Not famine but a new Arab Spring: The global impact of grain shortages caused by the war in Ukraine

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Russia. Andrei Sizov, head of the Sovecon think tank

Russia will have enough grain

Russia's primary grain export challenges emerged when shipments were halted after February 24 with the suspension of navigation in the Azov Sea. The ports in the Black and the Azov Seas soon resumed operation, but the interruption to delivery chains has been significant. Russia was expected to export 1.2 million tonnes of wheat in March, but the resulting volume reached 2.2 million tonnes, surpassing the average value for this month.

Financial transactions are also complicated because some of the banks have stopped working with Russia, but most payments are still being processed. The trade has resumed, if not without a hitch. Consumers now prefer the CFR (Cost and Freight) scheme, meaning that the seller covers the transportation of goods to the port of destination, to avoid risks. Earlier, most buyers purchased Russian grain under FOB (Free on Board) terms, loading it onto their vessels in Russian ports.

Interestingly, the main factor hampering Russia’s export growth is not the hostilities, the sanctions, or payment issues, but the quotas imposed by the Russian government last season: 8 million tonnes of wheat and 3 million tonnes of corn and barley. The quota is valid from mid-February to the end of June. Without it, Russia could export more, but the Russian state has lately imposed quite a few such restrictions.

Thus, it has embargoed grain exports to EAEU countries, which used to be unlimited and duty-free. Kazakhstan, for one, has no export duties and could therefore sell its wheat at a high price, importing Russian wheat at a lower one. Russian prices are artificially low due to excessive export tariffs, so the embargo was motivated by the need to curb the opportunities for active grain export to Kazakhstan. Kazakhstan sells its wheat at $400 per tonne, buying Russian wheat at a much lower price, which isn't profitable for Russia.

This season, Russia won't be facing any shortages. The new crop forecasts are solid, if there aren’t any extraordinary natural events, so we are not anticipating any grain availability issues in the next season either. On the contrary, we may see a considerable production growth – there are many factors indicating this possibility – and the stocks can be stored for years, from season to season, under the right conditions. So grain availability is not an issue. However, prices are still growing, and the consumers are unhappy because they always want lower prices. The main factor in price growth is the rapid devaluation of the ruble. Despite the tariffs and quotas, we are still integrated into the global market, where trade is based on hard currency, so whenever the ruble plunges again, ruble prices are affected. Furthermore, global prices have spiked because of the war.

Agricultural investments are at risk

How will the current international situation affect the investment appeal of Russia’s agricultural business? It's an essential question. Such turbulence never favors investment. In addition, the regulators are verifying the justification of food prices growth, with inspections from the General Prosecutor’s Office and the Federal Anti-Monopoly Service, which is demotivating to investors: why invest in a sugar plant if the state can barge in and say: “Starting tomorrow, you must sell sugar at X rubles.”

That said, there is money in the country, and it needs investing. The food industry and agriculture present some of the best investment opportunities under the present circumstances. There’s still a demand for export and a domestic market, so we should not expect agricultural investments to shrink unless further steps are taken to regulate or nationalize the sector. Thus, the LDPR party proposed to nationalize the sugar industry. In the absence of such initiatives, the inflow of investments will continue and may even increase. Considering the inflation rate, investing money is imperative, and the agricultural industry is one of the safest domestic bets.

Low-income Arab countries taking the hit

As for the global market outlook, the interrupted chains of supply from Russia and Ukraine will undoubtedly hit the poorest countries the hardest: the poorer the country, the bigger the impact. In a poor country, an average resident spends over 50–60% of their income on food. This is the case with Yemen, Afghanistan, and Sudan – that is, countries that struggled as it were. If we look at the map, we can start with North Africa and look further to the east: Lebanon, Iraq, and Iran. In the south of Iraq, food price growth has already triggered social unrest. Parallels with the Arab Spring of the early 2010s, when people protested over rising bread prices, are inevitable. Back then, it was the Russian embargo on grain exports that caused shortages. The current situation is more dire. Shipments are still reaching African and Middle Eastern ports, but the problem is that the grain prices have gotten out of hand. Seventy percent of Egyptians depend on the bread subsidy program, buying bread at rock-bottom prices. They are now at an impasse.

Europe is rich and therefore safe in this regard. Food makes up 10–15% of consumer expenses in Europe and around 10% in the U.S., so food prices are not a paramount concern there. Southern Europe is looking to lower corn export barriers. They had an arrangement with Ukraine, but Ukrainian supplies are merely a trickle now, so they want to buy corn in North America. Low-income countries are struggling. By late 2021, food prices worldwide had already reached record levels. We expected them to stabilize or even somewhat decrease, but February 24 drove them up even higher.

In a different season – in the mid-fall, for instance – the situation would have been much worse. Harvesting in North Africa begins in April, with the crops partially covering domestic needs. The grain market is a global commodity market, where most buyers can change sellers. For instance, Egypt, the world's largest wheat importer, may have already started buying more European grain instead of Russian or Ukrainian.

Politicians predicting imminent global famine caused by the war in the Black Sea are letting their emotions get the better of them. The world’s grain stocks are far from the lowest in history, and the prospects of new crops worldwide are far from bad. For the situation to take a worrisome turn, it would take the “special military operation” to go on for at least a year. I optimistically assume this is not very likely.

Ukraine. Denys Melnykov, Ukrainian agribusiness and agricultural market expert and consultant

The sowing season in Ukraine continues against all odds

Ukrainian farmers’ primary concern was the sowing season, but a solid 42% of spring crops have been sowed by now. It is a healthy indicator, considering the early spring. We had +20℃ yesterday, but precipitation is scarce. People realize they have to fend for themselves, so they are stocking up on seed grain, fertilizer, and fuel and have redoubled their sowing efforts. Despite having been cut off from Belarusian petroleum imports, Ukraine still has enough fuel for the sowing campaign. Ammonia fertilizers are a problem, however: an acquaintance of mine was looking to buy half a tonne of saltpeter, and everyone kept saying he’d never find that much. He did, eventually – where there’s a will, there's a way.

As for the crop yield, I do not doubt that Ukraine will meet its domestic demand. Domestic consumption is finite: we could eat a jar of red caviar, but a second one would go wasted. Ukraine is export-oriented because of the need to earn foreign currency and because the domestic market is not prepared to buy at European or global prices. As a result, the domestic market sets the price for grain relative to the export price.

By my estimates, we are exporting around two-thirds of the production. The state has an efficient toolset for regulating export opportunities: it could impose a quota or an embargo, so we will pull through without grain shortages and ensure domestic food security.

We are forced to seek a compromise between two needs. On the one hand, we have an acute need for foreign currency earnings to keep the hryvnia afloat, drive manufacturing industries, and rebuild the country. On the other hand, none of this will be possible if people starve. We will have a food riot at the very least or face unforeseen consequences caused by our inability to feed the population. The government has to find the middle ground between selling grain for foreign currency and feeding a war-ravaged country.

Ukraine's core grain cluster remains mostly intact, including Poltava, Cherkasy, Vinnytsia, and to a lesser extent Khmelnytskyi, Dnipro, and Kirovohrad regions – midland areas with fertile soil and sufficient humidity. Individual airstrikes in these regions do not hamper agricultural operations, so I think they are ready for the season, considering the active sowing. I’m sure that large groups of companies restocked all supplies back in December and January because they had the resources and the funds to prepare for the season during the winter. As a result, their risks are low.

Farming is risky near Mykolaiv, Kherson, Zaporizhzhia, and Odesa. Kherson Region is almost entirely lost; Zaporizhzhia is too close to the frontline, so the decline is inevitable. We can't count on Sumy or Chernihiv either. We still have Zhytomyr, Lviv, and Ternopil, which have paradoxically started to rival southern regions, considering that the zone of at-risk farming has started expanding to the north.

Ukrainian export shrinks but continues

The biggest agricultural production challenge is the combination of a high yield and a shortage of equipment, in which case the price per tonne drops, or a low yield when the price is high but there is nothing to harvest. The process is cyclical, with a cycle of about five years. A few years ago, an unprecedented drought destroyed grain crops in the south, but the export level remained unchanged, as we harvested the usual minimum of 35 million tonnes thanks to a high yield in the north. The climatic disaster did not lead to an apocalypse. Similarly, even though the hostilities have made farming impossible in some of the regions, we will balance out the production level within the range of the last seven years if there is no drought in the summer.

At the moment, export has become a bit of a challenge because of an export infrastructure bottleneck: we’ve been cut off from the Kherson port. We can also see other ports blocked, so the operation of the port infrastructure may be unstable, and there is no saying what vessels will risk mooring there. Our shipping options are therefore limited to trucks and railways, which leads me to the conclusion that we will export less than last year. The railway capacity is not sufficient.

Agribusinesses detest trains because railway shipments are a hassle. They are expensive and only accessible to the largest groups of companies with relevant professionals and certain political leverage. We also have an issue with train cars, which don’t always have enough thrust, and generally problematic logistics. The share of railway shipments in grain exports was low, compared to sea transportation, and trucks were overall a doubtful option.

As for export prices, as far as I know, there is a firm correlation between grain prices in Ukraine and at the Chicago Mercantile Exchange. The CME sets the price at which grain is purchased in Ukraine. Export is normally the concern of large traders, who set prices based on a simple formula: Chicago price + the middleman's margin + logistics to the destination point. If logistics is a problem, the internal price drops, and the trader says: “I’ll dominate the market, picking goods of the best quality and with the most convenient logistics.” In a nutshell, this algorithm determines internal pricing decisions. I presume a group of large players will dictate prices to smaller enterprises.

Speaking of the impact of the hampered export on poorer countries, they cannot afford to buy quality goods and therefore have to settle for lower quality, buying from Ukraine and Russia. Both countries grow soft wheat, which is low on gluten and cannot be used for proper Italian-style pasta. From what I know, Ukraine does not sell grain to Europe or America because these regions have particular import restrictions and large domestic producers; as a result, Russian and Ukrainian grain is shipped to third-world countries. In the absence of Ukrainian grain, they will have to purchase it from first-world countries. Apart from that, nothing much will change.