Ukraine war may further regionalize global ag

Russia’s invasion raises short, medium and long-term questions that could cement a focus on regionalization and shorter supply chains in global agriculture.

Even before the events of the past few weeks, it seemed difficult for observers to recall that the long-running debate surrounding farmland sales in Ukraine was resolved only under emergency conditions imposed by covid-19 in late 2020.

Bate Toms, a British lawyer with decades of experience in Ukraine, told Agri Investor last August that despite early signs of development after partial removal of the sale moratorium, geopolitical realities were the far more important factor slowing the pace of farmland transactions.

Russia’s invasion marks a tragic intensification of a complex risk profile for Ukraine, which has gradually escalated since at least 2014, thwarting hopeful investors big and small drawn to the country’s uniquely rich soils.

Kurt Groszhans is a North Dakota farmer who moved to Ukraine in 2017 with hopes of developing farms only to find himself jailed on accusations of plotting to kill the country’s agriculture minister, despite high-level US attempts to intervene on his behalf.

NCH Capital – the largest private equity group invested in the Former Soviet Union’s ag sector – is facing at least one LP with intentions to divest and a very challenging future for its ag investments in Ukraine and Russia.

Emerging markets-focused Grammercy Funds Management filed a federal complaint in December alleging corruption by a Ukrainian business partner in relation to its position as “one of the largest investors” in UkrLand Farming, which is among Ukraine’s largest farmland owners.

Beyond direct exposures to Ukraine’s ag sector, war and the financial focus of the West’s response have raised significant short, medium and long-term issues likely to heighten the existing focus on shorter supply chains and a regionalization of the global economy.

Ospraie’s Dwight Anderson highlighted in a CNBC interview that weather-related challenges in Latin America have led to the loss of 15 million tons of grain production this year, threatening to exacerbate the near-term consequences of events in Ukraine.

“With stocks-to-use ratios at 20-year lows outside of China, if the Ukrainian farmers don’t get on their tractors, that’s 100 million tons of food that’s not going to be grown,” he said. “We’re not just concerned about food inflation and prices continuing [to rise], we’re actually worried about food availability and shortages, especially in the developing world.”

Disruption of agricultural input supplies from countries including Belarus and Russia was among the drivers for the USDA’s decision last week to invest $250 million to support domestic fertilizer production and promote competition over the medium term.

Cordiant Capital co-chief executive Benn Mikula told Agri Investor that over the long term, the fact that Russia’s invasion cut off Black Sea grain will highlight the key position of South America in global markets.

“Thanks to Putin, we are facing a world in which we will be returning to far more geographically constrained spheres of influence,” he said. “Production in Latin America is one of the few places that global swing production can come from, and it will be more and more important.”

The invasion of Ukraine marks a definitive end to a period when integration of a post-Soviet Russia into the global economy was viewed as a somewhat realistic goal. The degree and variety of challenges faced by NCH, Grammercy and others suggest that few sophisticated managers – ag-focused or otherwise – will approach either market meaningfully for the foreseeable future.

The regionalized future suggested by early reactions to Russia’s invasion is by no means guaranteed. But public and private response to the food security challenges feared in the coming weeks and months could shape opportunities available to agricultural investors for decades to come.