How World Economies Impact Domestic Agriculture: Russia and Ukraine

Monday, June 16, 2014

 Russia and Ukraine are major players in global agriculture markets, together producing over 5 percent of the world’s coarse grains. The countries also contribute almost 20 percent of the world’s grain exports and are major competitors of the United States. Professionals in the agriculture industry have long paid attention to the countries that make up the part of the Black Sea ag region. Lately, Russia and Ukraine have dominated headlines outside of the industry as political unrest has sparked violent protests in Ukraine and renewed tension between Russia and the West. The ramifications of conflict in the region are many, but most important for commodity markets is the impact that tensions have had on economic conditions in the countries.
   After Russian forces entered the Ukrainian peninsula of Crimea in the first weekend of March, grain markets gapped higher and took off on a tear higher that lasted nearly three months. Traders feared that the situation would affect shipments out of Ukraine’s main port region, but it turned out that exports were largely unhindered. The most striking consequences for markets have been of the economic sort. An international flight to quality quickly siphoned capital out of the region and is likely have lingering effects on agriculture in the region for years to come.
   As political upheaval wreaked havoc on financial markets in Ukraine, subsidies to agriculture were threatened and access to private credit was cut off. Analysts are watching closely the estimates for production in Ukraine this year, knowing that a financial squeeze was likely to have hurt the farmer’s ability to procure the inputs necessary to maximize yield. The tight finances were also coupled with the fact that Ukrainians had limited access to chemicals that are normally sourced from Russia. And, piling on to the economic troubles were volatile currency markets in Russia and Ukraine that limited forward contracting and proper risk management.
   While conflict can always flare up between the two countries which have such a checkered history with one another, the tensions have largely subsided. Ukraine has elected a new president and so far Russia’s Putin has decided not to continue acting as an overt aggressor. Despite recent economic troubles, Ukraine and Russia have plenty to be optimistic about going forward.
   Russia’s massive natural resource endowments make the economy one of the world’s largest, 8th in the GDP rank. The Russian government has come a long way from the oppressive communist state that it once was, but policymakers will need to continue efforts to liberalize the agricultural economy. One feature of the economy that bodes well for Russia is its strong commitment to investing in energy. The investment is likely to continue benefiting from increasing returns to scale and agriculture will enjoy access to cheap, technologically-advanced crop inputs that will make more of Russia’s previously un-farmable land available for production.
   Ukraine has an economy with abundant potential that so far has been under-fulfilled. Ukraine will need to support the private sector in its effort to upgrade infrastructure and the other various types of linkages that support agriculture. Financial institutions will need to do their part to stabilize the currency so as to avoid problems in the trade sectors. If Ukraine achieves success in addressing some of these issues, it will remain a formidable producer and exporter of agriculture commodities.
   Check back next week to take a look at China and the economies in Asia. The countries seem to have insatiable demand for agriculture goods and play a big role in world markets.