In addition to the humanitarian crisis in Ukraine, a second-order effect of the war that is being felt around the world is historic commodity price swings—from energy and metals to agriculture and other real assets. Commodity prices had already been rising off multiyear lows after the onset of the COVID-19 pandemic, but price increases for many raw inputs have accelerated over the past month (see Commodities spike amid war in Europe below).
Here's a snapshot of what's happened in commodities since February 20, 2022:
- Brent crude (the international oil benchmark) and WTI crude (the US oil benchmark) spiked to their highest level since the spring of 2014, and have since given back all of those gains. Still, gas prices remain high.
- Metals are among the biggest movers. Nickel prices doubled at one point. Gold has been trading around all-time highs, just under $2,000 per troy ounce. Both aluminum and zinc shot up to or near all-time highs in early March, but have since come back down dramatically.
- Some agriculture prices are soaring. Wheat prices are up more than 25%. Potash, which is a primary input for fertilizer, has soared more than 75%. Corn and soybeans are trading within striking distance of all-time highs.
Commodities spike amid war in Europe
It is widely expected that commodity prices may stay high, relative to pre-war levels, while Russia's invasion of Ukraine lasts. And as global tensions have escalated, so too have fears of recession. The more consumers must spend on energy and food, for example, the less they may have available to spend on other goods and services. "The higher prices rise, the greater the risks for the US and global economies," says Dirk Hofschire, senior vice president of Fidelity's Asset Allocation Research Team. But investors might not need to prep for the worst yet. “While price shocks may drag on growth, at this point there still isn't a high risk of US recession," Hofschire notes.
Here's a closer look at some key commodity markets and what the broader impact may be.
Oil and gas prices heat up
Rising oil and gas prices have captured much of the world's attention—and for good reason. The ubiquity of oil has spillover effects throughout the global economy.
Russia produced about 11% of the world's oil supply and 37% of Europe's natural gas supply last year. Disruptions to the global energy market, plus any additional uncertainty, are likely to be felt in the form of higher energy prices and heightened stock market volatility.
Still, certain segments of the energy sector may benefit—most notably large, integrated oil companies that don't own significant assets in Russia, and companies that benefit from rising European and international gas prices.
Wild price swings for nickel
Gold and silver are usually the most widely watched metals by investors, but it's been industrial metals that are making the most waves in the wake of the war in Ukraine.
Nickel, which is a key input for a wide variety of products (such as stainless steel appliances and electric vehicles), recently doubled in price over the course of a single week—sending many end users of the metal into a panic. Prices have come down a bit from that record move, but trading has been so chaotic lately that the London Metal Exchange was forced to halt trading several times and impose limits for nickel futures.
Russia accounts for roughly 9% of the world's total nickel production. Their decision to ban commodity exports in response to sanctions from the US and its allies, on top of existing supply chain disruptions and mounting trade tensions, has led to hyper-volatile trading—which may persist for the foreseeable future.
Perhaps even more impacted by the war in Ukraine is palladium. The Hightower Report's* March 14 weekly metals market outlook (which you can find on Fidelity.com in the markets & sectors research page) calls palladium "the physical commodity market most impacted by the war… 40% of the world supply of palladium is held inside Russia, and this will result in significant supply chain disruptions for the global automotive industry [which is a primary user of palladium]."
The full repercussions for these metals remain to be seen. But investors can likely expect price increases to impact the end users of these metals.
Wheat, potash inflate food prices
You've probably felt the sting of higher food prices at the store and in restaurants recently. Indeed, a significant contributor to the inflation that consumers have seen is coming from food prices.
Several agricultural commodities have been surging on expectations that the war is going to have a major impact on harvests. For example, according to The Hightower Report's* March 15 daily grain markets recap (which you can find on Fidelity.com on the markets and sectors research page), foodstuffs such as corn are expected to have weaker harvests due to the war. "A Ukrainian analyst expects to see spring grain plantings, but projected crop yields could be down by 39%, and in fact, there are reports that soldiers are commandeering farm equipment," according to The Hightower Report.
Corn prices have increased by a relatively large amount, and wheat prices have surged even more. Both Russia and Ukraine are among the largest producers of wheat in the world, along with China, India, the US, France, and Canada. According to The Hightower Report, "Russia's ban on exports continues to be a source of strength for wheat prices, and while this year's wheat crop is already planted in Ukraine, there are obvious concerns about what shape it will be in when harvested in July."
Another area of the agriculture market that is a major global concern is potash, which is a critical component of fertilizer used in farming. Potash prices have soared since the war began in large part on worries that supply chains with Belarus, which is an ally of Russia and is one of the world’s largest producers of potash, could be disrupted. "Brazil is the world’s largest fertilizer importer: What happens to Brazil's economy if trade wars escalate and Belarus’s potash is cut off from global markets?" asks David Bridges, senior geopolitical advisor at Fidelity.
The potential impact on food supplies goes far beyond what’s happening between Ukraine and Russia. "Consider Egypt, which is a major importer of grain and cereals from both Russia and Ukraine," Bridges notes. "Egypt is concerned about food shortfalls and social stability. In fact, social stability in Egypt depends largely on the government’s ability to continue to provide bread and wheat at subsidized prices, and that becomes more difficult as the price of both fertilizers and the grains themselves go up."
Food producers and restaurants are grappling with raising prices to sustain profit margins and maintain volumes. The question for investors is which companies may be able to do so effectively.
What might all this mean for you?
The implications for these commodity price increases may be far ranging, and there's no telling how long it will last. Typically, commodity prices are broadly influenced by the business cycle (they rise when the economy is expanding and demand is relatively higher, and they fall when the economy is contracting and demand is relatively lower). But over the past several years, global trade wars, the COVID-19 pandemic, and now the war in Ukraine, have disrupted those patterns.
The bottom line is that consumers can likely expect price increases across a range of products. Meanwhile, investors may have to think more about a company's ability to raise prices if input prices stay high.
If it aligns with your objectives, investors may want to learn more about how investments in natural resources and commodities can affect their portfolio in times of rising prices. Many commodities and other real assets can be negatively correlated to stocks, meaning they can perform well when higher inflation is negatively impacting stocks and other traditional investments. If you are looking for ways to invest in commodities, you might consider utilizing a stock, ETF, or mutual fund screener to search for opportunities.