Howdy market watchers. Feb. 24, 2022 — the day Russia invaded Ukraine.
It sounds like a line from the past, but it is very much present day. Another year we thought may be dominated by COVID headlines has now shifted to geopolitical tensions and military action that is likely just beginning. After Russian forces moved into so-called separatist regions in eastern Ukraine, they are now closing in the capital of Ky ev to take control of what is otherwise a sovereign nation.
While equity markets rebounded Friday in one of the best recoveries since late 2020 on news of a Russian-Ukrainian meeting in Belarus, I believe this is a gross underestimation of the situation. It was only a week ago that the market took the bait that Putin was pulling troops off the border only to lead an invasion days later. And all that was before any lines were crossed. Russian forces are now in Ukrainian territory with real consequences in counting. The Ukrainians are fighting back.
Reactions around the world have drawn divisions and demonstrated the balance that Europe must keep. China has refused to categorize Russia’s movements as an invasion and blamed the US for the current state of affairs.
Perhaps unsurprising, but there is increasing solidarity being shown among these two major socialist countries, including China’s approval of wheat imports from all Russian provinces that were previously banned due to pest concerns. Germany halted the progress of the natural gas pipeline from Russia, the UK implemented sanctions followed by the US, although excluding restrictions on the trade of energy and agricultural products.
While President Biden is trying to avoid further price escalation amidst decades high inflation, it is naïve, in my estimation, to think that sanctions excluding energy and agriculture on one of the world’s largest exporters of such products will have any meaningful impact. It may cause short-term pain, but sanctions will only be effective if these sources of foreign currency are entirely cut off.
Enter the anxiety of energy and agricultural markets this week as Russia initiated the invasion. It is unknown to many how important Ukraine is in the global supply chain. Overall, the Ukraine ranks fourth in the world in total value of natural resources. Agriculturally, it ranks No. 1 in Europe in terms of arable land and third globally in area of black soil. As we covered last week, it is a major agricultural exporter able to meet the food needs of 600 million people while having a population of just over 40 million. Ukraine is the largest producer of ammonia in Europe, the second-largest natural gas pipeline in the region and fourth-largest in the world. There are plenty of reasons why a country would want control of this territory.
This is personal for Putin and there will be a fight. There is no simple meeting of compromise that will settle this matter. Grain and energy markets surged after the invasion only to end the week with sharp selloffs and profit taking. Risk premium remains in this market with all Ukrainian ports said to be shut down. This is a relatively lower volume time of year for grain exports as we approach the summer harvests. However, the longer this prolongs, the more uncertainty will add underlying support. Severe drought and cold temperatures in the US wheat belt also will begin to be factored in should the weather remain dry.
The wheat market finished Friday’s trade limit down on expanded limits of $0.75 after surging $1.10 in 3 days. Corn contracts also were limit down on Friday at regular limits of $0.35. Soybeans contracts finished down $0.70 cents versus the regular limit of $0.90.
The USDA Outlook Forum in Washington this week shared expectations of lower corn acres while increased soybean and wheat acres. Given everything discussed here, I do not think we are done with upward movement. However, we are likely to see significant volatility continue that will keep option premiums high. Opportunities are being presented by such volatility, but come and go quickly. Use these market spikes to capture market value for grain still in storage as well as protecting downside on new crop.
US grain exports this week were solid with decent soybean buying by China. If the threat of exports are prolonged, I believe we will see greater US exports as importers get demand anxious to secure supplies. Interestingly, this weekend marks the 50th anniversary of President Nixon’s historic visit to the People’s Republic of China to foster international relations. Despite all the “progress” made since then, in some ways, it seems we are further behind than ahead at being aligned. I only expect these divisions to intensify in the coming years as China and Russia work together.
The USDA released the monthly Cattle-on-Feed report on Friday at 2 pm Feb. 1 on-feed numbers were right in line with expectations at 100.8%, January placements were lower than expected at 98.8% versus 99.2%, and while January marketings were also lower than expected at 96.9% versus 97.3%. Feeder and live cattle futures briefly recovered on Friday with a surging stock market, but closed well off the highs. Gaps were created on the charts, and I don’t expect them to be filled this next week. As more cattle come off wheat in the coming weeks, I believe feeder markets will remain soft.
As mentioned before, if selling cattle here, consider buying call options for the potential to ride these markets back up. Beef in cold storage at the end of January was the highest since 2016 and will only create buffer stocks for packers to back off on purchases. Give me a call if you would like to implement an upside, call option strategy for your operation should markets remain under pressure when you sell your cattle.
If you’re ready to trade commodity markets, give me a call at (580) 232-2272 or stop by my office to get your account set up and discuss risk management and marketing solutions to pursue your objectives. Self-trading accounts are also available. It is never too late to start and there is no operation too small to get a risk management and marketing plan in place.
Come see me every Thursday sale day at the Enid Livestock Market and let’s talk markets. Wishing everyone a successful trading week.
Sidwell is a Series 3 licensed commodity futures broker and principal of Sidwell Strategies. He can be reached at (580) 232-2272 or at brady@sidwellstrategies.com. Futures and options trading involves the risk of loss and may not be suitable for all investors. Review full disclaimer at http://www.sidwellstrategies.com/disclaimer.
