Porto Alegre, March 9, 2022 – The deterioration of the geopolitical picture in Eastern Europe has resulted in intense volatility in the financial market. From the point of view of global geopolitics, Ukraine is a strategic territory, with a robust production of wheat and corn, with major ports on the Black Sea. Commodities have coped with intense volatility since the outbreak of armed conflict. Wheat suffered the most serious consequences, reaching a limit up on the CBOT on many occasions. The conflict drags on and the consequences tend to be lasting, especially in the field of economic sanctions.
In such an uncertain environment, the trend is for a classic move to seek protection, with the expectation that the dollar and gold will appreciate more robustly. In times of serious economic crisis, the search for protection is natural. The main exchanges around the world showed intense downward movement. At the end of Friday some of these indices recovered.
The European Union, the United Kingdom and the United States are adopting a package of economic sanctions that aim to economically suffocate Russia. The removal of most Russian banks from the SWIFT payment system tends to harm the flow of global trade. The European Union economy is heavily dependent on Russia for its natural gas supply. Therefore, sanctions have been very calculated to avoid a trade war similar to the one that happened between the United States and China in 2017, which intensified between 2018 and 2019. So far, Brazil has adopted a position of greater neutrality on the conflict, it remains to be seen whether NATO member countries will exert pressure so that Brazil also adopts economic measures against Russia.
Russia recently set an import quota for pork and beef, and there is potential for growth in imports throughout the year due to the advance of African Swine Fever (ASF). In any case, these shipments follow only in the field of possibilities, there has been no substantial advance in recent weeks.
In January, Brazil exported just over 1,600 tons of pork to Russia. Regarding beef, approximately 7 thousand tons in carcass equivalent were exported. There was even an increase over January 2021, when around 2.3 thousand tons in carcass equivalent were exported. Ukraine has even figured as a major importer of Brazilian pork between 2013 and 2014, but its volume of purchases became null during the Crimean crisis. Regarding beef, that country was never a relevant partner.
The indirect consequences seem more harmful to the meat industry, such as the maintenance of prices of the soybean complex at a high level. Wheat, which is a substitute for corn in animal nutrition, is also impacted by this unpredictable environment. Last week, the news of corn exports in the first half of the year worried consumers in Brazil, especially in the field of animal nutrition. The rise in the price of the main feedstuff ingredient tends to put even more pressure on the margins of chicken and pig farming, besides reducing the first round of confinement.
Oil prices have shown a significant rise in recent weeks, that is, fuel prices will also be pressured, as well as fertilizer prices. In other words, inflationary pressure could squeeze even more the margins of feedlots, pig and chicken farmers, besides the evident reduction in the consumption power of the Brazilian population. In addition, exchange rate volatility must be mentioned, which also directly affects the formation of agricultural commodity prices.
Apparently, the conflict tends to remain regional, without advancing on European territory. It remains to be seen the new war developments in the coming weeks, just as it is also necessary to carefully assess the effects of economic sanctions. The global economy is still coping with the effects caused by the pandemic. The increase in inflation caused by the lack of certain products puts in check all the predicted rates of economic recovery, whether for mature or emerging economies. Volatility has become a recurring feature in the global financial market, information spreads with great speed, demanding agility in decision making. In the commodities market, the use of protection tools is more than necessary to mitigate the effects of intense price variation.
The beef industry had an environment of intense volatility in the last quarter of 2021 due to the embargo imposed by China on Brazilian beef. The use of options or even the purchase or sale of forward contracts is essential to guarantee a good operating result, be it from the perspective of the industry or farmers.
Agência SAFRAS Latam
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