What investors should know about Russia-Ukraine agflation, from commodities markets to grocery stores

Published Sat, Mar 5 20229:37 AM EST

War between two of the biggest agricultural exporters in the world is sending shockwaves through commodity markets and beyond. Since Russia's invasion of Ukraine on Feb. 24, the prices of key crops have surged to multi-decade highs as traders worry about global supply. Wheat futures jumped 40.6% this week — the biggest weekly rally on record dating back to 1973. "As long as there's uncertainty around a conclusion on this outcome, the risk is to the upside across all the commodity markets … The one that's more worrisome is wheat," Jeff Currie, global head of commodities research at Goldman Sachs, told CNBC's "Squawk Box" on Friday. The Russia-Ukraine crisis could be "potentially the largest disruption we've ever seen in commodities," Currie added. Rising agricultural commodities prices, or "agflation," come as food costs are already elevated amid Covid pandemic challenges. U.S. food inflation in January jumped 7% from the year prior. "Everyone is trying to understand right now the indirect impact of this war because our global economy is more interconnected than ever," said CFRA analyst Arun Sundaram. Impact on agricultural commodities Russia and Ukraine comprise the largest wheat export bloc in the world, according to Bank of America. The two countries collectively supply 28% of the world's wheat exports, with Russia making up about 18% of the global wheat trade, the firm said in a research note. Ukraine also is the fourth largest corn exporter in the world and the two countries are significant barley exporters, Bank of America highlighted. Wheat futures settled at their daily limit Friday at $12.09 per bushel, the highest level since March 2008. Corn futures on Friday hit a high of $7.8275 a bushel, a level not seen since September 2012. The biggest risks to Ukraine's agriculture market are supply disruptions and logistical challenges such as port closures, transportation issues and lost labor, Bank of America said. Ukraine's corn production could fall about 10% and corn production could pull back around 30% year-over-year in the 2022 to 2023 season, according to initial estimates from S & P Global Commodity Insights' Pete Meyer. "It's impossible for us to believe a 'normal year' of production/exports is in the offing," Meyer said in a note. Crop production in Russia could be flat or even increase, but agricultural trade could be contracted by sanctions, political pressures and high freight costs, according to Bank of America. On top of the conflict in Europe, adverse weather in Latin America is also adding to the global agriculture supply challenges, analysts pointed out. "Russian military action in Ukraine could potentially prolong the bull market for global grain markets," Bank of America' Aakash Doshi said. Impact in the bread aisle Do rising wheat futures mean the price of bread and other food products will soon skyrocket for Americans? "The short answer to that is no," said CFRA's Sundaram. Large packaged food makers typically negotiate commodities contracts with suppliers in advance, so these companies should have locked-in prices for many of their inputs before the Russia-Ukraine crisis began, Sundaram said. If the conflict is short-lived and global trade normalizes soon, food inflation in the U.S. could moderate later this year, according to CFRA. However, "if this war is prolonged, if this goes on many more months or, God forbid, goes on to next year, that's when it could have negative consequences in terms of food prices continuing to climb higher and make their way to the grocery stores," Sundaram said. Depending on the trajectory of the conflict, agflation could start showing up in corporate earnings results down the line, said Victoria Fernandez, Crossmark Global Investments chief market strategist. "It could be a similar story to what we had during Covid with supply chain pressuring margins. You're going to have higher costs, just on different types of items," Fernandez said. Industries that could benefit Investors could find opportunities in shares of fertilizer producers and agriculture businesses as crop commodity prices are elevated, according to CFRA. Fertilizer stocks like CF Industries , Mosaic and Nutrien could get a boost from tight crop markets going into the key growing season, the firm said. U.S. corporations that sell agricultural commodities and commodity products, known as agribusinesses, could also benefit from the constrained supply. Archer-Daniels-Midland and Bunge are two names CFRA highlighted. "These businesses have been doing really well over the past year because of relatively high crop prices, and they're likely to continue doing well because it looks like crop prices are going to stay elevated, at least for the near term," Sundaram said.

A combine harvester gathers grain from a field in the village of Mala Divytsa on July 27, 2015.

SERGEI SUPINSKY | AFP | Getty Images

War between two of the biggest agricultural exporters in the world is sending shockwaves through commodity markets and beyond.