil and Gas, food crops are experiencing extreme shortages due to low inventories, elevated demand from Government stimulus and the elimination of supply from Russia and Ukraine. Too often the media pundits add Global Warming to the causes of food inflation. The fact is, climate has never been an impediment to long term food supplies. All crops exhibit secular production growth commensurate with demand and have been able to overcome short-term and long-term interruptions due to extreme weather throughout history. There are no signs of crop production declines outside of Government influence.

CO2 is not the culprit for food inflation as the replacement of Coal with cleaner fossil fuels has lowered CO2 emissions in the US. The war in Ukraine unfortunately may elevate CO2 and coal usage over the short to medium term. This will  eventually be offset by increased adoption of relatively clean Natural Gas and higher capacity utilization of existing zero emission nuclear power plants.

If CO2 plays a major role in climate, then perhaps the shift to Natural Gas from Coal has been a factor in the flat temperature trends over the past 7 years. For now, war is clearly the greater existential risk.

A cessation of Corn and Wheat exports from Russia and Ukraine should lead to food shortages, sky high prices and civil unrest in Middle Eastern and African countries. Normally food inflation is merely a problem of poor countries that can’t compete with wealthier countries for more expensive agriculture sources. This year there may actually be widespread shortages if a third of the world’s wheat exports are removed. While civil unrest and starvation will be heightened concerns in 2022, excessive Western consumption could certainly afford to go on a diet as unhealthy overconsumption of calories has reached alarming levels.

Much of the expected food shortages have been priced into the extremely inflated crop prices in the futures market today, but there may be another leg higher when China opens after this new Covid lockdown ends and when the Q3 harvest season is unable to satisfy depleted inventories. Since the Bull market in stocks peaked at the start of 2022, the broad large cap S&P 500 Index has fallen 14% to date, while the stock (ETF) of Wheat and Corn are 40% higher and Soybeans have 24% gains. While we don’t expect a Global Recession this year without a cutoff of European energy from Russia, the agricultural Exchange Traded Funds (ETF’s) continue to be a safe place to park investments during the Russia – Ukraine tumult.

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