This week, President Donald Trump announced a plan for the U.S. to take control of the Strait of Hormuz. He implemented a 20% charge on all cargo passing through the route as reimbursement for security costs. Extension Ag Economist Frayne Olson with North Dakota State University says the re-escalation of the war between the United States and Iran has an indirect impact on grain via energy markets.
“So I know that farmers are concerned about you know fertilizer prices and potentially diesel fuel prices and maybe even some natural gas or propane prices come fall if we have to do some drying. So on the energy side, it’s not something that farmers need to ignore. It is something to pay attention to, that’s, you know, again we’re looking forward, and there’s a time delay from when things are ordered to when they actually arrive, and farmers can use them. So we have to keep that in mind.”
He explains how commodities, particularly the grain markets, are connected to the energy market, and how volatility in energy can spill over.
“When the war first began, we start to see this larger rally that we got in the futures market. A lot of that was because of the investment community, as stock markets fell and financial instruments fell, they moved into the commodity indexes, primarily going after the energy markets. But those indexes are pre-packaged, which means that when you purchase those indexes, you automatically get a small amount of corn, soybeans, wheat, and even some of the meat complex. So the fundamental connection between energy and grains, for example, through biofuels. But then there’s this investment connection and a lot of that rally, and then the corresponding drop that we saw in futures market prices was because of this investment flux. So we’ll have to wait to see what happens in the stock markets and whether we see a repeat of that or not.”
Olson says so far, the repeat hasn’t happened.
“We were looking at crude oil prices, West Texas Intermediate Crude in the mid-70s, you know, it was well into the 90s, and almost a hundred dollars, you know, as we saw the peak of the pricing earlier this year. So we’ll wait to see you know some of this will start playing out. In my opinion, the easiest way to try and trace what the market is thinking and what that might do to grain prices is just to watch the crude oil prices. If you start to see crude oil starting to rise and rise fairly quickly, you know that something’s going on and something’s happening. Will this 20 percent fee – is that going to be low enough to get products through the straight? I don’t know what that’s going to do to any potential insurance rates. You know, is this 20 percent fee really going to choke off, effectively choke off, that supply chain, or are they going to be willing to pay it and get products through the strait? Nobody really knows at this stage.”
The other war the market is concerned about is the one between Russia and Ukraine. Olson says the Ukrainians are getting more aggressive.
“They have been able to make some drone attacks onto some port facilities. There’s a canal or a river that runs between the Sea of Azov and the Black Sea, and that route is one of the major ways that Russia is able to get some of their wheat products, as well some sunflowers, some oil seeds, from the Azov Sea into the Black Sea. And then from the Black Sea, it goes into the Mediterranean, and those facilities that have been damaged. Now some of those are grain facilities, and it is restricting the flow of or expected to restrict the flow of wheat, and that’s important not only for wheat prices but also when you look at Europe. Europe has had this really, really hot weather. The wheat crop in Europe is far enough along, there is some damage, but it’s pretty minimal, but the corn crop in some of the European states has really been hammered, and of course, corn and corn supplies, as well as feed wheat for some of their livestock, could be important. So there might be even some spillover into the corn market.”
Olson warns that with two wars going on simultaneously in roughly the same areas, there can also be corresponding issues with transportation and logistics coming out of both of those regions. The volatility, he says, is price supportive for grain.
“My take on it is I think it will be supportive because as we start adding some of the risk premium into the marketplace, just concerns about the availability of product coming out of that region in general, whenever you start to restrict supply, at least in the short term, that puts the product that is available for shipping at a little higher premium. So I do think we’re going to see a risk premium start to build. Combine that with possibly some weather issues because we’re still just in the middle of July right now, so there’s still plenty of weather to be talking about. So, I think this will be supportive overall politically. From a political geopolitical standpoint, I think this will be short-term supportive.”
The Associated Press reported Tuesday afternoon that President Trump had backtracked on plans to charge ships for using the Strait of Hormuz, saying Gulf countries would instead invest in the United States.