Impact of Russia-Ukraine Conflict on Canadian Ag

The conflict between Russia and Ukraine is driving grain and oilseed prices sharply higher, but what are the other potential impacts on the Canadian agricultural sector?

In a website post Tuesday, Farm Credit Canada Principal Economist Sébastien Pouliot outlined how the war might affect Canadian ag and food, beyond its more obvious and immense human and economic tolls. The highlights follow below:

Trade:

Both Ukraine and Russia are not large trade partners to Canadian ag and food businesses. In the last five years, Canada has exported on average $65 million in ag and food products to Ukraine and imported for about $33 million of these products. Over the same period, on average, Canada has exported $80 million and imported for $93 million in ag and food products to Russia.

Grains and oilseeds:

Ukraine and Russia are major exporters of barley, corn, canola, wheat and sunflower oil. If the conflict and accompanying sanctions negatively impact the production or the movement of those commodities, shortage on the world market or shifts in trade flows would cause prices to rise.

Fertilizer:

Fertilizer prices are already inflated because of various disruptions from the pandemic. The conflict could add to these disruptions if sanctions affect Russia’s fertilizer exports. In 2020, Russia was the world’s largest fertilizer exporter with exports reaching US$7 billion (World Bank WITS database).

Energy:

Russia was the world's third largest oil producer in 2020 (or second depending on the source). If sanctions limit Russia’s exports, this would further contribute to rising oil prices. Oil prices have been rising already because of the uncertainty caused by the conflict. If sanctions affect the ongoing flow of natural gas, it will cause prices to spike in Europe. This will further boost fertilizer prices as natural gas is a key input in nitrogen-based fertilizer production.

Macroeconomic conditions:

An indirect effect of the ongoing conflict is that investors are turning to the US dollar as a safe-haven currency. Oil prices should currently favour a stronger Canadian dollar but the uncertainty regarding the conflict in Ukraine is supporting the greenback.

Going forward, what will happen will depend on how the conflict develops. If the loonie stays weak, it will boost exports, help growth but also make imports pricier and cause additional inflationary pressures at a time when inflation is hitting levels not seen in a generation. This might force the Bank of Canada to take a more aggressive approach to curb inflation by raising interest more rapidly than otherwise. Another possible outcome is the war and sanctions will cause global economic growth to slow down, weaken inflationary pressures and delay expected interest rate hikes from western central banks.