Businesses and consumers are already feeling the impact of the rally in commodity prices of everything from crude oil to grains and metals. The highly volatile commodity markets, roiled by the Russian-Ukraine war, are complicating real-world economic growth prospects and are raising food and energy prices for consumers globally. The surge in commodities, including crude oil, natural gas, wheat, soybeans, and industrial and precious metals, have already hit consumer prices globally, with inflation at a 40-year high.
The supply of commodities of all kinds is lower than the demand globally.
“Inventories across energy, agricultural and metals are critically low everywhere,” Tracey Allen, commodities strategist at JPMorgan Chase & Co was quoted as saying. JPMorgan sees commodity prices staying elevated through the end of next year.
The supply of commodities could head even lower if the Russian war in Ukraine disrupts more materially exports of energy products out of Russia and/or wheat and corn exports out of Ukraine, the so-called “breadbasket of Europe”, as it is one of the world’s top exporters of corn, wheat, and vegetable oils.
According to IHS Markit, reduced exports of Ukrainian agricultural commodities could raise food insecurity in many countries in South Asia, Western Asia, and Africa.
Russia and Ukraine combined accounted for around 30 percent and 20 percent of global wheat and maize exports over the past 3 years, respectively, the UN said last week when it noted that the war resulted in a fresh all-time high in global food prices.
The FAO Food Price Index tracks monthly changes in the prices of a basket of commonly traded food commodities. Last month’s prices were 33.6 percent higher overall compared to March last year.
The FAO Food Price Index averaged 159.3 points in March, up 12.6 percent from February, when it had already reached its highest level since its inception in 1990, the UN Food and Agriculture Organization (FAO) said.
“The prospect of continued supply disruptions from Ukraine this year together with US and South American weather concerns as well as the mentioned rise in the cost of fuel and fertilizers will likely lead to another year of tightening supply,” Ole Hansen, Head of Commodity Strategy at Saxo Bank, said in a weekly commodity market update last week.
“The commodities sector overall saw the best quarter ever in Q1 2022,” he added.
“During the first quarter, war and sanctions turbocharged an already strong performing sector, resulting in the Bloomberg Commodity Spot Index registering a 24% gain, its best quarter in living memory, thereby almost eclipsing the 2021 gain of 26.5%, the best annual performance since 2000,” he said.
“The war in Ukraine and increasingly tough sanctions against Russia have uprooted multiple supply channels from crude oil and gas to key industrial metals as well as food commodities such as wheat, corn, and edible oils,” Hansen says.
The market turmoil in commodities, the extreme volatility, and the futures exchanges raising initial margins significantly after Russia-Ukraine war began have led to an exodus of speculators from oil futures. The lower liquidity in the paper oil market exacerbated the volatility.
