Last week’s news that Russian troops moved into southeastern Ukraine with tanks and heavy weapons was a significant new escalation in the conflict, which does not seem well understood yet in the West. Before August 28, there was hope that sanctions from the U.S. and Europe would convince Vladimir Putin to stop at Crimea and behave within his own borders.
However, Russia’s blatant advance into Ukraine last week made it clear that Putin has no such intention. Most troubling is the fact that so far, the West has failed to offer any meaningful response. Putin poked his finger into the soft underbelly of NATO and received a tepid reply: “Today, we expressed strong solidarity with Ukraine.”* But so far, that “strong solidarity” does not include providing arms to Ukrainians.
Understandably, the nations of Eastern Europe are concerned about this turn of events and are lobbying the West to do more. As Lithuania’s President Grybauskaite pleaded, “We need to support Ukraine, and send military materials to help Ukraine defend itself. Today Ukraine is fighting a war on behalf of all Europe.”** But it is not clear yet that Europe is up for the task. Winter is coming and Europe is dependent upon Russia for 30% of its natural gas, a critical supply of fuel that has no easy alternative.***
Of all the articles I have scanned, there is one from The American Interest by Lilia Shevtsova, “Putin Ends the Interregnum,” which stands out in its ability to connect the dots and provide laser-like analysis of the current situation.****
Ms. Shevtsova, an expert on Russian politics and Senior Associate with the Carnegie Endowment for International Peace, uses the word “interregnum” to describe world events in the first decades of the 21st century. As she explains, interregnum is “a time without a trajectory,” a time of “political ambivalence” somewhat similar to the early 1930s. As she sees it, the West has been stuck in its old ways of looking at Russia and has not adapted to the new challenge that Putin’s authoritarian surge presents.
Thursday’s invasion of Ukraine proves again that Putin does not care about international rules and has convinced Shevtsova that “Hell is unfolding…”
What does this mean for the grain markets?
There is no easy answer at this point and much will depend on how the West responds. On Sunday, the European Union said it will enforce a new round of sanctions against Russia if troops are not out of Ukraine in one week. Another threat of sanctions sounds lame, but could be an effective lever if it packed enough punch. Russia’s economy is struggling, their stock market is down 16% in 2014, and social media is showing signs of dissent within Russia. Without starting World War III, Europe could make things extremely difficult for Putin, but it would involve sacrifices on their part, which they may or may not be up for.
According to USDA’s August WASDE report, Ukraine is expected to supply 14% of the world’s corn exports and 6% of the world’s wheat exports in 2014-15. Of course, any fighting in Ukraine makes the short side of the grain market nervous and there is always a bullish risk that the flow of grain out of Ukraine could stop. However, if we simply focus on how their crops are doing and whether or not the grain is flowing out the Black Sea, we do ourselves a disservice by missing out on the bigger picture.
Corn and wheat prices have a long history of responding to world events and are currently in interregnums of their own.
In 2013, the corn market returned to a state of surplus after a seven-year challenge to meet the demands of the ethanol mandates of 2005 and 2007. Similarly, world wheat supplies have rebounded after several hits of adverse weather in the past decade. Corn and wheat prices have fallen to fundamentally cheap levels and are suffering a form of malaise with no bullish driving force on the horizon. Shetsova’s warning that Putin “has paved the way for the emergence of new trends” should serve as a wake-up call to us all.
Russia’s latest actions present a fresh bullish risk to grain prices that should not be taken lightly, especially by livestock producers that benefit from low-cost grain.
* August 29, 2014 statement from NATO’s Secretary General at: http://www.nato.int/…
** Lithuanian President Grybauskaite quoted by BBC News on August 30, 2014 at: http://www.bbc.com/…
*** “The risk of tougher sanctions on Russia” by David Ignatius, July 17, 2014 at: http://www.washingtonpost.com/…
**** “Putin Ends the Interregnum” by Lilia Shevtsova, August 28, 2014 at: http://www.the-american-interest.com/…