The Economist - USA (2022-03-12)

The Economist March 12th 2022 Finance & economics 59

deficits.Analysis by The Economist sug­

geststhat,allelsebeingequal,oilat$150a

barrelfora yearwouldcausethecurrent­

accountbalancesof 37 oilimporterstosink

byanaverage2.3percentagepoints.That

would clobber countries already under

stress,suchasPakistanandTurkey (see

chart2 onpreviouspage).Chinawouldsee

a percentagepointknockedoffitscurrent­

accountsurplus.Evenbigcommodityex­

porters like Chile could suffer, because

metalshavenotappreciatedasmuch.Oil­

exportingcountries wouldgainbut still

faceissues,suchascurrencyappreciation

thatweighedonnon­energyexports.

Highpricesarelikelytooutlastthelift­

ingofsanctions.Russia,seenasa disrepu­

tableandriskytradingpartner,willremain

marginalised,saysTomPriceofLiberum,a

bank. Asits capitalmarkets andexport

proceeds struggleto recover,investment

in commodity production will dwindle.

Togetherwithalossofskillsandassets,

thiswillcausecapacitytoshrink.Beyond

2022 higherinterestratesandslowerglo­

balgrowthmaypromptthemarketfinally

tocool—atanexorbitantcost.In 1876 Nek­

rasovstartedwritingthefinalandjolliest

partofhispoem,callingit “Thefeastforall

theworld”.Thehappyendingnevercame:

thechapterremainsunfinished. n

Agriculturalcommodities

Grainstorm

I

n october 1914 the  Ottoman  Empire,

having  just  joined  the  first  world  war,

blockaded the Dardanelles Strait, the only

route for Russian wheat to travel to Britain

and France. The world had entered the con­

flict with wheat stocks 12% above the five­

year  average,  but  losing  over  20%  of  the

global traded supply of the crop overnight

set food markets ablaze. Having risen by a

fifth since June 1914, wheat prices in Chica­

go,  the  international  benchmark,  leapt  by

another 45% over the following quarter.

Today Russia and Ukraine, respectively

the  largest  and  fifth­largest  wheat  export­

ers,  together  account  for  29%  of  interna­

tional annual sales. And after several poor

harvests,  frantic  buying  during  the  pan­

demic and supply­chain issues since, glo­

bal stocks are 31% below the five­year aver­

age. But this time it is the threat of embar­

goes from the West that has lit a bonfire—

and the flames are higher than even during

the  Great  War.  Wheat  prices,  which  were

already 49% above their 2017­21 average in

mid­February,  have  risen  by  another  30%

since  the  invasion  of  Ukraine  started  on

February 24th. Uncertainty is sky­high: in­

dicators of price volatility compiled by if-

pri, a think­tank, are flashing bright red. 

Rabobank,  a  Dutch  lender,  reckons

wheat prices could climb by another third.

But the damage to global food supply will

extend far beyond the grain—and last lon­

ger than the war itself. Together Russia and

Ukraine  export  12%  of  the  calories  traded

worldwide.  They  rank  among  the  top  five

exporters  of  many  oilseeds  and  cereals,

from  barley  and  corn  to  sunflowers,  con­

sumed  by  humans  and  animals.  Russia

alone is the biggest supplier of key ingredi­

ents  in  the  making  of  fertilisers,  without

which crops falter or lose nutrients. 

In  February,  even  before  the  war  start­

ed, a food­price index compiled by the un

Food  and  Agriculture  Organisation  had

reached  an  all­time  high;  the  number  of

people  deemed  food­insecure,  at  800m,

was at its highest for a decade. Many more

could  soon  join  them.  Higher  food  prices

will  also  stoke  inflation,  adding  to  the

price pressures generated by dearer energy.

The  fallout  from  the  war  will  be  felt  in

three  ways:  disruption  to  current  grain

shipments, low or inaccessible future har­

vests in Ukraine and Russia, and withered

production  in  other  parts  of  the  world.

Start  with  shipments.  In  normal  times

wheat and barley crops are harvested in the

summer  and  exported  in  the  autumn;  by

February most ships are gone. But these are

not  normal  times:  with  global  stocks  low,

big importers of Black Sea wheat, chiefly in

the Middle East and North Africa, are anx­

ious to secure more supplies. They are not

getting  them.  Ukrainian  ports  are  shut.

Some  have  been  bombed.  Inland  routes,

via  the  north  of  Ukraine  and  onwards

through Poland, are too great a diversion to

be practical. Vessels trying to pick up grain

from  Russia  have  been  hit  by  missiles  in

the Black Sea. Most cannot get insurance. 

Alternative  sources  are  unaffordable.

Last week Egypt cancelled its second wheat

tender  in  a  row  after  receiving  only  three

offers—at  a  stomach­churning  price—

down  from  20  a  fortnight  before.  More

concerning still, exports of corn, of which

Ukraine  accounts  for  nearly  13%  of  global

exports,  usually  take  place  through  the

spring until the early summer. Much of it is

normally shipped from the port of Odessa,

which is bracing for a Russian assault. 

Future  crops  are  an  even  bigger  worry.

In  Ukraine  the  war  may  result  in  lower

yields and area planted. Winter crops such

as wheat and barley, which are sown in Oc­

tober, could be smaller because of a lack of

fertiliser and pesticides. Spring crops such

as  corn  and  sunflowers,  the  planting  of

which  would  normally  start  imminently,

may  not  get  sown  at  all.  Leonid  Tsentilo,

whose farm in central Ukraine grows 7,000

tonnes of wheat a year, says local prices for

diesel and plant­protection products have

risen  by  50%  in  two  weeks.  Some  of  his

workers have been shipped off to war. 

In  Russia  the  risk  is  not  curtailed  pro­

duction  but  blockaded  exports.  Although

food sales are not yet subject to sanctions,

Western banks are reluctant to lend to trad­

ers. Fear of being fined by governments in

the West or shamed by its press is keeping

KYIV

War in Ukraine will cripple global food markets

For more, listen to our Money Talks podcast

at economist.com /bigoilpod