Wars and Hamburgers
How can a war breaking out thousands of miles away mean a more expensive hamburger?
Back in 2022 when Russia launched its full-scale invasion of Ukraine, multiple commodity markets repriced almost immediately. The ones that made the biggest headlines were in the energy complex. Europe was heavily dependent on Russian energy, and a combination of sanctions, buyers stepping away from Russian supply, disruption fears, and subsequent cuts to pipeline flows forced consumers to compete for alternative sources.
Oil, gas, power, and transport costs all increased. But the shock did not stop at energy.
Before the invasion, Ukraine accounted for approximately 15% of globally traded corn and was also a major exporter of wheat, barley, and sunflower oil.
When its main Black Sea ports were blockaded, large volumes of grain expected to reach the global market could no longer be exported through their usual routes.
In March 2022 alone, global maize prices rose by 19.1% and wheat prices by 19.7%. Crucially, a country did not need to buy its grain directly from Ukraine to feel the impact.
Commodity markets are interconnected. If a buyer can no longer obtain Ukrainian corn, it has to compete for corn from another origin. That additional demand pushes up prices elsewhere, transmitting a regional supply disruption across the global market.
Corn and barley are also important animal-feed ingredients. As grain, fertilizer, fuel, and transport became more expensive, livestock farmers faced rapidly rising production costs. In the US, beef-cattle feed prices were 16% higher year over year by May 2022.
These costs are not necessarily passed on immediately one-for-one. Farmers may initially absorb them through lower margins, substitute feed inputs, or reduce production. But, in a market such as cattle where production cycles are long, eventually this can mean tighter meat supply and higher prices further downstream.
And beef is only one part of the hamburger. There is wheat in the bun, vegetable oil in the sauces, diesel used to transport the ingredients, and energy required for processing, refrigeration, and cooking.
The war was not the only issue farmers had to contend with - drought, pandemic-related disruption, and labor shortages also created inflationary pressures.
But this case provides a perfect example of why I find commodity markets so fascinating. In physical commodity trading, every part of the global economy is linked.
Physical commodity deals tend to move more slowly than derivative trading. Negotiations take time to mature, but those physical flows ultimately affect the availability and cost of the products we use every day, impacting nearly every part of society.
