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Institute Alert

Wells Fargo Investment Institute strategists provide insights on this week’s market volatility and guidance for what may be ahead.

March 18, 2022

John LaForge
Head of Global Real Assets
Wells Fargo Investment Institute

Gary Schlossberg
Global Strategist
Wells Fargo Investment Institute

Lawrence Pfeffer, CFA
Equity Sector Analyst
Global Securities Research
Wells Fargo Advisors

The commodity wars

Key takeaways

  • Russia’s invasion of Ukraine has roiled capital markets, in our view, because the large size of commodity production in this region, with its focus on food and energy production, may aggravate inflation that was already rising to levels that posed global economic risk.
  • As Russian and NATO punitive economic measures against each other reduce supplies of energy, grain, and fertilizer, we expect that other countries can fill the global supply gaps only partially.

What it may mean for investors

  • The direct energy impact is likely to fall mostly on Europe, because of its proximity to Russian supply lines. The food impact will be felt globally, in our view, and could become particularly troublesome for select emerging countries.
  • Overall, the current commodity wars, we believe, will lead to higher and more persistent inflation around the world, including in the U.S. However, we think a U.S. recession is unlikely because low trade volumes with Russia should leave the U.S. in a comparatively stronger economic position. We reiterate our preference for U.S. equities, especially U.S. Large-Caps and Mid-Caps.

Commodities are no strangers to war. They have often been targeted and used as weapons during wars. In his Pulitzer Prize winning book, “The Prize,” Daniel Yergin argues persuasively that World War II ended in large part because Germany ran out of oil, thanks to persistent Allied attacks on fuel lines.1

Russia’s invasion of Ukraine is another reminder that time marches on and wars change, but targeting commodity availability has not. The NATO capitals have frozen Russia’s access to the global financial system, making it difficult for Russia to accept payments for commodity exports. Russia has since fired back by officially banning the export of more than 200 goods, including many commodities.2 In response, the Bloomberg Commodity Index (BCOM) has gained has gained roughly 30% since early December, when the possibility of a Russian invasion really gained traction.

What makes today’s commodity war particularly troublesome is: 1.) the sheer size and breadth of commodity exports from Russia and Ukraine; 2.) that key commodities are food related; and 3.) continued disruptions will likely keep global commodity prices higher for longer than many expect. In this report, we discuss how bad the global food and energy situation is, and whether it’s possible to fill the Russian/Ukrainian export gap.

How bad is it?

The short answer is that it is pretty bad out there. A prime example of how bad the commodity situation is, the United Nations Food and Agricultural Organization’s Food Price Index (FFPI) hit an all-time high last month.3 An often underappreciated fact is the sheer size and breadth of commodities being exported from Russia, Belarus (which has offered Russia access to its territory), and Ukraine. Chart 1 highlights that more than 30% of the world’s exports of palladium and potash come from Russia, Belarus, and Ukraine. Think of the purple bars in Chart 1 as potential supply gaps. Some of these gaps may be filled by other countries — some not — and that’s why global commodity prices have been rising.

Commodities generally fall into four groups: 1.) food, 2.) energy, 3.) industrial metals, and 4.) precious metals. We will focus on the first two — food and energy— because they arguably have the most pressing supply concerns today. Russia is most vulnerable to energy, as it is the country’s top export and moneymaker. And the world fears food supply restrictions most, due to its tie to social instability. Industrial metals are not in such short supply globally, and we will consider them at a later date should the fighting persist into the summer.

Chart 1. Percentage of total global production of raw materials attributed to Russia, Ukraine, and Belarusthe chart shows the percentage of global production of select raw materials attributed to Russia, Ukraine, and Belarus. The area accounts for a significant portion of production of energy, agriculture, and metals production.Sources: USGS data as of 2016 for steel, aluminum, nitrogen, nickel, platinum, titanium, potash, and palladium; USDA data for 2019-2020 crop year for corn and wheat; EIA as of 2019 for crude oil, natural gas.


Russia and Ukraine together accounted for 24% of last year’s global exports of wheat and corn (Chart 2, blue portion). And unfortunately, the majority of Ukrainian grain production occurs in the eastern, central, and southern parts of the country, where hostilities are the most intense. Ukraine exported a significant portion of last year’s harvest prior to the invasion, but much remains unshipped (approximately 30% of wheat and 45% of corn). Reports suggest that the country’s railroad system is currently shipping roughly 25% of the total carloads it was prior to the invasion. Grains are key Ukrainian food exports, but Ukraine was also a significant exporter of other key staples last year, such as vegetable oil and barley.

Another critical piece to the food discussion is fertilizer. Last year, Russia and Belarus combined to account for 9%-32% of the globe’s exports in the three main fertilizer groups (nitrogen, phosphorus, and potassium). Last week, Russia “temporarily” suspended its fertilizer exports, which could make it harder for other countries to fill the food gap left by Russia.

Chart 2. Share of global grain exportsthe chart shows the percentage of global production of select raw materials attributed to Russia, Ukraine, and Belarus. The area accounts for a significant portion of production of energy, agriculture, and metals production.Sources: International Grains Council and Wells Fargo Investment Institute. March 2022. Data as estimates for the 2021-2022 season, for wheat and coarse grains

Filling the grain gap

At 24% of the world’s corn and wheat exports, grains appear to be that part of the Russian/Ukrainian food pie that will be critical to fill. We believe it will be difficult, but the U.S. Department of Agriculture (USDA) revised modestly higher its overall projections for global output of wheat and coarse grains (this category includes corn) from February, and these projections now point toward low-single-digit year-over-year growth in both areas.4 As well, the report expects increases from Australia, India, and the U.S. to fill a significant portion of the gap. While the USDA’s new estimates are encouraging, we caution that weather uncertainties still may play an outsized role in determining ultimate crop yields.

Chart 3 highlights those countries most reliant on Ukrainian wheat, and likely the most impacted, should this important grain gap go unfilled.

Chart 3. Ukraine wheat exportsThe bar chart illustrates which countries bought the most wheat from Ukraine in absolute U.S. dollar terms. The Middle East, Africa, and certain Asian countries are the largest buyers of wheat from Ukraine.Sources: UN FAO Data and Wells Fargo Investment Institute. Data as of 2020.

Food problems not likely to end in 2022

As of March 2022, it appears that global food supply issues are likely to persist into 2023. Firstly, current fighting is taking place during Ukraine’s spring planting season. Secondly, the list of exporting countries issuing temporary food export bans and quotas is rising by the day — Hungary (grain ban), Argentina (beef ban), Egypt (grain quota), and Indonesia (palm oil quota) to name a few. The longer the war, the greater the risk that more food exporters turn into food hoarders.

The last, and arguably the thorniest, long-term problem is rapidly rising global production costs. Recall that Russia and Belarus, two of the world’s largest suppliers, are balking at exporting fertilizer. Also, many fertilizer blends are produced with fossil fuels (natural gas and coal mainly), which have skyrocketed in price this year.

Fertilizer, or course, is only one input cost. In Chart 4, the USDA breaks down U.S. farmer costs, as of March 2022 (excluding land, livestock, and equipment purchase/finance). All of these costs are rising globally, and in some cases rapidly. The United Nations estimates that the war’s effect on supply and farm costs could boost international food and feed prices by 8%-22% from their February high. They anticipate that this could raise the number of malnourished to an estimated 7.5 to 13 million people, atop the 811 million globally in 2020. The bottom food line is that we expect global prices to remain elevated in 2022, and likely into 2023.

Chart 4. Variable cash costs for U.S. farmersthe pie chart illustrates the breakdown in percentage terms of the variable cash costs for U.S. farmers. Animal feed, labor, and fertilizers account for roughly half of farmers variable cash costs.Sources: USDA and Wells Fargo Investment Institute. March 2022 estimate.


Russia is both the world’s largest natural gas exporter and oil exporter, and is so critical to filling the world’s energy needs that the U.S. initially exempted Russian energy exports in its sanctions against Russia. The U.S. has since banned imports of Russian oil, but the European Union (EU) depends heavily on Russian energy and still allows imports of Russian oil. The same goes for natural gas, on which the EU relies heavily.

Filling the oil gap

Calculating the gap to fill Russia’s void is much easier to do with oil than food, since production depends less on weather and hoarding by producers. The worst-case oil scenario is that the world would need to make-up roughly 7.6 million barrels of oil per day. 4.7 million barrels of this is raw crude oil exported by Russia (see Chart 5). Not shown in the chart is the refined oil product that Russia exports to the world, too – things like diesel and jet fuel – to the tune of 2.9 million barrels per day.5

Chart 5. Selected energy exports from Russiathe chart illustrates the spare capacity of OPEC as an absolute value and as a percent of world production. Current spare capacity sits around 4.8 million barrels per day.Sources: U.S. Energy Information Administration, Global Trade Tracker, and Wells Fargo Investment Institute. Data as of 2021.

7.6 million barrels of oil per day is a tall order in a world that is projected to consume 100 million barrels per day in 2022.6 A quick glance at potential global spare capacity makes this number look doable, particularly with the help of the Organization of Petroleum Exporting Countries (OPEC). However, OPEC’s advertised 4.8 million barrels per day of spare capacity (Chart 6) is the group’s own estimate and may be prone to exaggeration. Moreover, OPEC has been hesitant to release any additional capacity so far in 2022. There are only a handful of countries with the potential to add 500,000 to 1 million barrels per day and they include OPEC countries Iran, Iraq, Saudi Arabia, the United Arab Emirates (UAE) as well as the U.S. Oddly, the U.S. may be the long shot in this group to produce meaningfully extra supplies. U.S. producers have become more conservative, producing almost 2 million barrels per day less in March 2022 (with prices near $100 per barrel) than it produced two years earlier (with prices near $40 per barrel).

Chart 6. OPEC share capacitythe chart shows the percentage of global production of select raw materials attributed to Russia, Ukraine, and Belarus. The area accounts for a significant portion of production of energy, agriculture, and metals production.Sources: Bloomberg, Department of Energy, Wells Fargo Investment Institute. Monthly data: January 31, 2002 – February 28, 2022.

Filling the natural gas gap

If filling the oil gap is a tall order, filling the natural gas gap may be much more difficult. In 2021, 74% of Russia’s gas exports went to Europe, either by pipeline or by ships carrying liquefied natural gas (LNG).7 Russian natural gas accounts, on average, for 40% of the EU’s natural gas needs (Chart 7, dark orange bars).

Chart 7. Share of EU natural and liquefied natural gas importsThe chart breaks down EU's natural gas imports attributable to select countries. Russia accounts for roughly 40% of EU's natural gas imports.Sources: Eurostat and Wells Fargo Investment Institute. Data as of January 31, 2022.

The EU will have to do some heavy lifting to wean itself off of Russian natural gas. Domestic natural gas production has declined by 50% over the past 10 years.8 Europe increasingly has turned to Russia and has imported LNG from other countries. LNG, however, cannot fully fill the gap should Russia decide to turn off the gas spigot. The most recent statistics by the BP Statistical Review show that LNG supplies roughly 20% of Europe’s total natural gas needs, and some of that arrived via Russia (Chart 8, red striped bars). Extra capacity is coming online, but the equipment is expensive and slow to build, and not all countries will benefit. Over one-third of LNG regasification terminals are on the Iberian Peninsula, which has limited connection with the rest of Europe.9

Chart 8. Europe and U.K. natural gas domestic production vs. importsThe chart illustrates Europe and U.K.s natural gas domestic production and imports via pipelines and imports via LNG. Europe and the U.K. rely mostly on imports for their natural gas.Sources: BP Statistical Review and Wells Fargo Investment Institute. March 16, 2022.

Energy’s bottom line is that, in theory, other countries can replace Russia’s oil exports, but realistically OPEC must release the majority of its extra supply, and other countries must pump extra oil, too. Russian natural gas exports are not a major issue for most of the world, but Europe depends heavily on Russian natural gas exports, and we do not foresee a significant change in 2022 or 2023.

Investor implications

The sharp rise in commodity prices is fueling additional consumer price inflation globally. We recently raised our 2022 year-end targets for inflation, and lowered our gross domestic product (GDP) growth forecasts, across the U.S. and all global regions. Commodity price pressure, intensified by the invasion of Ukraine, should add significant inflation pressure that reduces purchasing power worldwide.

While we do expect global commodity supplies to remain tight in 2022, and prices high, we did recently downgrade our tactical (6-18 months) guidance on Commodities from favorable to neutral. Our belief is that commodity prices have priced in a large portion of the effects of the Russian invasion. Should prices spike once again, there is the real potential for demand destruction, which could ultimately hurt commodity prices in the short run. Over a strategic timeframe (10+ years), we remain favorable on Commodities, as the asset class entered a new bull super-cycle beginning in March 2020.

We expect slower growth in emerging markets, where the share of income spent on food is higher than in other regions. Also, we anticipate a European economic recession later in 2022; however, we believe a U.S. recession is unlikely. That’s in part because the U.S. is a more service-oriented economy, and services output is increasing rapidly, somewhat sooner than we had expected, and increased spending should sustain the U.S. economic expansion. Persistent inflation makes a headwind for the economy, but we still expect 2022 economic growth above 3%, stronger than historically average rates.

This relative economic ranking reinforces our regional equity preferences, which mostly have been in place since 2020. We favor the U.S. over international equity markets and, more specifically, favor U.S. large- and mid-cap equities. Another way to understand this ranking is that we favor quality companies — those with strong balance sheets and earnings prospects.

1 Yergin, Daniel. “The Prize: the Epic Quest for Oil, Money, & Power”. New York: Free Press, 2009.

2 “Russia banned the export of over 200 goods. But is Putin retaliating against sanctions, or stockpiling supplies?” (March 11, 2022).

3 “The FAO Food Price Index rises to a new all-time high in February” (March 4, 2022).

4 “Grain: World Markets and Trade” (March 9, 2022).

5 “Oil Market and Russian Supply”, (2022).

6 “Today in Energy”, (January 12, 2022).

7 “Today in Energy”, (February 11, 2022).

8 Ibid.

9 Holbrook, Ellie (January 28, 2022). “LNG cannot offset half of Russian gas flows to Europe.”

Risks Considerations

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors. Foreign investing has additional risks including those associated with currency fluctuation, political and economic instability, and different accounting standards. These risks are heightened in emerging markets. Small- and mid-cap stocks are generally more volatile, subject to greater risks and are less liquid than large company stocks. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investing in a volatile and uncertain commodities market may cause a portfolio to rapidly increase or decrease in value which may result in greater share price volatility.


An index is unmanaged and not available for direct investment.

Bloomberg Commodity Index is comprised of 22 exchange-traded futures on physical commodities and represents 20 commodities weighted to account for economic significance and market liquidity.

United Nations FAO Food Price Index (FFPI) is a measure of the monthly change in international prices of a basket of food commodities. It consists of the average of five commodity group price indices weighted by the average export shares of each of the groups over 2014-2016

General Disclosures

Global Investment Strategy (GIS) is a division of Wells Fargo Investment Institute, Inc. (WFII). WFII is a registered investment adviser and wholly owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.

The information in this report was prepared by Global Investment Strategy. Opinions represent GIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. GIS does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report.

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