Ukraine, Russia and Stalin: Geopolitics, Grain Movement and Fairy Tales

Ribbet-collage    The wheat market rose last Thursday as we heard Russian troops had invaded the Ukraine.  It was not very much of a surprise that wheat would rise on Ukrainian tensions as it is a major exporter of wheat.  Black Sea grains loaded on the rivers leading to the Sea of Azoz are often loaded in small boats, which sail down to North Africa.  Egypt has the largest per capita consumption of wheat in the world and Black Sea wheat has a great comparative advantage to getting there.

Of course wheat does not get the scrutiny that corn and soybeans get in North America.  It is grown around the world and if there is a shortage one place invariably there is a surplus another.  The price of wheat does not move much, mostly plagued by bearish market conditions, which seem to be a constant.  So put a few Russian guns and troops in the wrong place like the Ukraine and the wheat market gets excited.

I made a few comments about it on Twitter and I got the strangest reply.  I often talk about the history of Russia and the Ukraine.  There is such a long memory in that part of the world, where people have been brutalized for years at the hands of each other.  I often say to people all you have to do is Google Stalin to get a few clues on what  could happen to Ukrainian grain exports.

I put that out on twitter and got a reply from one of my followers who said he had to look up who Stalin was because he didn’t know.  It took me aback because if he didn’t know who Stalin was, maybe he didn’t know who Hitler was either.  He is a very diligent person but young so his world is not full of the self-doubt that maybe my generation has.  Simply put, Google some of these villains of history and you will see that the world can be a very messy place.

In the grain business we like to talk about carry, future spreads, basis and futures prices.  These factors give us clues to what grain prices might do next.  However, geopolitical events always affect the grain business and the greater economy.  So it is always key to know the nuances behind something going on in a place like the Ukraine.  Russia’s dalliance in Ukraine this week is the latest example of a long history of distrust in that part of the world.   It is long simmering and will continue that way.  Grain shipments certainly could be impacted.

Yes, it is a bit of a stretch as predicting a war with Russia is just that.   I’m of the generation that lived most of its life under the threat of nuclear destruction from the Soviet Union.  This latest aggression from the Russian government towards Ukraine reminds me of a Soviet Re-Union.  It is a reminder to younger people that the world can be a very violent and messy place, where casualties can become economies.  We’re not there yet, but the possibility of a hot war in that region is certainly a distinct possibility.

The jingoism from the Canadian government has me a bit concerned and embarrassed.  Our foreign minister John Baird has called the Russian action “absolutely reckless” and “shamelessly dishonest”.  He has added several other adjectives to make it worse.  I don’t know what he will be saying if the Russians park their icebreakers in our Northwest Passage.  This is Russia we are talking about, not some 3rd world backwater.

So are we about to see the price of wheat rise $3 a bushel in the next few weeks or even months?  Well, as I always say nobody knows that, but of course it is very unlikely in these very bearish times.  The price of soft red winter wheat, the stuff I grow in Ontario is mired in the lower part of the last five-year price distribution range.  Friends in the noncommercial investment sector aren’t much interested.  However, with the troubles in the Ukraine and Russia our commercial side has shown some interest lately.  Needless to say, despite all the geopolitical problems that may be raising their ugly head, wheat is still too cheap for any farmer.

So as we move ahead, we all need to keep an eye on what is happening in the Ukraine.  Keeping our eye on China is a good idea too.  However, keeping abreast of current events in these countries is what it is, but it is not as good as understanding where these places have come from and how that might affect them in the future.  For a grain exporter like Ukraine and a grain importer like China it is imperative to understand their history.  If we don’t, trying to measure grain price direction based on geopolitical events is just a fairy tale.   Things happen for a reason.   You have to dig deep to understand why.