The First Grain War
Is it true that Russia threatens the whole world with famine?
UN Secretary-General Antonio Guterres said Russia's invasion of Ukraine and blockade of Black Sea ports threaten the world with food shortages that could last for years. One of the world's leading business publications, The Economist, published an issue with a frightening cover — it depicts ears of wheat with skulls instead of grains, and the headline reads: "The coming food catastrophe. War is tipping a fragile world towards mass hunger."
How justified are these fears? An expert on the food market Andrei Dmitrievsky answers this question (the expert speaks under a pseudonym, because "Important Stories" is designated an "undesirable organization" in Russia).
There was famine before, but because of the war, the number of starving people will increase
Hunger was there before the war and it didn't go anywhere. Over the past five years, the number of starving people in the world has been growing. The main reason is the increase in food prices. In total, the UN estimates that in 2021 193 million people were starving around the world. According to the estimates of the UN agencies, FAO and WFP, due to the war in Ukraine, the increase in the number of starving people this year will be 20 to 50 million people.
According to the international food insecurity classification Integrated Phase Classification (IPC), which is used by the UN, there are five phases of food insecurity.
1. Households are able to meet essential food and non-food needs.
2. Households can afford basic food, but hardly can afford some essential non-food expenditures.
3. Households have food consumption gaps that are reflected by high or above-usual acute malnutrition.
4. Have large food consumption gaps which are reflected in very high acute malnutrition and excess mortality.
5. Extreme lack of food when starvation, death, destitution, and extremely critical acute malnutrition levels are evident.
People living in conditions of the third, fourth and fifth phases of food insecurity are considered starving.
We believed that prices had peaked and would not rise anymore, there were good prospects for the new world harvest. But on February 24 the war began, and we saw a new jump in prices. World grain prices have already risen by more than 50% since the beginning of the year. And this, of course, is the most important story right now — that there is a war going on, that Ukraine cannot ship grain from its blocked ports. The main Ukrainian ports and oil terminals are Odesa and Mykolaiv, the southwest of the country. Ukraine is one of the main suppliers of wheat and corn and the largest supplier of vegetable oil to the world market.
Supplies from Ukraine are ongoing, but almost entirely by land — this is a very modest volume. At best, they can now export a million to a million and a half tons of grain per month, while in peacetime they could export six to seven million. Last year, Ukraine had a record harvest, stocks are available, but they cannot be exported because of the war.
War is a very important, but not the only reason for the rise in food prices. Weather conditions have deteriorated noticeably. South America was unlucky: the drought affected first Argentina's and then Brazil's crops. The situation with winter wheat in the United States is unprecedentedly serious. It has never been in such a bad state in the entire history of observations. Plus, the prospects for a new harvest in Europe, primarily in France, the number one wheat producer and exporter in the European Union, have deteriorated last month. There is also not enough moisture, and the prognosis is very bad at the moment.
The West accuses Russia of a "grain war", but it has not yet begun
European politicians are now talking a lot about the fact that the Kremlin has unleashed a "grain war": firstly, it has blocked Ukrainian ports, and secondly, it can limit the export of Russian wheat to the world market. But the fact is that the Kremlin has not yet unleashed this war.
Ukrainian ports are blocked, but I don't think it was a goal in itself. There is a war going on, these are its consequences. Right now, it's hard to expect the ports to be unlocked. The war becomes protracted, it is a war of survival. For Ukraine, agriculture is a very important component of the economy, about 10% of GDP.
To truly start a global food world war, the Kremlin will need to limit Russian exports. This, in my opinion, is a completely nuclear scenario. Russia is the largest supplier of wheat to the world market. The world volume of wheat trade is 200 million tons, of which Russia accounts for 40 million. If that one-fifth drops out of the world balance, the price increase will not be half, but multi-fold worldwide. And the hunger that there is now will seem just a light warm-up.
If Russia restricts grain exports, it won't hit Western countries directly because they don't buy much Russian grain. Basically, the blow will be on poor countries. And the poorer the country, the stronger the consequences of rising prices will be for it. In the US, on average, households spend 10% of their income on food, in Europe — 10–15 %. In countries where food costs account for 60–70% of income, rising food prices are a matter of physical survival.
Now the regions where they are consistently undernourished are primarily sub-Saharan Africa: The Central African Republic, Congo, Ethiopia, and Sudan. In Asia — Yemen, Afghanistan. The situation will be very difficult if Russia really unleashes a "grain war". I don't know how many millions of refugees will try to break into more well-fed countries from the Middle East, from Africa. This is something unprecedented, there has never been anything like it in the world.
High prices benefit the Russian budget, but not Russian farmers
In recent years, Russia has been actively introducing various restrictions on exports. There are two types of them: a quota (it is impossible to export more than the established amount) and very strict export duty. All these restrictions remain in effect. And the Russian budget is the beneficiary of today's high grain prices, because the higher the price of grain on the world market, the more duties agricultural producers pay to the budget.
Fees, according to officials, were introduced to combat food inflation — rising food prices. But these measures were not effective. The fact is that the growth of wholesale prices for grains and oilseeds has little effect on food inflation. The main factors that determine the dynamics of retail prices — those that the consumer sees on the shelf in the store — are completely different. Those factors include the general inflation in the country, logistics, rent, wages, and the ruble exchange rate. All of these factors are far more important overall to food inflation than the cost of wheat.
Russia, unfortunately, went down what we call the "Argentine way" a few years ago. Of the notable food exporters in the world, Argentina is the only one with permanent severe restrictions from the government. They do it for fiscal reasons: the duties are used to replenish the budget. And it is also done under the slogan that the domestic consumer must be protected (from rising prices). Moreover, in Russia, export restrictions have been in effect for several years, and in Argentina — for several decades. The result of these restrictions is as follows: food inflation in Argentina is about 50% per year.
The restriction of exports is a huge blow to Russian agriculture, to Russian farmers. Now farmers lose about 30% of revenue because of these restrictions. Not profits, but revenues! A huge percentage, no one in the world has this.
The growth of Russian agriculture was based on cooperation with the rest of the world: Russia exported products and bought equipment and technology. All these successes that Russia has become the number one wheat exporter in the world are not due to state support, but because there was normal access to the world market. Now there is no such access. That is, they will export grain, but at the same time, they will earn significantly less.
At the same time, the cost of food is growing all over the world. But American and European farmers can offset the costs by selling their grain or soybeans at a high price. Russian farmers are faced with the fact that they have an increase in ruble prime cost year-on-year — 20-30% and the prices at which they can sell their products are artificially lowered. And in Russia, grain prices are going down. That is, the cost of grain has increased, and the price at which it can be sold on the market has decreased. This means that in a few years there will be zero growth in Russian crop production, and even more likely, there will be a fall.
Russian farmers need the whole world — as a buyer and as a supplier
In Russia, we are expecting a record harvest of grain and wheat. But this is due solely to the wonderful weather. The area under crops has already begun to shrink. In the case of winter crops' sowing — what was sown in Russia last autumn —, there was a decent reduction, by 5%, by about a million hectares. And it will continue in the coming years. It's just that the weather is so good that this year it has completely compensated for this factor. This is the number one consequence of government policy.
Russia's successes are based on cooperation with the world. And cooperation is not only about the fact that we can sell grain and oilseeds. It is about the fact is that we can safely import what Russian agriculture needs. Being North Korea, we can't dream of any agrarian success, because to succeed, we need the rest of the world, both as a buyer and as a supplier.
Consequence number two is that we are waiting for the archaization of production, a decrease in intensity. Farmers will try to economize, apply less fertilizer, avoid updating equipment, and use fewer plant protection products, which will lead to a decrease in yields and an increase in the risks of crop failure in case of adverse weather. If you start scaling back here and here, then — bang! You have bad weather, and there can be a serious crop failure out of the blue.
It is important how long the war will last and how the main suppliers of material and technical resources will behave. These are mostly global international companies, and they have partially suspended operations in Russia. And 2022 is going to be a normal year for us because all the plant protection products, seeds, and so on are brought in well in advance. But in 2023 there will be problems. It is unclear whether foreign companies will supply material and technical resources.
And Russia's successes are based primarily on cooperation with the world. And cooperation is not only about the fact that we can sell grain and oilseeds. It is about the fact is that we can safely import what Russian agriculture needs. These are seeds, plant protection products, fertilizers, equipment, animal feed additives, and the parent flock, which is needed to maintain reproduction. Of course, being North Korea, we can't dream of any agrarian success, because to succeed, we need the rest of the world, both as a buyer and as a supplier.
What's Next for Food Prices
A good scenario is that in the coming months there will be a truce, and deliveries from Odesa and Mykolaiv will resume. Then we will see prices fall. If there is stabilization, Ukraine will be able to harvest the crop and will be able to sow.
A bad scenario — the war continues to drag on until at least 2023, damage is caused to the terminals in Odesa and Mykolaiv. It is unclear how to harvest the Ukrainian crop. It is unclear who will gather it, and how it will be sold. Then we will see a decent increase in prices from the current record levels.
And the third scenario, the most dramatic, is that hostilities continue, Ukraine does not export anything, plus Russia imposes restrictions on exports. Not necessarily tough, just to scare the market. That's when it's going to be a real grain war.