With tensions between Russia and Ukraine escalating, and war looking more likely than ever, traders have yet to fully recognize the risks a conflict would pose to the commodities market, particularly natural gas, wheat, and corn.
A potential conflict could raise the possibility of disruptions to commodity flows. The U.S. and European Union may also react in the event of a conflict, leading to sanctions against Russia that would have an impact on the supply of a number of commodities to world markets.
GRAIN SUPPLIES
With some of the most fertile land on Earth, Ukraine has been known as Europe’s breadbasket for centuries. Its fast-growing agricultural exports—grains, vegetable oils, and a host of other products—are crucial to feeding populations from Africa to Asia.
And it so happens that a substantial part of Ukraine’s most productive agricultural land is located in its eastern regions, exactly those parts most vulnerable to a potential Russian attack.
With Russia and Ukraine accounting for around 29% of global wheat exports, 19% of world corn supplies, and 80% of world sunflower oil exports, traders worried that any military engagement could impact crop movement and trigger a mass scramble by importers to replace supplies from the Black Sea region.
Of the 14 countries that rely on Ukrainian imports for more than 10 percent of their wheat consumption, a significant number already face food insecurity from ongoing political instability or outright violence.
For example, Yemen and Libya import 22 percent and 43 percent, respectively, of their total wheat consumption from Ukraine. Egypt, the largest consumer of Ukrainian wheat, imported more than 3 million metric tons in 2020—about 14 percent of its total wheat.
Ukraine also supplied 28 percent of Malaysian, 28 percent of Indonesian, and 21 percent of Bangladeshi wheat consumption in 2020, according to FAO data.
ENERGY SUPPLIES
Oil rose to nearly $100 a barrel on Tuesday, reaching its highest level since 2014 after Moscow ordered troops into two breakaway regions in eastern Ukraine. Russia is the second-largest oil exporter after Saudi Arabia and the world's top producer of natural gas.
Russia produces close to 11 million barrels per day. Any possible action that targets oil exports would tighten the oil market at a time when there is already concern over falling OPEC spare capacity.
Of the big European countries, Germany is the most vulnerable. Because of its climate-motivated push to retire coal-fired power stations and its rash decision, taken in the wake of Japan’s Fukushima disaster, to shut down its nuclear plants, it remains more reliant on natural gas than it needs to be. It is Europe’s largest consumer of gas, which accounts for roughly a quarter of its total energy consumption, with Russia supplying over half of its imports.
In the event of a disruption in energy supplies, the United States and many other industrialized countries would most likely consider releasing millions of barrels of oil from their strategic reserves in an effort to offset any shortfalls.
Washington would also lean on those oil-producing countries, including Saudi Arabia and the United Arab Emirates, that are believed to have capacity to increase production.
