OUT-TAKE:

'Russia is the world’s No 1 exporter of ammonium nitrate and urea, although export controls reduced their volume of exports. Higher prices or reduced supply from Russia would make things more difficult for farmers to take delivery of fertiliser'

The Russian invasion of Ukraine is hitting the headlines and as far as agriculture and commodity markets are concerned, price volatility and uncertainty brought about by this terrible political upheaval, are at the top of the list.

It is early days and it is far too early to forecast what the outcome may be regarding wheat and oilseed rape supplies, and indeed gas prices and supply as well.

Futures have reacted strongly, though, with the Chicago Board of Trade wheat futures posting gains of nearly 20% on the previous week's closing figure. They hit their highest level since 2008 caused by panic, fear and speculators, which exaggerated the trend, but is also very much due to the huge concern that the world’s wheat importers may well have lost access to a major source of exportable wheat and maize as due to the Russian military action.

To date, the Ukraine had exported nearly 18m tonnes from its 24.5m tonne surplus of wheat this past season but it now looks very unlikely that they will be able to move any more for the foreseeable future.

It is not only wheat and maize exports that will be affected but also sunflower oil exports as well due to commercial ship movements in the Sea of Azof being suspended and Russia controlling the Kerch Strait, where the Sea of Azof joins the Black Sea. This area contains several ports, including Ukraine's main port of Odessa, which was under attack.

Both Ukraine and Russia have supplied 29% of the world's wheat exports this season and both also accounted for 78% of global sunflower export. Therefore, there are huge concerns for what will happen to future Black Sea export ports as sanctions being imposed on Russia will have a bearing on how they are allowed to operate in future as well.

Ukrainian crops account for 73% of global agricultural output and it is currently the world’s fourth-largest exporter of barley and maize, the sixth-largest exporter of wheat and the second-largest exporter of rapeseed.

Rising fuel and fertiliser prices will also have a big affect on agricultural businesses as well as, at the end of last week, Brent crude oil closed at $99.08 per barrel – up 5.92% on the week and the contract price was trading at $101.07 per barrel, the highest price since 2014.

This saw red diesel rise by 5p per litre in one day. Prices will not have been helped by the cancellation of the strategically important Nord Stream 2 gas pipeline certification last week.

Natural gas prices have risen again with a jump of around 30p per therm, putting the UK nearby futures contract back at its highest level since just before Christmas, which will no doubt push up nitrogen fertiliser prices as well.

Russia is the world’s No 1 exporter of ammonium nitrate and urea ammonium nitrate, although export controls reduced their volume of exports. At the time of writing, no sanctions against Russia by the US, UK or EU targeted Russia’s fertiliser products, but higher prices or reduced supply from Russia would make things more difficult for farmers to buy or take delivery of fertiliser.

Last week, wheat futures prices reached £245.25 for May, 2022, delivery but dropped down to £234 per tonne by the beginning of this week. November wheat futures for the same periods hit £224 and then fell back to £208 per tonne. March, 2022, futures closed at £243 having gained £22.85 over last week, reaching their highest nearby price since at least 1987.

Paris rapeseed futures for May, 2022, closed at the end of last week at £635 having risen by £50 per tonne during the week and for August, 2022, closed at a new high of £555, up £17 on the week.

Despite the ongoing crisis, 2022 wheat production prospects look encouraging, with the Ukraine’s winter wheat area up by 400,000 ha on the year at 6.5m ha and crops are reported to be in good to satisfactory condition.

Russia increased its wheat production estimate by 3.6m tonnes to a new total of 84.8m tonnes due to ideal weather conditions but much will depend on the outcome and damage done to the Ukraine in the foreseeable future. Kazakhstan indicated its grain exports for 2022-23 will rise to between 8-9m tonnes, from 7.5m tonnes this season.

The EU increased its weekly exports total by 352,000 tonnes recently to a new total of 17.273m tonnes, which puts the total just 400,000 tonnes up on the year. Analysts have now cut the EU export estimate to 30.4m tonnes as a result of strong competition in world markets. Algeria is the biggest importer for EU exports, with an intake of 2.7m tonnes to date, followed by China at 1.68m tonnes and Egypt at 1.64m tonnes.

The US wheat crop ratings were updated last week and they do not paint a pretty picture although the US wheat production figures look better with their wheat area up to 48m acres from 46.7m acres and yield rising by 10%, which would see production rising by 8m tonnes in 2021 to a total of 52.8m tonnes.

These figures, however, look optimistic with Kansas ratings down from 30% 'good to excellent' last month to 26%. Oklahoma is down from 16% to just 9%, which compares to 48% last year and 52% of the Texas crop is seen as very poor.

The French winter wheat crop is in excellent condition in contrast to the US crop, even though it slipped 2% down to 93% 'good to excellent', but this confidence is not as high in other parts of the EU.

Drought in the Mediterranean regions have damaged wheat and barley crops, and Southern Spain, Portugal, south-east France and north-west Italy, are the worst affected. The forecast is not looking good, with conditions drier and warmer than average expected through to May.

There are similar conditions in North Africa, with Morocco having 64% less rainfall than average which again damaged crops and will result in a need for more imports.

Read more: Doug Niven: War threat increases grain market volatility

Another weather issue which could affect wheat and maize prices is the La Nina weather event in the South Pacific, which has not been experienced since 2010-11. Cold ocean temperature anomalies have now weakened in the South Pacific, which means that the La Nina will start to weaken and go back to a more neutral phase by this summer.

If this happens, La Nina will influence the weather in South America, between now and the start of the UK 2022 harvest, where 86m tonnes of maize has still to be grown in Brazil and this second maize crop will account for over 75% of Brazilian total production.

This crop is vital for global supply and demand, and what happens to this crop will drive maize prices which will influence ex-farm wheat prices. Extremes of the La Nino and El Nino weather events do influence maize crop yields, as they did in 2010-11.

In 2011-12, when recovering from La Nina, yields increased by 41% year-on-year and markets will be watching closely for any positive or negative weather news caused by these weather systems.

The 2021 UK oat crop was the biggest since 1972 at 1.12m tonnes and was 92,000 tonnes more than in 2020. With larger opening stocks, supplies are at their largest, according to AHDB electronic records going back to 1999-2000.

However, industry sources suggested the market feels tighter than that as tonnage may well have been used for animal feed because ex-farm oat prices remained much cheaper than barley, or wheat.

From last July to December, animal feed compounders used 65,000 tonnes of oats – an 83% increase from the first half of 2020-21. AHDB forecasted that total human and industrial oat milling demand at 531,000 tonnes from July to December, however UK oat millers used 11% fewer oats than in the same period in 2020.

The balance between supply and demand is forecast at 306,000 tonnes, the highest in recent seasons due to the larger crop. The oat area is expected to fall back this year by 6%, according to AHDB’s Early Bird Survey.

This may be linked to prices as ex-farm feed oat prices are far below other grains but with high fertiliser prices and the fact that oats have a relatively low input cost, compared to other crops, this may limit the fall in oat area in 2022. A projected area of 187,000 ha could still mean a 2022 crop of close to 1m tonnes if yields match the five-year average of 5.4t/ha.

Many milling oats are grown on contracts based on UK feed wheat futures and November, 2022, futures prices are currently very high at £224 so milling oat contract prices are likely to look attractive in the rotation.