Home / Opinion / Columns /  Soaring prices of wheat also have broad implications

In order to understand the political and economic repercussions of Russia’s attack on Ukraine, analysts and economists have been concentrating on the rise of crude oil and natural gas prices, among other things. This isn’t surprising given that Russia is the world’s second largest exporter of oil and the largest exporter of natural gas. But there is another important commodity that needs attention, and that’s wheat. Data from Observatory of Economic Complexity tells us that the total global wheat trade stood at $44.1 billion in 2019. Russia was the top exporter, with exports worth $8.1 billion. Ukraine was fifth with $3.1 billion. Hence, Russia and Ukraine accounted for a fourth of the world’s total wheat exports.

With the war on, both current and future supply is likely to be disrupted. The seaports of Ukraine are shut and hauling wheat over land has proven tough. Also, earlier this month Russia and Ukraine banned wheat exports. The price of wheat futures has risen by close to 30% since 23 February, the day before Russia invaded Ukraine.

This means trouble for countries like Egypt, the world’s largest importer of wheat. In 2019, it imported a little over a tenth of all global imports. It was followed by Indonesia, Turkey, the Philippines and Japan. Countries in Africa make up for around 28% of total imports. The wheat is mainly used to make bread.

As Rupert Russell writes in Price Wars: How Chaotic Markets Are Creating a Chaotic World: “[Bread is] the source of 35 per cent of daily caloric intake for people living in the Middle East and North Africa… Even with the government subsidies, people in Egypt, Tunisia… Algeria and Morocco spend between 35 and 55 per cent of their income on food." Hence, any rise in the price of wheat hurts a large number of poor people across Africa.

When it comes to regions, the Middle East is a huge importer and imports close to a fourth of the total global imports (16 countries of Asia and Africa were considered for this calculation). The price of wheat is a very important constituent in the overall political structure of many Middle Eastern countries that have autocratic regimes. In these countries, bread isn’t just bread. As Russell puts it: “[Bread] is the cornerstone of the social contract between the rulers and the ruled across the Middle East… Subsidies ensured that food was cheap… This social contract was part of an authoritarian bargain, whereby security was traded for freedom and people enjoyed the ‘democracy of bread’ rather than the ‘democracy of the vote’."

Of course, with the price of oil going up, many Middle Eastern autocrats can continue to subsidize bread, but not all of them have access to this windfall. Take the case of Egypt. Retail inflation in the country in February stood at 8.8%, the highest it has been since June 2019. The Central Bank of Egypt attributed the jump in inflation “to strong monthly food dynamics". Food inflation is high despite the continued availability of subsidized bread.

Or take the case of Turkey, which takes in around 4.9% of all global wheat shipments. Its retail inflation in February was already at a very high 54.4%. Any food inflation will only add to it.

Note that food inflation has created massive problems in the Middle East in the past. In Egypt, for example, attempts to increase the prices of subsidized bread have led to riots. In fact, Russell suggests that it was food inflation which in 2011 led to the Arab Spring across large parts of the Middle East.

In late 2008, central banks of the rich world started printing a massive amount of money in order to prevent an economic depression in the aftermath of the financial crisis that had broken out. This led to the belief that high inflation was on its way.

In order to protect themselves, “speculators poured their money into commodities to ‘hedge’ against the inflation to come". This was possible as commodities over the years have been turned into financial assets, which can be bought and sold on exchanges. The hedging drove up commodity prices and thus food prices.

By December 2010, food prices had shot up dramatically and this may have triggered the Arab spring. In fact, the three major demands of Egyptians, back in 2011 when the Arab Spring broke out, had been: “bread, freedom and social justice". Does this mean another revolution may be around the corner in the region? On that, your guess is as good as mine. Nonetheless, if the war in Europe continues, things will remain delicately poised on the bread front.

In all this, India hasn’t been impacted by the global wheat shortage because we produce much more grain than we consume. As of 1 March, the Food Corporation of India had 2.34 million tonnes of wheat stocked in its central pool, significantly more than the required strategic and operational stock. Hence, India is in a position to export wheat.

As a Mint news report says: “Egypt, Israel, Oman, Nigeria and South Africa have approached India to secure wheat supplies." These exports might help a little, but the global price of wheat is likely to remain high as long as the war continues.

Finally, oil is not the only commodity that has wide economic and political repercussions globally; wheat falls into that category as well.

Vivek Kaul is the author of ‘Bad Money’.

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