There is no doubt that the developing situation in the Ukraine is having a significant impact on the world markets (including grain), this week. As producers and marketers of agricultural commodities, the question that farmers need to wrestle with is: how far will this push the markets? And how long with the tension last?
The standard measurement across all markets, both commodities and equities, during a political crisis is based on three criteria. First, the impact of an economic disruption on consumption; second, the impact of the disruption on material supply; and third, the potential for the crisis to spread to other markets.
Although the early reactions in the stock market saw equities dropping, the impact of a political crisis on the consumption market in the Ukraine is not apt to have much impact on the world economy. If the Ukrainian public hunkers down and stops spending on consumer goods for a few months, the resulting decline in world smart phone sales won’t adversely impact either Apple of Blackberry’s quarterly statements. The potential impact of the Ukrainian conflict on world consumption is very limited, and should not impact the stock markets for very long.
The potential for the conflict to spread across other economies is also quite limited. The civil uprising and the resulting change of government in the Ukraine is not apt to spill over into neighboring countries, nor is the Russian response apt to lead to similar incursions into other troublesome post-Soviet states. In all likelihood the Ukrainian conflict is going to remain a Ukrainian issue, and the situation will not spread in either geographical or economic scope.
Where a political conflict in the Ukraine has serious market consequences is in terms of material supply. This region is a significant producer of agricultural commodities (especially wheat), and therefore a disruption in supply in the Black Sea region has immediate consequences in North American agricultural markets. The secondary supply issue with a conflict in the Ukraine is that several major oil and gas pipelines run across that country, and while I am not an expert on safety, it would seem that if the situation deteriorates into a military action, having oil and gas pipelines in an active battlefield could be problematic. The potential consequences of turmoil in Ukraine are in grain and energy markets, two areas of significant interest for Canadians.
It would appear that the world’s political leaders would prefer to have the Ukrainian crisis end peacefully. In the absence of military action, the economic situation should stabilize quickly and without spreading to other parts of the world. A quick and quiet end to the discourse would also mean that the political crisis’ impact on our commodity markets has likely ended as quickly as it had started. As citizens of the planet, this is the best outcome which we could hope for. If you’re a seller of grain and looking for a rally to market into, don’t expect this one to last very long. Short bursts of anxiety-based action like we saw in the world markets early in the week are a great reason to have pricing orders in place. It tends to be that there is the most price action when there is the most anxiety, and then markets settle down as the situation subsides. The simple three-point analysis would suggest that short of a military action, the risk of escalation are limited. If this was the rally that you wanted to sell into, work quickly.