Commodity Supply Shortages: Will We Have Enough?

Six months into Russia's war on Ukraine the effects on commodity supplies are being felt around the world.  Additionally, the climate crisis is creating further supply shortages as countries struggle to fill the deficit.  





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Transcript

Russia/Ukraine: Commodity Supply Shortages
Season 2: Episode 2

 Ryan: Welcome to The Real Spiel with Ryan and Kurt. Wanted to talk to you Kurt about commodity supplies and to talk about supplies we'd be remiss not to mention the Russia and Ukraine conflict. They're both critical suppliers of food and grains, energy, and metals. And earlier this year it was a widely held belief that Russia wouldn't invade. But if they did, it would be over in a week. Now we're well over six months in and of course it’s still having an impact on markets today. Through summer, Ukraine has continued to show resolve and have actually regained some of their territory more recently in the context of commodities, ongoing conflict will continue to be a supply constraint globally, and while not trying to predict an outcome. What are your thoughts on commodity supplies as they relate to the Russia Ukraine conflict?

 Kurt: Hey Ryan. I think this conflict was something that was not in anyone’s  forecast. Right. And no one at the beginning of ‘22 thought, okay, let's put in a major, you know, military conflict between Russia and Ukraine and the commensurate kind of economic impacts that would have whether it's you know embargoes on fuel or exports from Russia as well as Russia’s refusal to deliver oil and gas to Europe in a way that they have traditionally for the last decades. So, I think this is very been very unexpected. But as you said, in addition to the conflict itself being a surprise, I think that just the fact that we're still talking about it and it's still ongoing and very much alive today. And more than six months in is significant. And I'm saying this in the context of commodities, because this is the breadbasket of Europe, there is huge amounts of wheat that are produced from this region, sunflower oil, which is not maybe as common in the US, but is very common in Europe and the UK, and many of those supplies come from this Ukraine region and all the supplies have been just bungled up for the last six months. And so we're not seeing the production that we would hope for. There have been some successes in exports from grains that were in storage at the beginning of the war that are finally starting to eek out. But I would say, those shipments are not anywhere near what we saw in 2019, 2020 and further production, the harvest for the next cycle has also been constrained by the conflict and by the lack of ability of storage for farmers. So, this is still a big issue. So going beyond even food, we've got the aspect that Russia is a huge producer of certain key industrial metals, the large producer of gold, also major producer of platinum palladium group metals, which are used in pollution control. But you know, also significant producers of nickel, of copper. And Russia continues to move towards being an economic pariah on the global stage, that we are seeing less and less willingness to do business with Russia. I think there’s a reasonably high risk that Russia's not gonna be a global exporter of energy, anywhere, like they used to be. They were a major exporter of oil and gas for decades. Huge one of the most important sources of their economic output every year. Essentially Europe is cutting off Russia as a supplier of both oil and gas. Probably by the end of ‘22. That's going to be painful for large parts of Europe. Painful in terms of not having adequate supply of heating oil or gas for heating or for energy output. But also painful in terms of the prices, of you even can access those that prices have gone up a lot. If you look at natural gas prices in Europe or even the price of local spot oil, they are very high. 

 So, I think that it is almost impossible to overestimate the impact on global supplies. Whether it's food, metals, or energy that the Ukraine and Russia conflict have imposed on the global economy. And in, you know, interestingly, as we get into the later, ‘22, we're not seeing any kind of quick resolution. We're seeing, in fact, maybe an escalation of hostilities between those. Thankfully we've had some positive signs of shipments of grains out of Ukraine. But I think the conflict itself still is as hot as ever maybe as I said, even escalating from here. And I think those are all going to have a significant input or impact on global supplies and output across major sectors of the commodity world. 

 Ryan: Absolutely and you touched on this, Ukraine is a massive exporter of grain and through March to August of this year, it's been reported that they've only exported about forty per cent of the amount of grain that it would normally export. And it's expected to bounce up with the Black Sea grain export deal with Russia. it will be closer to the 80-90% range for September. But Russia expected to sell more of it's fertilizer through that deal and that's not happening. That deal expires in November and will need to be renewed for global food security and free up storage for the next crop as well. So, it remains to be seen how that will play out. That might be another stress on supplies if they cannot renew that deal. But not only are food supplies critical from these regions. But we've also had lackluster US food harvest. We've had persistent drought conditions, South America has had some challenges as well. Corn, soybean, wheat yields are much lower than expected and will likely need two more normal quote unquote years to ease tight inventories. What other factors are you keeping an eye on that may have an effect on supplies?

 Kurt: Yeah. I mean, those are great points. I mean, the source of Ukraine, Russia for food for parts of the Middle East is critical. So, for example, like a country like Egypt, 80-100 percent of their wheat comes from that region and they cannot produce it domestically. And it's a major food source. And I'd remind everyone that, you know, something as chaotic as the Arab spring was to some degree driven by a food crisis and a wheat shortage and a price spike in Egypt. So, you know, these are events that can create global instability, certainly regional instability.  So, going beyond Ukraine and Russia, where else can we produce and maybe take up for the slack and production? Well, we've seen as you mentioned significant heat and drought effects that affected Central Europe, Western Europe or even the UK where we had, you know, fires going on in central London and temperatures that they haven't seen and in decades. And we've seen challenged, you know, heat and weather conditions in the US, thankfully, for the United States, we are energy independent. We can produce raw food. We have adequate supply of most industrial metals that we might need to produce. But we are a major exporter. So, if we have diminished supplies, that means that prices go up and we don't have as much to export. We've even seen things Ryan like in India. Where the global. The population of India is so high, their production of food is somewhat limited, and we've seen them decide I think in the last month or two to halt exports of rice globally, that's a big deal and they're doing it domestically to make sure that they have have ample stores for their population. But that means that they're not exporting it to other countries that might be relying on them as an export partner. So, I guess my main point would be there's not that much slack in the system to fill the role that Russia and Ukraine would have traditionally provided to the global stage for food production. And these climate constraints are creating further and further supply shortages. Which the UN and others have highlighted as being not just a food security risk, but a global security risk, because it creates instability and can lead to higher prices and other effects.

 Ryan: Absolutely. So, it does look like we're looking at tight inventories for least the foreseeable future. This has been The Real Spiel with Ryan and Kurt. We'd love to hear from you at therealspiel@USCFinvestments.com and we'll talk to you next week.