Wheat, rice and El Niño: food security warning lights are flashing red

Wheat, rice and El Niño: food security warning lights are flashing red
A triple whammy of Russia's withdrawal from the Black Sea Grain Initiative, India's ban on rice exports and a powerful El Nino effect that will reduce yields has analysts and politicians warning of a new food crisis. / bne IntelliNews
By Ben Aris in Berlin August 1, 2023

Russia’s exit from the Black Sea grain initiative, India’s ban on rice exports and a “strong” El Niño expected in the second half of this year mean the global food security warning lights have started to flash red.

The war in Ukraine has spilled over to affect global markets once again after the Kremlin pulled out of the Black Sea Grain Initiative on July 17, warning that any ship steaming towards one of Ukraine’s port would be considered a military threat, and deploying a corsair warship to the waters to underscore this. Ukraine managed to export some 33mn tonnes of grain last year, but traders fear that the volume leaving the country this year will be radically reduced and could cause a fresh food crisis as supplies dwindle and prices soar.

Emerging markets (EMs) are most exposed to the Kremlin’s tough-man tactics. Ukraine claims that some 400mn are dependent on Ukraine’s grain, but as bne IntelliNews reported, the physical volume of grain exported to Africa in particular from Ukraine is relatively small – a few million tonnes – while the bulk of the grain exports go to the EU and China, which is the biggest importer of Ukraine’s grain.

Out of the African nations, Egypt is amongst the most exposed.

The biggest importer of wheat in the world, the end of the Black Sea grain deal has exposed Egypt to rising global wheat prices which will add to strains within the country’s balance of payments, force the government to cut non-subsidy spending and push up inflation. Egypt has already had to devalue three times and more food inflation could tip it into a fourth episode.

“Egypt is particularly vulnerable to developments in the wheat market. It is, after all, the world’s largest wheat importer and, prior to the war, nearly 90% of its imports and around 45% of its total wheat needs came from Russia and Ukraine. (See Chart 1.) Clearly this leaves Egypt very exposed to supply disruptions. And, even if these are avoided, higher wheat prices will impact Egypt’s economy through three key channels,” Capital Economics said in a note.

If wheat prices remain at their current level, the country's wheat import bill is estimated to reach $2.5bn annually, lower than the $3.8bn spent in 2022, but still enough to put considerable pressure on the currency.

To mitigate some of the impact, Egypt has secured $100mn in financing from the United Arab Emirates (UAE), and negotiations are underway to extend this facility by an additional $400mn, covering a significant portion of the estimated wheat import bill.

“Nonetheless, the bigger concern lies in the potential deterioration of the current account position, which could further strain the central bank's foreign exchange reserves. This may increase the likelihood of officials devaluing the pound in the coming months,” says Capital Economics.

The situation may also force the government to reassess its fiscal plans. The subsidised bread programme, benefiting nearly 70% of the population, has faced challenges in the past, and officials shelved plans to rationalise it in 2022. While the subsidy bill is expected to be lower this fiscal year, high wheat prices could surpass the budgeted amount for FY2023/24. To maintain fiscal austerity goals, the government might have to consider curbing the programme or cutting spending elsewhere, although the former option could raise concerns over potential unrest.

Another consequence of rising wheat prices is the potential upward pressure on inflation. While the bread subsidy helps shield households from some of the impact, wheat products still constitute around 5% of the consumer price index (CPI) basket. With inflation already exceeding 35% year on year in June, the fastest pace in over 60 years, continued high wheat prices could keep inflation elevated for an extended period. In response, the central bank may need to resume its monetary tightening cycle and possibly adopt a more aggressive approach than initially envisaged. A new bout of food inflation would be particularly painful for Egypt.

Grain price rise worse than lack of supply

A shortage of grain is a problem but the effect on prices is much more damaging, hiking the cost of bread and making it unaffordable for many in the world’s poorest markets – even if they are far away from Europe and do not import any Eastern European grain directly – that could tip millions into poverty or even starvation.

That scenario was avoided last year when Russia first imposed a naval blockade on Ukraine, partly because many poor could turn to another staple to replace the missing wheat: rice.

Rice supplies in 2022 were plentiful, so no one went short of food, but on July 20 India imposed a ban on the export of non-basmati rice in an effort to bring its domestic prices down after they soared by a third in the last year. As the world’s biggest exporter of rice, the drop in Indian supplies could hit the international markets hard and catch the disadvantaged in between a pincher of a shortage of both rice and wheat.

The supply conundrum this year may be compounded by forecasts for an exceptionally strong El Niño effect in the second half of this year that could reduce yields in many of the world’s poorest countries.

They are facing mounting risks to their food supply due to a combination of factors, including the likelihood of an El Niño event, the termination of the Black Sea grain deal and India's ban on non-basmati white rice exports. Countries in the Middle East and Africa are particularly vulnerable to lower grain supplies, and many EMs, especially in the Middle East, heavily rely on rice imports. The potential impact of these developments presents significant concerns for food security and could exacerbate external imbalances in North Africa.

In a recent update, we examined the potential consequences of El Niño on EMs, highlighting the threat of decreased production of vital commodities such as cocoa, sugar, coffee and rice in Africa and Asia. These disruptions pose a risk to food security in EMs, and these concerns have escalated further with recent developments. Russia's decision to withdraw from the Black Sea Grain Initiative, which allowed Ukraine to export agricultural products during the war, has significant implications. Additionally, India's announcement of a ban on all non-basmati white rice exports adds to the pressures on global food supplies.

“There are two key channels through which EMs could be impacted. One is via food supply. An El Niño-related drop in food production could reduce supplies in those EMs where food is produced and consumed (e.g. rice in Asia). Disruptions to food supplies could also impact those that depend most heavily on imports for their food needs, particularly if food-producing countries restrict exports to safeguard domestic supplies,” Liam Peach, an emerging market economist with Capital Economics, said in a note on July 28.

Capital Economics conducted an analysis of food security, comparing food import dependency and food self-sufficiency ratios (domestic production as a percentage of food supply) that revealed that wheat and other grain risks are most pronounced in the Middle East and Africa, amongst the world’s most import-decedent countries.

Notably, countries like Tunisia and Egypt are among the largest consumers of wheat globally, making them highly susceptible to the collapse of the Black Sea grain deal, as much of their wheat needs came from Russia or Ukraine before the war.

Ukraine is exploring alternatives so as to maintain its export volumes, but those leaving by rail and travelling to the EU have already been stymied after Poland and other Central European countries banned imports of Ukraine’s grain earlier this year after their local wheat markets tanked due to the surfeit of cheap Ukrainian grain. The European Commission (EC) reaffirmed the ban and extended it for five months until September 15.

Another alternative route Ukraine has been developing is increasing exports via the Danube River, but in the last week Russia has begun to bomb port facilities servicing that route, which will also limit exports, leaving Kyiv with few alternatives.

Russia itself enjoyed a all-time high record harvest of 153mn-155mn tonnes of grain last year and its grain silos are full to bursting. Russian exports are expected to climb to about 60mn tonnes this year, which will alleviate some of the pressure. During the African summit at the end of July Putin promised that six countries – Mali, Burkina Faso, Somalia, Zimbabwe, Eritrea and the Central African Republic, all amongst Moscow’s staunchest allies – will get Russian grain for free to make up any shortfall there. Russia has been complaining about the limits to its own seaborne traffic that limits its ability to export.

“In other parts of Emerging Europe, the Middle East, and North Africa, cocoa, coffee and rice are almost entirely reliant on imports. While these countries may not consume significant quantities of these foods, those with the lowest self-sufficiency and highest food imports per capita face the greatest risk of reduced food supplies. This includes countries like Saudi Arabia, Israel, Kuwait, Jordan and the UAE, particularly for wheat, corn, coffee and rice. Parts of Africa, too, heavily import rice from Asia, including from India,” Peach reports.

The second channel through which EMs may be affected is via higher food prices. That means that countries that are heavily dependent on imports but import nothing from Russia or Ukraine may still be as badly hit by the food crisis as those countries buying their grain directly from those two countries.

So far, the market reaction has remained fairly modest as traders are expecting some sort of new deal to be thrashed out, according to Alexandra Prokopenko, an analyst with Carnegie in Berlin. Russian President Vladimir Putin has been hosting nearly all of Africa’s leaders in St Petersburg this week and they have been lobbying for a resumption of the trade. Turkey too is exerting pressure on the Kremlin to restart shipping, as it is a major importer of Russian and Ukrainian grain and the world’s biggest exporter of flour.

“While revisions to commodity forecasts are currently underway, it is expected that most changes will be modest. There is no clear indication that a substantial reduction in supply and a spike in prices is inevitable,” says Peach. “In fact, forecasts suggest that most commodity prices will fall in the coming months, with wheat, coffee and cocoa prices expected to decline while rice prices experience a slight increase. The S&P GSCI agricultural price index is projected to decline by around 15% by year-end.”

Analysts say there is no direct relationship between global agricultural prices and EM food inflation; nevertheless, it is expected that if prices remain at current levels, last year's food inflation shock will continue to pass through, resulting in a further decline in EM food inflation over the coming months, says Peach.

“Nevertheless, the impact of supply disruptions would take time to filter through, and at this stage, it remains a risk rather than an embedded factor in inflation forecasts,” Peach added.

In conclusion, the risks to food supply in emerging markets have increased dramatically, but a food crisis is not a given. While the full extent of the impact remains uncertain, policymakers are already working to head off a bigger disaster and ensure a stable and sustainable food supply chain for these economies.