Let’s face it. The biggest news in the world these days is not that Argentina finally got some rain. It is the incursion of Russian armored troops into eastern Ukraine. Every news report starts with the 21st-century version of Sudetenland, and we in the grain business have to think about how it affects our prices.
As Europe wound up toward war in the last century, and the Europeans tried to appease their way out of it, great Britain’s Prime Minister Neville Chamberlain came back from a conference proclaiming, “Peace in our time!” Shortly thereafter, Europe entered into the worst war in history.
Hitler, on the pretense that Austria was Germanic, had invaded it in March of 1938, and conquered it quickly. On the pretense that what we came to know as Czechoslovakia was populated by Germanic peoples, he took over Sudetenland, which had an ethnic German population, in September of 1938, then looked around and took over the rest of the region.
Chamberlain and the French Premier agreed to this in a meeting that notably excluded any representative of the Czechoslovakians.
Now, we have Putin saying that the people of eastern Ukraine are actually Russian, and want to unify with Russia — same argument, different century.
For our purposes, we wonder what this does to the price of grain. That does not matter as much as peace does to Ukraine, but it’s what we care about if we are honest. How does this affect me? What is in the best interest of the United States?
Political uncertainty
In general, political uncertainty and, ultimately, war, is a disruption to trade. Anything that disrupts trade adds costs to the products being traded. It is sometimes hard to see direct connections, but psychology is one of the unknown adding costs to the known.
In the case of Ukraine, there is the possibility that grain production and exports will be hindered, and Ukraine is one of the great grain production areas of the world.
Ukrainian wheat gets exported through Crimea to the Black Sea. These ports, since the Obama administration, have been in the control of the Russians. They have lusted after a warm water port for the entire history of Russia, and in our time, they got one.
It remains to be seen how far the Russians will go and what disruptions will ensue. However, uncertainty is the fuel for prices on the Chicago Board of Trade.
As events unwind, we could see this as a means of maintaining a rally that was running out of steam, or it could escalate into a rally of its own.
If events cool off, the markets may overreact, and we could end up with worse prices than we otherwise would have had.
South America
This geopolitical excitement comes as the South American crops seem to be getting enough rain to stabilize after significant losses.
Early last week, prices fell as the market absorbed the reality that was already being traded, that the South American crop was reduced by drought.
We got actual numbers to trade, both from the U.S. Department of Agriculture and Brazilian estimates. The USDA did not reduce the crop as much as the Brazilians did.
Later in the week, we rallied back to see March soybeans settle above $16, a big benchmark. We finished the week up 181⁄2 cents on the March contract and made a new contract high in the new crop. In the process, we finished the week with the November contract up 193⁄4 cents.
The corn market, meanwhile, was up 31⁄2 cents nearby, and the new crop was up three cents. In the process, the December futures traded within a fraction of a cent of $6, another huge benchmark.
The negative news was shrugged off. Yes, the ethanol values have cut margins in the business some more. Yes, the Chinese canceled small contracts of corn, but overall, the Chinese exports are still encouraging the idea that we will exceed the USDA export estimates.
So, we trade fundamentals, guesses that are mainly encouraging to prices, and political news that could be all over the board. Stay tuned, and stay close to the markets.
