The Intertwining of Commodities and the Ukrainian Russian Conflict

Decisions made by international leaders rarely affect the world of managers, programs, or the managed futures space, let alone the grain markets… But that might not be the case this time…  Confused?

First, we must catch ourselves up on what’s happening in eastern Europe. Understanding the happenings in Ukraine over the past week can be difficult. We don’t specialize in politics, let alone international relations, so with a quick Google search, we found a fast read by ABC to get you caught up on the Ukrainian protests. Cultural differences in Ukraine have been prevalent since the country’s inception. However, the catalyst of the conflict boiled to the surface because of a back out of a trade agreement by the President of Ukraine.

 “Why are they protesting? 

But they are very angry because Ukraine’s President Viktor Yanukovich backed out of a trade deal with the European Union last week. This wasn’t just about a trade deal, it was a symbolic decision about the future of the country: Would Ukraine be allied with Europe or with Russia?”

To make matters worse, just before the weekend, Russian President Putin sent forces into Ukraine, and made warnings of war. Here comes the (Ah-Hah moment). For those unaware of Russia’s and Ukraine’s agricultural history, they happen to grow and harvest around 17% of the global wheat supply, and 16% of the corn supply via Reuters.

“Wheat, corn surge as market frets over Ukraine The U.S. Department of Agriculture forecasts that Russia and Ukraine will export a total 26.5 million tonnes of wheat in the 2013/14 marketing season, or 17 percent of global shipments. In corn, Ukraine alone is forecast to export 18.5 million tonnes, or 16 percent of total exports. But analysts and traders said there were no signs so far of actual disruption to trade and that the market was reacting nervously.”

The question remains… with rising political unrest, the Ukrainian President fleeing the country, are these events halting countries from exporting grains? An ADM spokeswoman says, not at all, via the Wall Street Journal.

“Archer Daniels Midland Co. said its Black Sea grain-trading operations haven’t been affected so far by the escalating turmoil in Ukraine, though the commodities company is watching the situation closely. We haven’t seen any significant impact to business and continue to monitor the situation.”

As uncertainly continues, the two ag markets did see some grain gains today (Corn up 1.2%, Wheat up 4.5%), but nothing that couldn’t happen any other day. {past performance is not necessarily indicative of future results}.

Corn and Wheat
(Disclaimer: Past performance is not necessarily indicative of future results)
Charts Courtesy: Finviz.com

These modest gains today could easily disappear the next. Speaking of disappearing… There’s one other commodity that’s deeply rooted in this conflict… Natural Gas.  The Washington Post reports that Russia supplies Ukraine with half over their natural gas needs…  but after supply cuts, trade disagreements, and other emerging European suppliers, Russia is getting left in the dust.

“In December, Gazprom said it would discount the price paid by Ukraine, cutting it from about $11.50 per thousand cubic feet to $8.10. But that only brought Ukraine’s prices roughly in line with those being paid in other parts of Europe. Gazprom said it would review the price every quarter, meaning a new reset is possible at the end of March.”

As far as the futures markets go… Natural Gas has lost all of what it gained in the month of February and then some… remaining unfazed by the disagreements in Europe. 

Natural Gas(Disclaimer: Past performance is not necessarily indicative of future results)
Chart Courtesy: Finviz.com

Is this just the beginning? Will Russia use their physical force? Will Ukrainian protesters win out? Will this turn uglier than it already is? Will other nations get involved? While it’s fascinating to hear how commodities such as Natural Gas can play a deep role in a gripping political story in Europe, as a whole, traditional managed futures won’t pay too much of attention to Ukraine (outside of personal interest) regarding the corn, wheat, or natural gas markets. Managers pay attention to various markets indicators like moving averages, and multiple week lows.

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Forex trading, commodity trading, managed futures, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors.

The entries on this blog are intended to further subscribers understanding, education, and – at times- enjoyment of the world of alternative investments through managed futures, trading systems, and managed forex, and is not intended as investment advice, or an offer or solicitation for the purchase or sale of any financial instrument. Unless distinctly noted otherwise, the data and graphs included herein are intended to be mere examples and exhibits of the topic discussed, are for educational and illustrative purposes only, and do not represent trading in actual accounts. Opinions expressed are that of the author.

*The mention of specific asset class performance (i.e. +3.2%, -4.6%) is based on the noted source index (i.e. Newedge CTA Index, S&P 500 Index, etc.), and investors should take care to understand that any index performance is for the constituents of that index only, and does not represent the entire universe of possible investments within that asset class. And further, that there can be limitations and biases to indices such as survivorship and self reporting biases, and instant history.

The mention of general asset class performance (i.e. managed futures did well, stocks were down, bonds were up) is based on Attain’s direct experience in those asset classes, estimates of performance of dozens of CTAs followed by Attain, and averaging of various indices designed to track said asset classes.

It should be noted that past market performance is not indicative of future market movement.No market data or other information is warranted by Attain Capital Management as to completeness or accuracy, express or implied, and is subject to change without notice.

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Past Performance is Not Necessarily Indicative of Future Results. The regulations of the CFTC require that prospective clients of a managed futures program (CTA) receive a disclosure document when they are solicited to enter into an agreement whereby the CTA will direct or guide the client’s commodity interest trading and that certain risk factors be highlighted. The disclosure document contains a complete description of the principal risk factors and each fee to be charged to your account by the CTA.