Porto Alegre, March 7, 2022 – The market is supporting the thesis that the end of the war in Ukraine could alleviate the global supply scenario for wheat, corn and sunseed oil, the main products of this producing region and especially Russia. Undoubtedly, the end of the war is a positive point. However, we must assess whether Ukraine will continue as Ukraine, but with a new government in place, or become New Russia.
This becomes important at a time when it is considered that the main issue for the commodity market is not the effective war, but the sanctions and embargoes that will be maintained after the end of the social trauma caused by the invasion. So it is not just about the end of the invasion, but how the West will continue to handle the flow of trade with Russia or New Russia, should it be the case. As we pointed out in our last issue, the key issue is the increasing sanctions imposed by the West on Russia that could put a brake on the wheat market for longer. If these issues are resolved in favor of global trade, prices could fall as quickly as they rose.
The global picture involves the short term, mainly shipments that are not and will not be met by Ukraine. Importers are looking for options, and Brazil has shown a surprising surge in exports and accepting high prices. Global panic reached Brazilian corn exports for short-term shipments, April and May. Of course, for a semester in which supply is tight, exports now can generate greater difficulty until the second crop starts.
The advance of Russia’s invasion of Ukraine intensified last week despite some attempts of negotiations and sanctions by the West. Russia reaches the point of control of most of the country in a process of invasion and full domination. The questions now about the sequence of this process involve two points:
– Will Ukraine continue as a country but with a new government taking over?
– Will there be an annexation of the territory of Ukraine, forming New Russia?
It seems that Russia would not have invaded Ukraine without dominating and controlling it. So, this leads us to a second set of alternatives:
– Will sanctions only apply to Russia after the end of the invasion?
– Will sanctions also apply to the occupied territory?
This makes a big difference in the global commodity trading environment, mainly because Russia now dominates Europe’s largest nuclear power plant, i.e. much of the energy that serves the region. Would Europe maintain a good relationship with Russia because of this growing dependence on energy? Would the West maintain sanctions and accelerate this financial squeeze to the point of embargoing all economic relations with Russia? Apparently, the new war weapon has become economic and financial actions, in a similar way to what they intended to do against Brazil because of the Amazon. Will Russia rely on China and Iran for financial and trade support?
Last week, international insurance companies closed the Russian market, that is, they no longer issue insurance policies for the flow of international goods coming from Russia. This can further slow down the flow of commodities from this source, from oil to wheat. In the US Senate there was a proposal to ban Russian oil imports. Then the Biden administration launched the hypothesis of holding the production of biodiesel and ethanol to try to control food prices. Now, these two decisions seem to be conflicting, that is, without oil or alternatives with biofuels, the scenario could be catastrophic for the US energy sector and inflation. In fact, the US government should now be motivating biofuel production with oil above USD 110/barrel.
This was one of the aggressive moves of the week, that is, oil on the rise and now depending directly on an increase in production by the Middle East and other world producers to offset embargoes that are being imposed on Russia, which may be longer than imagined. With Russia taking over Europe’s biggest nuclear plant, the dollar surged at the close of the week. The index jumped from 96 to 98.50, showing a strong appreciation of the US currency. The euro is sharply losing strength and the dollar going up.
At this point, the FED meeting on the 16th now establishes a conflict between the world crisis generated by Russia and the US economic framework, in which the government intends not to bring pessimism to the future. Fed officials seem to assume that 0.25% would be a fair raise for the moment and that it may have already been priced in by markets. Little would change in the global and internal contexts. The Monetary Policy Committee (Copom) in Brazil will have a meeting on the same day. It seems that the adjustment in interest rates is already enough for the Brazilian economy. New rates can put the dollar at an unrealistic level, far below BRL 5.00, without exercising control over inflation. The containment of fuel hikes by Petrobras helps Brazil at this moment, but could this policy be sustained for much longer?
The most optimistic expectation is that the Russian invasion will end, and markets will resume normal operations. But it seems to us that the world picture has quite changed, creating worrying future factors, and the sanctions could keep Russia out of markets for longer, even if it is pointed out that embargoes do not affect commodities or food. This does not seem to be the case of Belarus and Iran, which need to barter their food for fertilizers.
Agência SAFRAS Latam
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