How any Ukraine conflict could affect wheat, fertilisers, food, and energy

'Sanctions could usher in shortages of food and energy, causing prices of both to soar', analysts say

Ukraine and Russia together are heavyweights in global wheat, corn and sunflower oil trade, leaving buyers from Asia to Africa and the Middle East vulnerable to more expensive bread and meat if supplies are disrupted.

Tensions over Ukraine are entering a critical period, driving up prices of raw materials key to the global economy, and piling pressure on governments already struggling with surging inflation.

The US has warned that Russia could attack its neighbour as early as this week, even though Moscow has repeatedly denied it plans to invade. Markets have been on edge for weeks, and an actual conflict — or sanctions on Russia — could drive energy and food prices even higher, and push Europe into a major supply crisis.

Crude oil is approaching $100 a barrel and gas in Europe surged on Monday. Aluminium is heading toward a record high and palladium has risen this year, while wheat continues to gain.

The crisis “could spawn a butterfly effect, sending commodity prices spiralling higher as supply woes multiply”, analysts at Bloomberg Intelligence say. “Sanctions could usher in shortages of food and energy, causing prices of both to soar," they said. 

One of the biggest impacts so far has been on Europe’s wholesale gas markets. 

A full-blown conflict could disrupt the massive volumes that Russia sends to Europe, about a third of which comes through Ukraine. Sanctions could hit trade and keep a new pipeline, Nord Stream 2, from bringing Russian gas to Europe. That could all have a big impact in the summer, making next winter difficult as well. 

Prices could surge even higher, and send Europe’s economy reeling. Russia would also lose huge amounts of revenue. Still, many think it’s unlikely gas supplies would stop, or even be cut significantly. 

Higher food prices

A major casualty could be even higher food prices. Ukraine and Russia together are heavyweights in global wheat, corn and sunflower oil trade, leaving buyers from Asia to Africa and the Middle East vulnerable to more expensive bread and meat if supplies are disrupted. That would add to food-commodity costs that are already the highest in a decade.

When Russia annexed Crimea in 2014, wheat prices jumped even though shipments weren’t substantially affected. Russia and Ukraine’s share of world exports has increased since. Russia is also one of the world’s biggest exporters of all three major groups of fertilisers. Any cuts in supply may result in a surge in already high nutrient prices, affecting crop yields and cause further food inflation.

Traders are also weighing the risk of disruption to Russian exports of metals including aluminium, nickel, palladium and steel. US sanctions against Rusal which formerly controlled Aughinish in the Shannon estuary, sparked turmoil in the aluminium market in 2018, and policymakers may not want to risk a repeat.

But should Russia get cut off from the Swift international payment system as part of any sanctions, it would slow down the flow of funds and hit exports. Even short-lived disruptions could have an outsized impact. JP Morgan estimates that Russia accounts for about 4% to 6% of global refined production of copper, aluminium, and nickel.

Any disruptions to oil flows from Russia, with low spare production capacity in other countries, could easily send prices rallying. JP Morgan’s analysts have even tested the possibility of a spike to $150. Prices are approaching $100 a barrel. At that price, the impact on the global economy could be debilitating. It’s a reason many don’t expect sanctions to be so severe that oil flows are significantly affected. Besides, Saudi Arabia and some others could potentially fill the gap.

Still, traders remain edgy. About half of Russia’s oil and condensate exports are directed to Europe. Disruptions could wreak havoc, and force trade routes to change. 

• Bloomberg