Barron's: Ukraine Farmers Stockpile Grain

By SIMON CONSTABLE
Here's something to chew on: Ukraine's farmers are using wheat and corn to hedge against the risk of a currency crisis. What's more, the uncertainty in Crimea has the potential to drive prices even higher in markets already worried about supplies from the major grain exporter.
"During the peak of the recent devaluation in the Ukrainian hryvnia, [grain] exports were being held back to provide a hedge against the currency," writes Mark Keenan, an analyst at Société Générale, in a recent report.
It's an interesting twist on safe-harbor assets, which usually sends investors flocking to gold.
Corn and wheat are sold on the global market in U.S. dollars. When the local currency temporarily weakens, growers often sell their grain because they receive more of their own currency when they convert their dollar profits.
The fact that Ukrainian farmers are holding on to their grain shows they're more concerned that the hryvnia could weaken further. The stockpiles of corn and wheat mean farmers will have something that keeps its value when the hryvnia hasn't. The value of one hryvnia has fallen from about 12 U.S. cents at the beginning of this year to 9.5 cents recently.
"This dynamic is often overlooked…especially when [the commodities] are not government-controlled," says the Société Générale report. "These markets are controlled by the farmers."
Any slackening of Ukraine's corn and wheat exports has global implications. Although the U.S. dominates supply of both grains, the U.S. Agriculture Department projects that Ukraine will contribute 16% of the world's exported corn and 6.2% of wheat shipments on the global market this year.
With major volumes at stake, it's no wonder that traders are taking notice.
"The uncertainty about it is probably driving grain markets now, because no one really knows what will be the outcome with Ukraine and the European Union," says Jerry Norton, a grains analyst at the World Agriculture Outlook Board of the USDA. Or more generally, will a military conflict arise between Russia and the West?
What we do know is that corn prices have rallied from about $4.20 a bushel at the beginning of the year to $4.80 recently. Wheat was trading at about $6.10 a bushel in early January, versus $6.98 recently. Both are traded on the Chicago Board of Trade.
The key is to watch the level of the Ukrainian currency, which will "provide more of a lead indicator into how grain prices will change," Société Générale says. In other words, if the hryvnia tanks, then grain prices will surge as farmers withhold exports.
That said, the rally may be relatively short-lived, says Shawn Hackett, author of the Hackett Money Flow Report. Eventually, the farmers must export their grain because they will need the cash to plant next season's crop, he says.
"We see this in Argentina repeatedly," he says. The Argentine peso slipped to a record low in January, the result of failed economic policies and rising inflation, and farmers halted sales of grains and other commodities until the currency stabilized.
When the eventual commodity selling does happen, Hackett sees a "huge crash" in prices as there are already "boatloads of corn, boatloads of wheat."
See original story here.


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