URBANA, Ill. (WCIA) — When COVID-19 hit, many countries blocked exports of food products, uncertain whether there would be enough food for themselves. Export bans were also imposed as part of the sanctions imposed on Russia after that country’s invasion of Ukraine.

University of Illinois ag economist Michel Robe and his colleagues have researched the impact on prices of exported products that are banned for various reasons. They said such action immediately causes a price increase.

“The net impact is you are pulling back one big exporter, one big supplier from the market, so prices go up and the price uncertainty goes up,” Robe said. “The reason why the price uncertainty goes up is because the remainder of the world production is more concentrated. There are fewer players left.”

“As a result of this, any additional shock to any of those ones, be it a weather shock, be it a transportation shock, or be it, God forbid, an additional war, is going to get you an impact,” Robe continued. “And so that increases the price uncertainty as a result that. What you get is option prices go up, the price of managing your risk goes up.”

Robe and his colleagues have a perfect data sets from COVID and Ukraine to test their theories.

“As you get closer and closer to the bans in position, the market uncertainty goes up, the price of options goes up, option and price volatility goes up. The ban is imposed, boom! We get that increase of anywhere between three and seven percent,” Robe said. “Seven percent is most of the time, what happens, and then there is a little bit of decay over time. The moment the ban is removed, we can see the impact and the implied volatilities go down. So there is no question about it that political risk actually needs to be implied in the market.”

Robe said farmers should certainly be able to see higher prices as a result of export bans.

“And so for farmers, for risk managers, what we are saying is those bans are costly to you,” Robe said. “Yes, of course, the prices are going to be going up, so if you are farming, you have the ban and if you are one of the countries that is not affected by the ban, then the prices, the world prices, go up, but your cost of hedging and risk management goes up as well.”

So U.S. farmers have benefited from higher grain prices from the Ukrainian war and actions taken against Russia, but the cost of hedging and options has also subsequently increased.