| Wars can swing commodity prices widely. Certainly, this has been true in Ukraine. The question for readers of the Van Trump Report is how markets might react if hostilities in Ukraine were to cease and tensions in the Middle East subside, or conversely, should conflicts spread further into the Middle East and China Sea. In this fourth installment, we review the impact the war has had on ag equities and how markets might react to peace. In our next installment, we examine China and the impact war in the China Sea and the broader Pacific might have. Farm commodity markets reacted immediately to Russia’s invasion of Ukraine on Sunday, Feb. 20, 2022. By market’s close on Monday, Feb. 21, 2022, the price for a metric ton of wheat delivered to the U.S. jumped 30% from $500/mt to $650/mt. Global food prices hit an all-time high in March that year. Wheat prices soared again in July when Russia withdrew from an agreement that had allowed Ukraine to export its grain via the Black Sea. |
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Equity values of agribusinesses affected by the invasion, though, moved more slowly than farm commodity values. The lag gave investors time to formulate defensive and, in some cases, offensive equity trading strategies. Those of us who appreciated, for example, that Russia was the world’s largest exporter of fertilizer purchased U.S. fertilizer stocks and earned 25% appreciation in just a few weeks. Chicago-based CF Industries, the world’s largest producer of ammonia, for example, grew in value by 30% between Feb. 18 and April 30, 2022. Other more levered firms like Houston-based CVR Partners and Itafos Inc. doubled in value. Fertilizer, though, wasn’t the only ag sector that appreciated in the initial weeks of the war. The price of shares in McLean, Va.-based Gladstone Land Corporation, a publicly traded farmland investment trust (NYSE: LAND), grew by 24% during the same ten-week period. Ukraine has more than 100 million farmland acres, which, when combined with Russia’s 200 million acres, meant about 6.5% of the world’s cropland was at risk. Investors in Gladstone believed higher ag prices and reduced farmland would drive up the value for the investment trust’s 116,000 U.S. acres. Likewise, global ag-commodity transportation was affected. The market value of Seaboard Corporation (NYSE: SEB), an ag-commodity shipping company, rose considerably as did a basket of publicly traded farm-commodity producers, including such firms as Alico, Inc., a U.S. citrus producer, BrasilAgro and Ukrainian-based grain producer MHP SE. On the downside, the values of other sectors fell. Seed and chemical company BASF fell sharply in value by 30%, enough to pull the entire seed and chemical sector down by 11%. Aquaculture firms, many of which have operations in Northern Europe, fell the most by more than 20%. See chart above. Reversals Should Hostilities Cease? As always, the question for Van Trump Report readers is what now? With the war in Ukraine continuing, tensions rising in the Middle East between Hezbollah, Iran and Israel, and China and the Philippines squaring off in the South China Sea, few analysts foresee the Ukrainian war ceasing soon. Yet, wars don’t last forever (fortunately). Peace can be negotiated with entrenched armies in the field, as it did with the Korean War along the 38th parallel in 1953 and World War I in 1918. One can find any number of plausible predictions and outcomes for the Ukraine War online. Under a peace scenario, your author would urge readers to quickly and carefully assess investment positions, as peace agreements can crash farm commodity prices and realign agribusiness equity markets. Fertilizer manufacturers, for example, which compete in a global marketplace, could find themselves awash in supply. Likewise, demand for world shipping and farmland could soften as new capacities compete with the liberated capacities from Ukraine and Russia. Your author grew up with stories of the Cotton Crash of the 1920s, which was triggered by overproduction after World War I (1914–1918). Personally, under a peace scenario, I will look at reducing my positions in farm-supply businesses and compounding my positions in those firms that create branded products from farm commodities. But what do I know? This analysis comes to you from brokebob.com. Special note: This is not an equity research report, only a commentary on selected market trends. Nothing herein should be considered investment advice. Your author does not necessarily represent the opinions of Kevin Van Trump, The Van Trump Report, or its affiliates. With any investment decision, independent due diligence and professional advice is strongly recommended. |