March 18, 2022

Commodities Stoke the Fire of Inflation


Over the past 15 years, Russia and Ukraine have become an agricultural exporting powerhouse, accounting for 30% of annual global wheat exports. Recent events have resulted in a significant spike in commodity markets with European wheat prices rallying +63% from USD300/mt to USD488/mt, Nymex crude oil +34% from USD92/b to USD123/b and fertilizer +27% from USD700/st to USD895/st within 7 days of the invasion of Ukraine (Bloomberg).

Supplies from the region are either logistically cut off by war activity or disrupted by Western sanctions imposed on Russia and Belarus including shipping bans from the world’s three largest shippers. Sunflower oil, wheat, corn, barley and fertiliser (ex-Russia) are most acutely affected and Russia accounts for 11% of global crude oil trade, 50% of ammonium nitrate, 10-25% of phosphate and 14% of urea (Bloomberg).

Even before Russia’s decision to invade Ukraine, global commodity supply chains had been challenged by disruptions caused by Covid-19 and seasonal weather patterns. Record high ocean freight rates, high oil prices, near record grain and oilseed prices were impacting global commodity flows and consumer prices prior to the Ukraine invasion.

With over $700m of agricultural assets as the security base for the investments in the Merricks Capital Partners Fund and Agriculture Credit Fund, we are cautiously optimistic that higher commodity prices will have a net benefit to our borrowers and the underlying asset values. A key defensive feature of the Merricks Capital Partners Fund and Agriculture Credit Fund is the low attachment point of our senior mortgages to the secured real estate assets. Both Portfolios have LVRs under 58% on a weighted average basis.

Merricks Capital believes that Australia should benefit broadly from higher commodity prices as the country remains a net exporter of energy, iron ore, food and fibre and is well placed to fill the void left by Black Sea constraints. We also feel that the broader agricultural supply chain will experience challenges and expect this to result in significant capital deployment opportunities as potential borrowers look for agile lenders and alternatives to banks.

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