Despite the unknown, the market has to build in the “what if” geopolitical risk premium

(Kara Oosterhuis/RealAgriculture)

There’s so much going on in the geopolitical scene right now, and all that works its way back in to the markets. The focus right now is squarely on Russia and Ukraine and how the current political situation is impacting markets.

Joining RealAg Radio host Shaun Haney to break it down is Arlan Suderman, chief commodities economist for StoneX Group Inc.

“We don’t know what President Putin of Russia’s intentions are. He certainly has put together a lot of troops, a lot of things, and a lot of equipment that have basically surrounded about 70 per cent of Ukraine’s borders,” explains Suderman.

Despite the unknown, says Suderman, the market has to build on the risk premium on the “what if” geopolitically, as Russia and the Ukraine account for 29 per cent of the world’s wheat trade, while 16 per cent of the world’s corn trade comes out of Ukraine alone.

“With both of those commodities, supplies are rather snug on the world market right now. So anything to disrupt that could have monumental impact on world trade. So that’s what the market is concerned about,” he notes. “If in fact we see sanctions from the West against Russia, that caused President Putin then to take action and restrict natural gas flow to Germany and other parts of Europe, we could see those natural gas prices really skyrocket again, shutting down fertilizer production in Europe,” adding that this could cause another big surge in fertilizer prices globally.

When it comes to risk management, Suderman points out that as a culture, we tend to look at what will take care of us today, without so much thinking about long-term consequences, as we’ve seen in the case with Europe relying so heavily on Russia for natural gas.

“There’s portions of Europe saying ‘look, there’s no problem with taking their natural gas today. That’ll lower my prices today, and that’ll keep my house heated today,’ without maybe saying ‘well I don’t want to be dependent on them. I don’t want to be held hostage by them. So maybe I’m willing to pay a little bit more for an alternative source. So that I don’t have to worry about that at a later date.'”

Listen on for a conversation between Suderman and Haney on China, COVID-19 market impacts, and more:

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