Bans on Russian soft commodities and disruptions spark potential food crisis: Silver lining for Ag stocks

The Ukraine-Russia region is considered one of six breadbaskets of the world - major regions that together supply roughly 60-70% of global agricultural commodities.

According to McKinsey, the Ukraine-Russia region is responsible for roughly 30% of global export of wheat and 65% of sunflower, in a context where those markets are increasingly tight and interconnected. 

Nicolas Denis, Leader of Food & Agriculture practice at McKinsey said that in the event of a more severe and extended disruption, we could see:

• A worsening refugee situation, meaning less labour available in places where hands are needed for agriculture

• Governments stop exporting some commodities to countries that need them, leading to a significant decrease in global food trade

Export bans have already intensified as countries seek to protect domestic food security.

• March 5: Hungary bans all grain exports effective immediately

• March 9: Serbia bans flour, corn, vegetable oil exports

• March 9: Putin bans the export of some raw materials exports until December 31

• May 16: India bans wheat exports

We've seen a lot of hard commodities like copper, lithium and iron ore experience massive rallies earlier this year and begin plateau in recent weeks.

This is hardly the case for soft commodities, particularly wheat, corn and soybeans, which remain elevated and close to previous peaks.

Wheat (top left), Corn (top right), Soybean (bottom left) and Lean Hogs (bottom right) prices (Source: TradingView)

ASX agricultural stocks

The ASX isn't exactly known for having much breadth when it comes to agricultural stocks. The main players include:

• Graincorp (ASX: GNC)

  • Grain storage and infrastructure

• Nufarm (ASX: NUF)

  • Crop protection and seeds

• Elders (ASX: ELD)

  • Diversified agriculture services (production, real estate, finance etc.)

• Australian Agricultural Company (ASX: AAC)

  • Cattle and beef producer

ASX 200 vs. Graincorp (Orange), Nufarm (Blue), Elders (Yellow), Australian Agri (Purple)

More broadly speaking, these companies are profitable and trading at rather undemanding valuations heading into 2022 (with the exception of AAC).

The backdrop of higher soft commodity prices and the markets focus on valuations and current cashflow, has helped these stocks strong outperform the broader ASX 200 year-to-date.