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In this episode host Casey Seymour sits down with Gregg Doud of Aimpoint Research to discuss how the conflict in Ukraine is impacting the global ag markets and what it could mean for U.S. farmers.

 They also talk about how the oil markets are being impacted, including the rise in diesel oil prices and how that is impacting U.S. farmers as we head into planting and what it could mean for farm profitability in the year ahead.

Full Transcript

Kim Schmidt:

Hi, I'm Kim Schmidt, executive editor of Farm Equipment. Welcome to Farm Equipment's used equipment remarketing roadmaps podcast. And this episode, host Casey Seymour sits down with Gregg Doud of Aimpoint research to discuss how the conflict in Ukraine is impacting the global ag markets and what it could mean for us farmers. If this is your first time listening, you can subscribe to the podcast on any of your favorite podcast platforms.

Kim Schmidt:

Okay. Let's get things going. Here's Casey and Gregg starting their conversation off discussing the wheat market and how much wheat worldwide is coming out of the Black Sea region.

Casey Seymour:

Gregg, how you doing, man?

Gregg Doud:

Hey, just fine. How are you?

Casey Seymour:

Doing good, bud. Briefly, let's do this real quick. Give a little bit of background about yourself and what you do at Aimpoint research.

Gregg Doud:

You bet. I'm just a farm boy from Jewel County, north central Kansas, Mankato area and a K-Stater. I've been back in DC now just almost 30 years as an economist for the weed industry, chief economist for the cattleman, back in the day, Senate ag committee, different things as a commodity analyst in my career. But recently I was the chief agricultural negotiator in the office of the US trade representative in the Trump administration. So I was the guy that negotiated the China deal and Japan and USMCA and a lot of other things there for three years. And now I've been for the last year with Aimpoint Research.

Casey Seymour:

Well, Gregg, let's talk a little bit about what's going on here in the whole Black Sea region. You got the whole Ukraine-Russia situation that we have. They've had a couple opportunities to talk about some ceasefire stuff and they can't come to an agreement. War's still raging over there in Ukraine right now, and that's had a big effect on what we see happen in the marketplace. So obviously, commodity markets are all over the place. Huge inner day volatility, day-to-day volatility. It's just crazy, especially when you look at wheat, because that's what's coming out of that area primarily.

Casey Seymour:

You start looking at sunflower oil and those kind of things that come out of that area as well. Iron ore, all the stuff, key components to fertilizer. There's just so many things that come out of Ukraine and Russia as well, coming out of the Black Sea as well, that a lot of people I don't think really knew what was there to come out of that area. So sending ripple effects across the market in such a big manner that it's hard to keep track day to day what's going on. So I guess in a real brief synopsis, I guess as you take a look at what's going on there, what are your thoughts and how do you see this rippling across the rest of '22?

Gregg Doud:

Well, in the ag commodity space, you referenced it, so most people don't realize that the Ukraine actually exports more wheat today than the United States does. About 24 million tons, the US is about 22. Russia is a much bigger exporter than that at about 33 or so million tons. So the situation right now on wheat and the reason it's so volatile is that's about 30% of all the wheat traded in the world. It comes out of those two countries and a big chunk of it, most of it, comes through the Black Sea.

Gregg Doud:

Right now there's a couple components of that that effect all commodities, whether it's fertilizer or grains or oil seeds coming out of that part of the world is no self-respecting vessel owner is going to take their vessel into those waters. In fact, three vessels have been hit in this process already. In case of the Ukrainian ports, the Ukrainian Navy, not the Russians, but the Ukrainian Navy, mined their own ports to keep the Russians from coming in there to potentially do damage to those ports. These are very modern ports operated by ADM, Bunge, Cargill, Dreyfus has been there for many, many decades. These are as modern and as good a ports as anything that we have in the United States.

Gregg Doud:

The fact that these ports are shut down, nothing going in or out right now, is a major issue for the trade in wheat, corn and sunflower seed oil. Most people don't realize that we actually trade more sunflower seed oil in the world than we do soybean oil and with corn, that's a major player in corn as well. So the biggest thing right now is the ports are down and you're not getting anything in or out of there. Now, potentially you could send some stuff and I think you're seeing some signs that the Russians want to try to figure out a way to get some wheat out of there going in different direction by rail. That's possible. We'll see what shakes out there.

Gregg Doud:

The biggest thing I think folks are talking about now is how long this lasts, because you've got six, eight or 10 weeks to get a crop in the ground in that part of the world. Then if we don't, you will have nothing coming out of that part of the world for more than the next year. So that is the big issue: how is a Ukrainian farmer going to get anything planted when he doesn't have any diesel fuel? How do you get diesel fuel in there when your ports are shut down? You have to bring it in by truck and how many bridges you have to do that. These are all really serious complications.

Gregg Doud:

On the steel side of the equation, I'm not really sure how much steel comes out of that part of the world. When I think of steel today, I think of China and the fact that China's got more steel capacity than US consumption. That's one of the big reasons that in the Trump administration, there were tariff's put on Chinese steel and aluminum because they really didn't care if they took the price of steel or aluminum to zero, they were only interested in running their facilities in China, and it was having a real negative influence on the prices of those commodities and US producers of those types of things for years. In fact, that is the one thing that the Biden administration has hung onto, is we haven't made any change with regard to China and steel, aluminum, or anything else for that matter on tariffs.

Casey Seymour:

You kind of hit on a little bit there. This is the question that people have been asking since they started: if everything went back to normal tomorrow, they stopped fighting anyway, and they got the ports back open and ships were going to be able to come in and out, what's the estimate of timeframe to really be able to go in there, get a cargo full of wheat or something like that and come back out. Is there any estimates to that right now?

Gregg Doud:

No, it'd be just a guess on my part, and that would guess would be probably a couple months. You'd have to clear the mines out of there, and that's not a thing you could do in a day or two. That's for certain. Then there would have to be some level of confidence by the ocean vessel owners that they could get insurance and be willing to go in and out of there again. So I think at a minimum, we are probably talking about a couple of months to get things back online, but I think most people's sentiment are thinking it's going to be significantly longer than that.

Casey Seymour:

Yeah. All right. So yesterday, just for time reference here, today is the 10th, so I believe the eighth, Biden administration passed the bill that they were going to no longer bring in Russian oil into the US for refining purposes and stuff like that. We saw some big jumps in crude values, as you look across the spectrum more in the down direction than the up direction when that came out and what you saw there. So I guess as you look at that and you're thinking about diesel demand as we go into planting season here in the US, and we had this big spike up in the price of diesel fuel, what are your thoughts there and how do you think that ripple effect's going to play across profitability, I guess for the US farmer?

Gregg Doud:

Yeah. Diesel fuel here on the east coast is already $5 a gallon. I think we're going to see that for quite some time, certainly through the growing season this year, you're going to see diesel fuel that's pretty expensive unless something pretty significant changes. Because the issue again is no one is willing to take their vessel into the Black Sea to go get Russian oil. Whether you could do it and get in and out of there or not without having some sort of problem, no one's willing to take that chance right now. So it isn't that much oil from Russia that the United States takes, it's the fact that the entire Russian supply chain is offline now for oil, for the foreseeable future.

Gregg Doud:

The BPs and some of these other companies that are the refiners, et cetera, they've said, "Look, we're just not going to go anywhere near it due to reputational risk. We don't want to be associated with being the guy that traded Russian oil." I think Shell did it for a little bit. And even they, after did it for just a second, they said, "No, we're not going to do it anymore." Then you have the swift financial implications of all of that. Even if you did try to go in and get it, I'm not sure how you would get paid.

Gregg Doud:

Now that doesn't mean necessarily at some point here that the Chinese won't figure out how to have some sort of operation going with the Russians. In fact, I would be surprised if they didn't. So that potentially would ease things up a little bit with regard to China's demand for oil. But the point being until this uncertainty subsides, you have an ability to even have a conversation about getting something in and out of that part of the world in terms of the Black Sea, these oil prices are going to be up there.

Gregg Doud:

The other issue I would note is ... done a little homework on fracking in North Dakota and Wall Street Journal's talked about this. It's the same thing that I've picked up from talking to these companies is there's nobody to drive trucks up there. There's no steel up there. Hard to get your hands on sand up there. To get our domestic production up and running is going to take several months at a minimum, I think as well. So I think you've got the price incentive here, but it's just going to take some time to get things and get alternatives going. By the time you would get that, I would think a huge chunk of our growing season in the US is going to be open.

Kim Schmidt:

We'll get back to Casey and Gregg in a moment. But first I wanted to pause to invite you to check out Ag Equipment Intelligence's newest release report, The Electric Farm Machinery outlook through 2027. This online exclusive report features original reporting from expert farm machinery journalists and primary research on the impact of electric farm machinery for North America equipment dealers, manufacturers and suppliers. To order your copy, visit agequipmentintelligence.com/electricreport. Now back to Casey and Gregg, as they continue their conversation on the price of diesel and how it's going to impact farm profitability in the year ahead.

Casey Seymour:

The truck driver issue is a huge issue for us, even here where I'm at. I mean, just trying to find truck drivers just to haul equipment around and those kind of things. It's getting to be a tougher and tougher situation every day. When you look at how natural gas plays in all this, because that's a key component of fertilizer, and you look at where we're at in the US, we're going to start taking some natural gas over to Europe to offset what they're given up as far as Russian natural gas goes, right now the price of natural gas is expensive in the US but it's nothing like it is in Europe. It's through the roof in Europe. As you take a look at what's going on here, how do you expect that to really have a ripple effect across the price of fertilizer that's already skyrocketing?

Gregg Doud:

Yeah. I think from my understanding and conversations, the fertilizer's been laid in here in the United States. A lot of folks have priced it. A lot of guys in the upper half of the corn belt put in HydroSol last fall. What's interesting is if you listen to these presentations and I've sat through a few of them on fertilizer, every supply and demand balance sheet, whether it's urea or anhydrous or what I call liquid or whatever, is different. They're all really complicated. Before the invasion, I would say that the US still had the cheapest fertilizer in the world, which is hard to believe, but it seemed to be the case. For me though, I think the issue with fertilizer is 2023. If you look at what's going on in the world, I think we've got to really understand more about what's going to go on with the potash situation, Ukraine, Russia, and China.

Gregg Doud:

What you were seeing on fertilizer is all these countries that have it are saying, we're going to take care of our own farmers first. So I think that puts the onus on us in the United States to make sure that we're doing a lot better job of making our own fertilizer here. I think on the nitrogen side of the equation, I think we can do that. On the phosphorus side, I think there's opportunity there. China's a third of the phosphate trade in the world. So we have to see what's going to happen there, but it's the K, it's the potash to me that is really going to be an interesting conversation going forward. We have Canada. But I don't know what else you have other than that. So you've got to make sure that you have an opportunity to get your hands on what's going on and make all of that work. So I think generally speaking for me on fertilizer, there is a lot of work to be done between now and 2023 on that topic.

Casey Seymour:

As you take a look at the relationship between China and Russia right now and how that relationship has formulated here pre Olympics and post Olympics, you see China's not necessarily separating themselves from Russia by any means, but they're saying some stuff like, "Hey, maybe we should get together and try to figure out a peace plan and those kind of things. They're trying to separate themselves, but not disassociate themselves with Russia. As you take a look at that partnership right now, what are your thoughts there? When you read the tea leaves, what are your thoughts?

Gregg Doud:

Well, it's pretty simple. China will play everybody off against each other to their own advantage.

Casey Seymour:

Sure, absolutely.

Gregg Doud:

One of the things that I learned 30 years ago when I first started doing this from an old China hand, who, by the way, we just lost the other day at 94 years old. He was the guy I kind of learned China from first. He said, "Gregg, always remember China will do what is in China's best interest." That's the answer, whatever the question is. I think that's what we're seeing them do right now. If it's in their best interest to play the Russians here a little bit, to get a pretty big time discount on some crude oil, they'll play that game in a way that they come out the winner and nobody else. They'll be very opportunistic about it and they won't really care what anybody else thinks.

Casey Seymour:

Yep. That's a great way to put it because that was my next question was talking to you about the China phase one deal and what that looks like. There was some that played into that that felt like China was going to come to the table when it was right for them to come to the table and then make those move as they see fit. Looking back now, that's what you saw. I didn't really see that with the Trump administration. What I'm seeing now is China's very much just showing up to fulfill their phase one deal part of that as it fits their needs, I guess.

Gregg Doud:

Well, let me walk you through this deal.

Casey Seymour:

Okay.

Gregg Doud:

So it was 33 negotiating sessions that I and our team spent with my Chinese counterpart, who was the vice minister of agriculture of China. Great guy, spoke very good English, had been in the United States on and off for some 15 years. He's gone on to be the governor of Jilin province now. So he's got a big promotion and I have a great deal of respect for the vice minister. Those 33 sessions, hundreds of hours going back and forth on this deal, he had 40 or 50 of his best people behind him. I had 20 or 30 of our best people behind me. We just went at it hour after hour after hour. And what we did was we agreed upon 57 different structural changes in agriculture, fixed problems that we'd had for years.

Gregg Doud:

So this wasn't about tariffs. This was fixing all the access for dairy products and beef and you name it, every different commodity you can name had some sort of issue getting our products into China. We resolved the vast majority of these issues. We still have some things on biotech and a few other things in that, so 53 or -four or -five of those things were fixed and going.

Gregg Doud:

So here's the punchline. Did deal really matter? Well, the answer is before we started, we had 1500 facilities in the US eligible to export ag products to China. Today, we have well over 4,000 facilities eligible to export ag products to China. So we've almost tripled the number of meat processing facilities or infant formula facilities or fruit and vegetable, alfalfa hay processing, you name it, all of those products and facilities had to be approved by the Chinese. The process wasn't working, it was broken. They weren't adhering to it. We got all of that fixed and that's made a huge difference.

Gregg Doud:

In 2020, we exported 26 billion to China. Last year, we exported $33 billion in ag products to China. But China imports from the world about 160 billion. So we still have a huge opportunity to grow this thing beyond what it is today. I think China will, but to answer your question, there was one point made very clear. They're not going to spend more on US soybeans versus Brazilian soybeans. Our commodities have to be competitive in the world marketplace. To answer your question, did I ever see China or have I seen China since do any that wasn't uneconomic? No, I think they've been very smart in how they've bought things from us and from other countries, quite frankly. They've upheld their side of the deal.

Casey Seymour:

OK. So my next question to that same aspect of that is with what we see happening in the Black Sea region getting stuff in and out of there, obviously Russia can just take stuff right across the border to China, that's not a big deal, but as you look at from a world perspective, how do you think that China is going to pick and choose where they buy stuff from them? Because, I mean, honestly, it doesn't matter where you're buying it from, it's really expensive right now.

Gregg Doud:

Let's be clear it's much, much cheaper. Anything going by ocean freight is relative to the cost of the commodity isn't that much. But if you have to rail that stuff halfway across the world, that's a huge expense. So I think everybody understands that ocean freight is the way to go here. Trying to deal with all of these issues by rail adds an enormous amount of cost to this, so it takes it out of the farmer's pocket in the Ukraine or Russia, quite frankly, at the end of the day, in terms of what they get for their commodities.

Gregg Doud:

In terms of China, look, China very much understands that they need more. They can't buy everything they need without the United States and without us agriculture. China has emerged as the biggest corn importing nation in the world, just in the last couple of years, because they've banned the swill feeding of hogs in China. They don't feed pigs food scraps anymore. So they need a lot more corn than they've ever needed before. They're the biggest importer of soybeans. They import 100 out of 167 million tons of soybeans in the world today. They are the huge player in soybeans. Second biggest importer in the world in wheat. Biggest beef importer in the world, 10 billion worth of that. Big pork importer. You name it, when it comes to agriculture, they're a huge buyer of this stuff.

Gregg Doud:

So when the US is competitive, they're going to do business with us. They understand what we have in terms of agriculture very, very well. What they don't like about the United States is the fact that we don't cut deals. We don't cut long term deals. If they're going to buy from us, they're going to pay what the market says it's worth. So in the cases of things like wheat, we're going to be a lot more expensive than Black Sea wheat, and the Chinese very much know that.

Casey Seymour:

Gregg, this is a great conversation and it's awesome to have ... That's why I like doing this podcast, I like you to come on here and enlighten me on things that I read in the news and give me what's really happening on the ground, man. So Gregg, I appreciate you being on the podcast.

Gregg Doud:

Thanks for having me.

Casey Seymour:

What's the best way for folks to reach out to you if they have any questions about this podcast or what you're doing?

Gregg Doud:

Well, they can go on our website, AimpointResearch.com and track me down that way or I think you've got my contact information as well. They can go to you as well. Happy to visit with folks. Because I will tell you, I've been doing this for 30-some years. I've never seen anything like, nobody has, what we've gone through the last couple of weeks here. It's pretty historic.

Casey Seymour:

Yep. It is that to say the least so honored to have you on, man. Good to have a fellow K-Stater and a [inaudible 00:22:32] on the podcast here. So, thanks for being on, man.

Gregg Doud:

My pleasure. Thank you.

Kim Schmidt:

Thanks to Casey and Gregg for sharing their conversation with us. You can keep up on the latest industry news by registering online to receive our free newsletters. Visit www.farm-equipment.com for Casey and Gregg, as well as our entire staff here at farm equipment, I'm Kim Schmidt. Thanks for listening.

Sound Effects: Jahzzar - Magic Mountain