Wheat is even more precious than precious stones. It feeds billions. A sequence of unfortunate events ending with the conflict in Ukraine has choked world supplies of the grain and set the stage for disaster. Can the troubles caused by Russia be alleviated by other major producers of wheat like India?
The world is facing runaway food inflation. It is worrying news for obvious reasons but despite the spectre of an unparalleled crisis, certain entities have benefitted from it.Global food prices, reaching record highs even before the conflict in Ukraine due to supply chain woes and adverse weather events, are now “shattering” all expectations. To put things into perspective, a food price index designed by the Food and Agriculture Organisation (FAO) has risen by an unimaginable 75% since mid-2020!
Russia and Ukraine are breadbasket regions of the world which means they produce large quantities of wheat and grain. Russia is the biggest exporter of wheat in the world, both in absolute and relative terms. In 2019, it exported a staggering 31.87 million tonnes of wheat (14% of world exports). Ukraine was in the top five. Put together, Russia and Ukraine were responsible for 23% of global wheat exports in 2019. They are also very big players in the market for other cereal crops such as maize and barley. Furthermore, Ukraine is the largest exporter of sunflower oil. Russia bags second place. In 2021-2022, Ukraine sold 6650 thousand metric tonnes of the commodity to the rest of the world. Both nations control 64% of global exports of the liquid. With this kind of significance in the grain market, it isn’t surprising that a war between the two has set off an unprecedented food crisis.
Wheat is a staple crop and it’s used to make fundamental foods like bread, pasta, and biscuits. Wheat and other cereal crops are also a key input of the meat industry because livestock needs to be well fed. It is quite clear that wheat is a very early input in the production process for a wide variety of food products which means a rise in its price has a snowball effect. This is exactly what is happening now.
The price of wheat is skyrocketing because the war between Ukraine and Russia has throttled supply of the grain from the two countries to the rest of the world. There are a multitude of reasons for this. Russia has made the waters of the Black Sea, Ukraine’s primary export route, very treacherous. Cargo trains which usually transport most of the crops are lying idle in rail depots, partly due to severely damaged national infrastructure and partly due to logistical issues such as a shortage of fuel and a lack of safe routes. There also seems to be an acute shortage of labour. Ukraine’s army is built on military conscription. When the conflict started, the government banned all men aged 18 – 60 from leaving the country and instructed them to “report for duty” at a military recruitment office. With a significant proportion of the economically active population busy with the war, there is no one to drive trucks, haul sacks, and manage operations. Moreover, 4.3 million people, some a part of the workforce, have fled the country. The administration has also imposed export quotas to ensure that there is food for the people. There also seem to be problems with exports of anything Russian, including grain, because of severe, crippling economic sanctions imposed by the west.
In a nutshell, all the wheat grain that was destined to be exported by both nations is either lying in warehouses, being diverted for domestic use, or getting destroyed due to the violent nature of warfare. Problems with the global supply of wheat and hence with its prices are likely to continue well into next year because of the difficulties associated with sowing crops this spring due to the extreme danger of staying out in the open and a lack of fuel, fertiliser, and machinery.
Russia and Ukraine have fallen off the pedestal of agriculture; it is starting to dawn on both farmers and governments that the world cannot depend on these two nations for a steady supply of precious wheat grain. However, as crude as it may sound, the crisis in East Europe has opened a window of opportunity in the wheat industry and the world’s second largest producer of wheat, India, has jumped through it.
You might be wondering how a country that needs to feed 1.38 billion people can afford to quench the world demand for wheat. It all boils down to the fact that Indian granaries are overflowing with wheat. Due to favourable weather, proliferation of high yielding wheat varieties, and support prices, the nation has had five consecutive record harvests of wheat grain. It is racing towards a harvest of 111.32 million tonnes this year compared to a record 109.59 million tonnes last year (2021). The 2022 season is the sixth in a row that the country has produced a surplus. Stocks of the crop at government warehouses are also approximately 14.5 million tonnes above target.
Maintaining such a large stockpile of wheat grain puts needless pressure on government finances, infrastructure and increases the risk of pest attack. Despite these liabilities, India wasn’t exporting a large portion of its surplus before the Ukrainian war due to an annual increase in government guaranteed price floors offered to farmers which reduced the relative competitiveness of exports and made overseas sales uneconomic.
However, a drastic change in the economic environment has greatly improved the competitiveness of Indian wheat worldwide. An unprecedented increase in the global price of wheat has enabled farmers to charge prices that reap very good profit margins but are extremely cheap for foreign buyers. A record low rupee has initiated a downward trend in the prices of Indian exports, including wheat, which has further increased its price competitiveness. Both of these effects coupled with a high demand from countries scrambling to find alternatives to Eastern European grain has increased the global status of Indian wheat to that of cheap gold!
The baseless war instigated by Vladimir Putin has caused the rest of the world, and more importantly Ukraine, immense suffering. However, it is not insensitive to acknowledge (from an economic viewpoint) that it is the reason wheat farmers in India can look forward to good times ahead.