The Landscape

Fearing the Worst

When Russia invaded Ukraine earlier this year, the whole world understandably panicked. Predictions of mass starvation were bandied about, and with some reason. A total of 345 million people are in danger of dying because of insufficient food, according to the World Food Program. So when the global price of many of our key ingredients necessary to sustain life, you know, things like food and energy spiked into the stratosphere, people sat up and took notice. Lucky for us, panic induced price hikes rarely stick. In fact, many of the war related price spikes have since dissipated and some are now even below their pre-war levels. Let's take a look at some of the key commodity charts to see how conflict can affect prices, and whether price changes are typically durable or not.

First, let's take a look at the price of wheat. Russia and Ukraine together account for over a quarter of the world's globally traded supply, so Russia's invasion naturally spurred the price higher. But 63% in less than two weeks? Wow.

As we can see in the chart above, the entire rally has faded and the price of wheat is now the same as it was before the war.

Next, let's take a look at a chart of Urea, which is a fertilizer. Urea is one of the input costs that go into the production of wheat. Notice a similar pattern, where the price jumped on the initial invasion, but has since descended back to earth.

Ok ok, you might say. Food and food's input costs have gone up and back down, but what about other things? Well, let's take a look at the price of energy. Oil also spiked on news of the invasion, and like so many other commodities, it has largely given back its conflict related gain.

Finally, let's look at the price of gold, which is known to be a safe haven in times of distress. Here, we can also see the same pattern where investors initially drove the price higher, only to then slowly revert back to its prewar price level.

With one commodity after another, we see a similar pattern. The price initially spiked on news of the war, and then began a more focused adjustment to the new reality. As you can see in the charts above, the initial surge higher usually fails. It makes much more sense to be patient and wait for a better investment opportunity that might come after the initial surge is corrected.

We could show you more charts, but the pattern is the same. There are enough examples that illustrate that it rarely pays to invest based on war news. Most of the time, the initial price gains will prove to be temporary. After the price has its initial wobble, you can better determine the value given the latest news. But it pays to remember that the initial price move is a knee jerk reaction, rather than a well-reasoned repricing of assets based on thoughtful consideration of supply and demand.

 

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