Russia’s invasion of Ukraine, which began in February, has caused broad disruptions in global commodity markets, said a report about the effects on markets and consumers from the Kansas City Federal Reserve Bank Thursday.
Russia and Ukraine are important producers and exporters of energy and agricultural products, such as oil, natural gas, wheat and corn, the report said. The effects of disruption were felt across much of the global economy.
PRICES RISE AT HISTORIC PACE
In February and March, commodity prices responded to the invasion by rising at a historic pace, pushing inflation on producer inputs and consumer goods, the Federal Reserve Bank said.
Reduced production and trade associated with the war and global sanctions have been the primary drivers of disruptions in commodity markets, the report said. Destruction in Ukraine has hampered production and exports in critical commodities like wheat and natural gas.
Moreover, several policy responses from nations worldwide have led to further and ongoing disruptions to global markets, the Bank said. Countries acted expediently following Russian’s invasion, implementing physical and financial sanctions against Russia.
Those barriers further disrupted global trade flows in Russian-linked commodities and products, the report said. Several factors and historical experiences suggest these disruptions and higher prices could persist into the medium and longer term.
First, futures markets are signaling persistent effects from the on-going commodity shock.
Second, inventories for key commodities like oil and wheat were limited prior to the conflict, exacerbating the effects of the disruptions to production and trade.
Third, disruptions in global trade flows likely will persist and have spillovers to other markets, the Bank said.
Lastly, as history suggests, sanctions appear likely to remain in place at least through Russia’s conflict with Ukraine and possibly for an extended period even after the conflict is resolved.
SIGNIFICANT IMPLICATIONS
The invasion and associated disruptions has significant implications particularly for regions closely tied to commodity markets and for consumers, the report said. Production of energy and agricultural commodities is important to the US economy and to the Federal Reserve’s 10th District, which accounts for more than 20% of US oil, natural gas and corn production and about 40% of US coal and wheat production.
Although higher commodity prices may support profit margins for producers in the region, higher food, energy and input prices could squeeze budgets and balance sheets for households and businesses, the Bank said.
In just a few weeks, prices for major commodities in energy and agricultural markets surged at a pace with few historical precedents. Other price escalations of this magnitude had not occurred since the oil embargo and Russian grain deal of the 1970s or the Dust Bowl of the 1930s.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $138.39 to $143.18 per cwt, compared with last week’s range of $140.00 to $144.52. FOB dressed steers, and heifers went for $217.53 to $220.73 per cwt, versus $219.21 to $225.67.
The USDA choice cutout Thursday was up $1.04 per cwt at $263.97, while select was up $0.37 at $244.43. The choice/select spread widened to $19.54 from $18.87 with 95 loads of fabricated product and 39 loads of trimmings and grinds sold into the spot market.
The USDA reported that basis bids for corn from feeders in the Southern Plains were unchanged at $1.55 to $1.65 a bushel over the Jul futures and for southwest Kansas were steady at even the Jul, which settled at $7.65 a bushel, down $0.07 1/4.
The CME Feeder Cattle Index for the seven days ended Wednesday was $153.80 per cwt up $0.45. This compares with Thursday’s May contract settlement of $154.57, down $0.02.