Russia’s war in Ukraine could bring long-term commodities price hikes to the Midwest, according to a recent Federal Reserve Bank of Kansas City report.
The war has caused massive global commodity market disruptions, both from reduced production in Ukraine and global sanctions levied on Russia in response to the invasion. Russia is one of the world’s largest producers of both crude oil and natural gas while Ukraine supplies a large amount of its wheat and corn.
The report, written by Senior Economist Cortney Cowley, Senior Economics Specialist David Rodziewicz and Data Scientist Thomas Cook, says market disruptions and higher prices could last for a long time due to futures prices. Futures for wheat and crude oil increased by 36 percent and 23 percent in the first two weeks following Russia’s invasion, according to the report. Though those prices have dropped as of late, they still remain higher than before the war began. In the U.S., winter wheat production is forecasted to drop 8 percent from last year due to poor weather.
The Fed noted that the likelihood of long-term impacts is further heightened due to the already low worldwide oil and wheat inventories before the war began and the possibility of global trade disruptions persisting and spilling over to other markets. The researchers said sanctions will likely remain in place through the war, “and possibly for an extended period even after the conflict is resolved.”
U.S. wheat and corn commodity prices soared by 60 percent and 30 percent, respectively, during the first quarter of this year. The Kansas City Fed region alone accounts for more than one-fifth of U.S. corn, oil, and natural gas production and approximately 40 percent of the country’s coal and wheat production. Though higher commodities prices could support producer profit margins, high costs could also squeeze household and business budgets and cause consumers to switch from wheat to other grains such as rice. Demand could spike for electric vehicles due to skyrocketing gas prices.
“The invasion and associated disruptions will have significant implications, particularly for regions closely tied to commodity markets, and for consumers,” the report stated.