War, Drought & Demand Create Uncertainty Over Hemp

By Eric Singular, Director, Hemp Business Journal

With global agricultural supply and demand conditions already facing a season of uncertainty, Russia’s military aggression in Ukraine only adds greater disruptions and jeopardy to the short- and mid-range outlook for food commodities prices, supply chains, and stakeholder confidence.

As the “breadbasket of Europe”, Ukraine last year supplied the U.N. World Food Programme with more than half of its supplies against world hunger. It is the world’s third-largest corn exporter, and a major wheat supplier.

Breadbasket of Europe

For its part, Russia is a major producer of wheat, along with oil and natural gas (for which Ukraine is an important transit route for its natural-gas flows to Europe). Between them, the two countries supply about 30% of the world’s grain and wheat, while combining as the world’s top exporters of same, accounting for nearly 1 of every 3 bushels of global wheat exports, almost 1 in 5 bushels of global corn exports, and over half of global sunflower seed-oil exports.

Commodity prices surged following Russia’s Feb. 24 invasion, catapulting wheat futures prices to record highs last week. Now, the two nations could be out of the market for months, with the war interfering with Ukrainian crop production this spring.

Thus, prices and concerns of staple agricultural commodities are skyrocketing to record highs.

Over the past two years, between the COVID-19 pandemic, ending of a trade war with China, and continued historic drought, the pressure on global agriculture and food supply chains has reached critical mass.

Since the start of the pandemic in March 2020, the per-bushel price of corn has increased 110% (from $3.64 to $7.63), soybeans 76% (from $9.53 to $16.76), and wheat 102% (from $5.50 to $11.10). The upward pressure on global food prices is unlikely to ease anytime soon, between continued war, rising consumer inflation, and an energy and labor crisis.

Crisis in Ukraine

Last week, Ukraine President Volodymyr Zelenskyy urged farmers there to sow as much land as possible to protect their nation’s food supply. In addition, Ukraine has banned exports of key agricultural goods including wheat, corn, grains, salt, and meat.

To mitigate the impacts on global food supplies, the G7’s agriculture ministers called on all nations to keep their trade channels open, and to prevent hoarding and profiteering on exports. A professor of agricultural and applied economics at the University of Georgia, Berna Karali, noted how “the decrease in Ukraine’s wheat exports affects the global availability of wheat, which puts an upward pressure on the global price of wheat. As financial markets do not like uncertainty oversupply, they priced that risk premium in the futures markets already, making wheat futures contract prices increase over 40% in a week.”

Time for Planting in North America

The longer that the crisis ensues, the higher that grain prices will soar. For North American farmers, March is typically a critical month for securing hemp acreage.

Given the soaring prices of staple commodities, which in turn means lucrative crop insurance, 2022 is looming to be an extremely difficult year to convince farmers to allocate land to an emerging commodity with minimal markets. With futures so high for corn, soybeans, and wheat, should farmers commit their acreage today and suffer a crop failure, the insurance would provide compensation at those very inflated commodity prices, thereby assuring a profitable season either way for corn, wheat, soybeans, etc. Conversely, any farmers betting on hemp would be subjecting themselves to unprotected risks.

Over the past two months, grower meetings have been held in Kansas, Vermont, South Dakota, and Montana to identify regional growers looking to contract for fiber and grain production. The fight for acres has been an uphill battle.

Last week, each of the National Corn Growers Association, the American Soybean Association, and the National Association of Wheat Growers spoke at the Commodity Classic in New Orleans. Their messaging was clear – the high commodity prices are showing no signs of crashing in the coming months, or even years, depending on how the situation in Ukraine plays out beyond ever-increasing perennial impacts on crop yields from global drought and low water availability. Addressing the event’s attendees, Cory Bratland, chief grain strategist for Kluis Commodity Advisor, predicted a 25% to 50% reduction in Ukraine’s corn crop this year.

Last week, the USDA’s March World Agricultural Supply and Demand Estimates (WASDE) report cited another compounding factor tightening the global grain shortage: South America’s three largest agricultural producers – Brazil, Argentina, and Paraguay – are experiencing a prolonged period of drought and low water levels in their main rivers. South America’s low crop yields will most impact the global market for soybeans, which relies on the continent’s 2022 production. The report also cut Ukraine wheat exports by 17% (from 24 million to 20 million tons), and corn sales by 6 million tons in 2021-2022. USDA’s cuts to Ukraine and Russian grain exports were partially offset by India and Australia.

Uncertainty in the global food supply chain may precipitate a U.S. shift of 3 million acres from corn to soybeans, with both corn and soybean acreage leveling around 90 million acres this summer.

However, soybeans remain the more attractive option for farmers due to lower fertilizer requirements. Already, fertilizer prices have more than doubled in the last year, a trend exacerbated as Russia provides 23% of the global ammonia market, 17% of potash, 14% of urea, and 10% of phosphates. While Ukraine is not significant in fertilizer, its neighbor Belarus supplies 13% of the world’s potash.

Rising Grocery Prices Ahead

Come autumn, the sky-high commodity prices will arrive at grocery stores. Last October, the United Nations, the Food and Agriculture Organization, and the Food Price Index had pegged the global prices of commodities used in food manufacturing up 30% relative to January 2020’s pre-pandemic levels 10 months earlier. While a commodity shortage is unexpected in the U.S., grocery prices will nevertheless be the most tangible impact felt by American consumers.

Wheat serves as a useful barometer of pressures on global food prices. The Chicago wheat futures contract is sitting near a nine-year high, while wheat globally has slipped into its largest deficit since 2013. After a decade of the world’s producing more wheat than it needed, and keeping inventories stocked, 2022 will see the second consecutive year of a deficit.

The confluence of all the described factors makes it increasingly difficult to secure hemp acreage in North America. That is especially troublesome for fiber and grain hemp processors – many of whom have invested millions of dollars to acquire facilities, equipment, and labor – who are now operational but cannot secure enough regional production to meet their annual feedstock needs. That could add financial pressure on the operators should they struggle to hit their sales targets, and could delay their timelines for paying back loans and meeting investor expectations.

As things stand, given the yields that farmers can achieve planting corn, hemp is a far less attractive option. In addition, the lack of crop insurance for hemp production means that growers must bear on higher risk with minimal chance of reward, especially in a year when a crop insurance loss on corn or soybeans would still be highly profitable given where the futures sit.

Nevertheless, there is a silver lining: High prices for major agricultural commodities will push food and feed manufacturers to consider cheaper, nutritious alternatives. That could make hemp a winner, especially if hemp grain can achieve approval as a feed ingredient (for poultry at the very least) in the next 12 months. The high-protein content and nutritional profile of hemp grain ingredients rival those of flaxseed and other oilseeds which may prove to become targets for manufacturers seeking alternatives.

Ukraine is the world’s largest exporter of sunflower oil, responsible for up to 46% of sunflower seed and safflower oil production. The second-largest producer is Russia, which supplies about 23% of the global demand. Sunflower seed oil is widely used in cosmetics and, like hemp seed oil, contains polyunsaturated fatty acids.

Upside to Hemp Seed

A global deficit in sunflower seed oil could draw new attention to hemp seed oil, which contains 75%-80% polyunsaturated fatty acids, as well as highly sought-after omega-3 and omega-6 fatty acids, including gamma-linolenic acid (GLA). Over the last few decades, GLA has gained recognition for its anti-inflammatory and anticancer properties, and a handful of clinical trials found that GLA reduced inflammation, symptoms, and the requirement for NSAIDs in patients with arthritis. The unaffordability of major crops as driven by market uncertainty could stimulate the market both for hemp grain and its adoption as a plant-based ingredient.

While each week of Ukraine’s sustained resistance floats renewed hope for peace talks between Ukraine and Russia, the next 30 days also hold critical importance for farmers in North America as they finalize production plans and begin sowing seeds for this summer’s increasingly vital harvest.