Cost increases - including a potential 50 per cent rise in fuel - could easily outweigh the price gains many Australian farmers reap as a result of market reaction to the ongoing war in Ukraine, warns Rabobank.
Cereal and oilseed markets seem almost certain to keep rising, or at very least remain strong, because war is quarantining up to 30pc of the world's exports of some farm commodities.
However, those same trade bans and export blockages around Russia and Ukraine meant more worldwide cost rises for freight, fuel and fertiliser were almost inevitable, according to analysis by the agribusiness bank.
Disruptions to trade flows from Russia and the Ukraine would be felt across our farm sector as 2022 progressed, driven largely by further energy and fertiliser price hikes, said RaboResearch's Australia and New Zealand general manager, Stefan Vogel.
His report described the two warring European neighbours as agricultural powerhouses which normally supplied the world with big volumes of grain, fertiliser and oil and gas.
Russia provides a third of the world's potash needs and about 10pc of global crude oil supplies, while Russia and the Ukraine, with Black Sea region neighbours Romania and Bulgaria, accounted for a third of global wheat exports in 2021.
Energy price shock
As the European Union further tightens the taps on Russian oil exports to lock Russia out of European markets by late 2022 Rabobank warned of a significant reduction in energy availability and more pressure on prices which were already "very high, as a consequence of the war".
"Crude oil and diesel price increases due to the war will add to costs in farming and the agribusiness supply chain," Mr Vogel said.
"Crude oil prices above $US100 a barrel already feel expensive, but a further price increase of more than 50pc is possible as a result of those planned EU sanctions - if they come to pass."
Global crude oil values are currently around $US114/barrel.
Farmers and the food supply chain were urged to prepare for continued high and volatile prices.
"The implications of the planned next round of EU sanctions on Russia are more negative than positive as prices for farming outputs like grains are expected to move substantially less upward than input costs like energy and, to some degree, fertiliser, which has already hit record highs," he said.
Although trade flow disruptions from the two eastern European countries would keep global grain and food prices elevated during 2022 "and likely beyond", the war's impact on fuel and fertiliser markets would also impact the livestock, dairy, fresh produce and possibly tree nut and sugar sectors.
Russia was among the world's top 10 fruit importers, including bananas, citrus, stone fruit and lemons, which could drive trade re-routing in global markets.
As key fertiliser import competitors like Brazil and India also tried to secure their needs, Australia may see some temporary shortages for certain products.
"While Australia does not typically import much fertiliser from the Black Sea region, we import most of our needs and therefore we will still face a tough fertiliser market in the coming months," Mr Vogel said.
"Unfortunately, fertiliser prices elevate with grain prices and the current high price period is not an exception."
He said Russia and Ukraine had risen into the ranks of "major powerhouses in the food and agri space during the past two decades.
Some products were still flowing from Russia and Belarus, albeit awkwardly because sanctions made trade difficult.
Ukraine had also shipped big quantities of grain before February's Russian invasion, equivalent to about half as much wheat, barley and canola as Australia will export for the year after our recent record harvest.
In addition, Ukraine corn export volumes would normally be equivalent to the entire Australian grain and oilseed export tonnage for this season.
Grain squeeze ahead
"As the war started in February 2022, Ukraine had already shipped at least half of the season's grain volumes," he said.
"Consequently, the world has not yet felt the full impact of the heavy absence of Ukraine's supplies, but this is about to change after July when Ukraine harvests its next crop."
Australian farmers had already benefitted from higher global grain prices, however they were not seeing as much value as many other parts of the world because our record crop was stretching export logistics to the limit.
"Still, for the upcoming season, and potentially seasons beyond, Australian grain and canola farmers will benefit from strong prices," Mr Vogel said.
Unfortunately, however, logistics challenges would continue because COVID-stressed global freight systems faced more pressure from the war as shipping costs were impacted by rising energy prices.
China's COVID cost
Pandemic-related lockdowns, especially in China, and labour shortages everywhere, were further compounding the freight challenge.
Rabobank estimated it could be two or more years before freight congestion around the world unwound and rates dipped closer to historic levels.
Mr Vogel's Ukraine report followed a similar look at the impact of China's coronavirus pandemic lockdowns, which tipped the freight price blowout to stay well above historic levels for the next year.
He also forecast China's COVID lockdowns had delayed corn planting opportunities, adding more concern about global grain supplies in 2022-23, especially if the late crops were caught by frost damage.
The spread of the Omicron coronavirus variant in China and Beijing's zero COVID policy had also hurt consumer activity, notably dairy demand in the food service sector.
"After record-breaking milk powder imports by China in 2021, the demand uncertainty from COVID restrictions is likely to dampen the dragon's import appetite, making it more difficult for Australian and NZ exports to be competitive."
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