Planned sanctions against Russia are boosting the fortunes of domestic farmers, miners and fertilizer producers.
Russia and Canada are the dominant competitors in commodities such as wheat, gold and potash, with rivalries that match the two countries’ storied hockey history. By punishing Russian President Vladimir Putin for his aggression against Ukraine, Western countries are potentially eliminating a major player from commodity markets and possibly increasing the profits for Canadian producers.
“Any increased tensions between Russia and the West would be considered positive for agriculture and fertilizer, for commodity-related reasons,” analyst Andrew Wong at RBC Capital Markets said in a report published ahead of this week’s escalation in the crisis, when Russia recognized the independence of two Ukraine regions.
“Russia and Ukraine are major wheat exporters, so tensions there were a positive driver for global grain prices.” Mr. Wong said. “Russia is also a major potash and phosphate exporter, so any potential sanctions on Russia could be positive for other fertilizer producers.”
Russia and neighbouring Belarus are the second- and third-largest potash producers in the world, behind Canada. Steve Hansen, analyst with Raymond James, says that the Ukrainian crisis is increasing pressure on the global potash network, with the possibility of sanctions against Russian potash producers pushing the commodity to near-decade highs.
“We’ve already got a very tight market,” Mr. Hansen said. “The Russian-Ukrainian conflict could add another element.” The prospect of higher prices is boosting the share price of Saskatoon-based Nutrien Inc. Its stock is up 35 per cent over the past 12 months, a year that saw Canada’s largest potash producer cut ties with two CEOs.
Nutrien spokesperson Megan Fielding said the company planned to increase potash production this year, as it did in 2021, to satisfy increased customer orders.
“Nutrien hopes for a peaceful solution to the conflict in Eastern Europe,” she said. “This region is a key supplier of agriculture, energy and fertilizer products and further unrest or sanctions could impact global trade flows.”
Wheat prices are up by about 30 per cent over the past year, in part because of the prospect of increasing turmoil in Ukraine, the traditional bread basket of Eastern Europe. Russian and Ukraine, together, account for about a third of global wheat exports. Dave Quist, executive director of the Western Canadian Wheat Growers Association, said Canadian farmers focus on high-quality crops and compete directly with Ukraine.
“Russian wheat is typically not high grade, but the Ukraine does produce a lot of good wheat,” Mr. Quist said in an e-mail. “If their crop is hampered by war, there is little doubt that the price will go up globally.”
Russia will shift its wheat export strategy if the Ukraine crisis escalates and sanctions are hiked, predicted analyst Felipe Ucros at Scotiabank. In a report, he said: “Readjustment would probably consist of Russia and separatist regions finding new markets for wheat – more wheat to China, Iran and other Russian allies, less to the U.S., European Union and allies.”
Restaurant chains, food producers and grocery chains will see profits drop if wheat prices rise, as they will struggle to pass the increasing costs on to price-conscious customers. In a report, analyst Chris Carril at RBC Capital Markets said: “Given costs are already elevated for the restaurant industry, further pressure on energy and other commodity prices – e.g., grains and proteins – could lead to prolonged margin pressures.”
In the forestry sector, Russia was the world’s largest exporter of lumber last year, followed closely by Canada.
Over the years, there has been little lumber shipped from Russia to North America since Canada and the United States are major producers in their own right.
Roughly half of Russia’s lumber exports are sold to China, which isn’t expected to scale back its orders any time soon, said Hakan Ekstrom, president of Wood Resources International LLC, a forestry consulting firm. “China needs the wood and wants the wood,” he said in an interview from Seattle.
Mr. Ekstrom said Europe is able to produce enough lumber to meet most of its domestic demand, in sharp contrast to Europe’s heavy reliance on Russia for natural gas.
Canada continues to nurture lumber exports to China as a diversification strategy for time periods when demand in the United States falters, though the American thirst for Canadian lumber has stayed strong, despite U.S. tariffs on shipments from Canada. Lumber prices have surged since the start of the pandemic.
Overall, Russia’s ambitions in Ukraine are also stoking wider inflation fears. In a report, Paris-based Amundi Asset Management chief investment officer Vincent Mortier said: ”An escalation of the conflict could disrupt some commodity markets, adding uncertainty to the global inflation outlook.”
Often seen as the go-to asset in times of great uncertainty, gold has benefited from the escalating crisis in Ukraine. The precious metal on Wednesday traded up to US$1,912 an ounce, its highest level since last summer.
But heavy exposure to Russia is hurting investors with exposure to Kinross Gold Corp. The Toronto-based gold miner shed 5 per cent of its value on the Toronto Stock Exchange on Tuesday after Russian troops occupied two separatist regions of Ukraine.
Last year, Russia accounted for 23 per cent of Kinross’s production, and the Kupol mine complex in the far east of the country is its most profitable operation.
Kinross on Wednesday said in a news release that Kupol is operating normally. The mining camp is stocked with sufficient supplies for the next year, the company said, and added that Kupol is located about 7,000 kilometres away from conflict zones in Ukraine.
“Kinross has managed similar situations like this in the past while complying with applicable laws and believe we have the experience and the resources to be able to do so again,” Kinross spokesperson Louie Diaz wrote in an e-mail to The Globe and Mail.
Still, continuing uncertainty in Russia remains an overhang for investors, said John Ing, gold analyst with Maison Placements in Toronto. The threat of tougher sanctions against the country, and particularly the possibility of it being cut off from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), a mechanism for payments across international borders, is something investors are weighing, he said. Furthermore, the risk, albeit small, of Russia potentially nationalizing Kinross’s operations in the country is a concern.
“We’ve seen that in other countries if push came to shove,” Mr. Ing said, referring to Kyrgyzstan last year nationalizing Canadian gold miner Centerra Gold Inc.’s Kumtor mine in the former Soviet republic.
“Kinross’s relationship with the governor, and with the locals is pretty good, and they haven’t been held hostage like some other countries,” he added. “But there’s always that risk.”
Kinross, which has operated in Russia for more than 25 years, has long traded at a discount to peers with mines in safer jurisdictions, such as Agnico Eagle Mines Ltd., whose operations are mainly in Canada and Australia.
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