Russia and Ukraine are two of the world's largest exporters of wheat, accounting for around a quarter of the total global exports of wheat. So the war in Ukraine has potentially had a major effect on the world market for wheat, as I noted in this post last year. However, the impact hasn't been as great as it was early on in the war, because Turkey brokered an agreement to allow Ukrainian exports of wheat. However, that agreement has now broken down, as CNN reported today:
Russia said Monday it was suspending its participation in a crucial deal that allowed the export of Ukrainian grain, once again raising fears over global food supplies and scuppering a rare diplomatic breakthrough to emerge from Moscow’s war in Ukraine.
The agreement, brokered by Turkey and the United Nations in July 2022, was officially set to expire at 5 p.m. ET on Monday (midnight local time in Istanbul, Kyiv, and Moscow).
Kremlin spokesperson Dmitry Peskov told reporters on Monday that Russia would not renew the pact right now, saying it “has been terminated.”
The impact of Russia withdrawing from the agreement on the global wheat market is shown in the diagram below. Prior to Russia withdrawing from the agreement, the market was at equilibrium, with supply S0 and demand D0. The global price of wheat was P0, with Q0 units of wheat traded. Then, with supply from Ukraine disrupted, supply decreases to S1. The price of wheat goes up to P1, with less wheat (Q1) will now be traded.
It is the higher price and lower availability of wheat that has many developing countries concerned, as they are the major importers of wheat, like Egypt, Nigeria, and Indonesia.
The wheat market isn't only in the news because of the Russia-Ukraine conflict though. There has also been concern about the coming El Niño weather pattern, as reported by Reuters last month:
Australia's production of winter crops is set to fall from record highs, with wheat output seen declining more than 30%, the country's agricultural department said, as forecasters predict dryness due to the El Nino weather pattern.
Australia is the world's second largest wheat exporter, supplying mainly to buyers in Asia, including China, Indonesia and Japan.
Total Australian winter crop production is forecast to fall by 34% to 44.9 million tonnes in 2023–24, around 3% below the 10-year average to 2022–23 of 46.4 million tonnes, according to the June crop report from the Department of Agriculture, Fisheries and Forestry.
Again, this is a reduction in global supply, which should lead to an increase in the price of wheat and a decrease in quantity traded. However, not everyone buys the simple economic argument here. David Ubilava (University of Sydney) wrote in The Conversation last week:
The global supply and prices of most food is unlikely to move that much. The evidence from the ten El Niño events in the past five decades suggests relatively modest, and to some extent ambiguous, global price impacts. While reducing crop yield on average, these events have not resulted in a “perfect storm” of the scale to induce global “breadbasket yield shocks”.
How does Ubilava's view reconcile with the simple analysis of decreasing supply shown above? He explains that:
El Niño does induce crop failures, but for food grown around the world the losses tend to be offset by positive changes in production across other key producing regions.
For example, it can bring favourable weather to the conflict-ridden and famine-prone Horn of Africa (Djibouti, Ethiopia, Eritrea and Somalia).
A good example is wheat.
Ubilava then provides some data shown that there is little correlation between El Niño events and global wheat prices. Wheat prices don't always increase when there is an El Niño event, and prices often fall. This is because, even though supply from Australia may decrease, supply from other sources increases and offsets much (if not all) of the effect of decreasing Australian supply on the world market.
However, the combined effect of Russia withdrawing from the grain export deal with Ukraine, and El Niño, is likely to lead to decreasing global supply. Countries that import wheat are right to be concerned.
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