For those that don’t know.
Russia and Ukraine together account for 35% of global export of wheat and corn, which is nearly double that of the US.
Ukraine alone accounts for more than half that number in terms of corn and a little under half of that in terms of Wheat. With a war going on, farms simply will not produce enough to export, and barely enough to feed their own population due to the disruption in logistics. Seeds, Fuel, Fertilizers and equipment will be hard to come by. The spring planting season is upon us, and if the war does not end in a month, which is highly unlikely, then the entire fall harvest of Ukraine will be in trouble.
Then you have Russia. Russian wheat is all on the west side of the Russia bordering Ukraine and have exported themselves through the black sea. With shipping/transport disrupted in that area, it is unlikely that the Russians can bring those produce to market. Additionally, Russia has already started banning of grain exports to many countries and it is only a matter of time that they do a full export ban to the west (making an exception to China). I think its likely that they foresee the coming fertilizer shortage and want to keep domestic prices down to ensure social stability.
Now I will talk about global domestic production. What is happening Russian/Ukraine is already bad enough, but this does not account for the spike in Fertilizer and Fuel prices, which are key inputs to agricultural production. The three main fertilizer groups, Potash, Phosphates and Nitrates are up 2-4x what they were a year ago. Again because of supply disruptions and Russia/Belarus being major producers.
This is stuff that needs to go into the ground in the next 2 months. If prices do not immediately go down 50-80%, many farmers will A) either significantly decrease the amount of acreage under production, or B) use significantly less fertilizers. Both of which will lead to a yield collapse for the fall harvest.
Each of Ukraine, Russia and Fertilizer spike would be bad enough. To give you an idea what happened the last time fertilizer prices doubled, which was in 2007, wheat prices tripled. ZW went from around 400 to 1200 over the span of 1 year from March 2007 to March 2008. In 2010, due to a bad harvest, Russia Temporary banned the export of wheat, Wheat futures doubled from 400-800 over the span of 8 months.
The three compounding with each other will easily create a 4-8x fold increase in the price of wheat from the pre-invasion price of around $700. Wheat will easily hit $3,000 – 6,000 over the next 12 months.
The crazy thing is the market is completely oblivious, wheat is only at 1100, which is only up 30% from pre-invasion.
I got about 20k in /ZW calls and will be loading up more. This should be a 100-300 bagger. I have never seen so much asymmetry in option prices in my 13 years of trading. The market is completely oblivious still relative to the scale of the problem.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.
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