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Russia and Ukraine play a very important role in the global agricultural system. Together, they are major suppliers of global energy, food and fertilizers. Other than water, which is a local resource, these three elements are integral to global agricultural production and food security. In addition to its direct impact, the Russia-Ukraine war impedes global logistics, which is critical to the international movement of food and fertilizers.

The US, Russia and Saudi Arabia are the world’s largest producers of crude oil, accounting for 40% of the world’s annual crude oil production. Russia is the second largest exporter of crude oil (after Saudi Arabia) and the largest exporter of oil and gas in multiple forms. Immediately before the war in Ukraine, Russia exported about 8 million barrels per day (mbpd) of oil, representing about 8% of daily global consumption. In the month since the war began, crude oil and natural gas prices have risen by about 20%, reflecting the significant role that Russia plays in the global energy market. Longer-term daily consumption requirements can be met by American shale-oil producers and members of the Organization of the Petroleum Exporting Countries (Opec) increasing production, but prices will remain elevated if Russian exports do not flow into the global system. Oil prices impact virtually every other price in the global market. They raise the cost of inputs and transportation for a vast array of products, including agricultural.

One major input into the global agricultural system is fertilizer. The global agricultural sector consumes about $180 billion of it each year. Fertilizers are categorized by macro/micro nutrients, their organic/inorganic origin, and by crop type. The Asia-Pacific region, with India and China included, makes up the biggest chunk of the market (over 50% today). Russia, Belarus and Ukraine are major exporters of fertilizers, particularly potassic and nitrogenous products. Global fertilizer prices have risen about 250% since their bottom in 2020, of which about 50% was after the war began. Russia has imposed an export ban on all types of fertilizers. Belarus, a land-locked country, can no longer export from the Lithuanian port of Klaipeda, which it normally uses, disrupting the supply of potash. While Russia’s role in the energy market is well known, the role of Russia, Belarus and Ukraine in the fertilizer market is relatively unknown and can cause enormous price volatility in that market. Insurance premiums for access to the Baltic Sea and Black Sea have shot through the roof, further complicating attempts at any exports from there. India and Brazil are the world’s largest net importers of fertilizer.

Beyond inputs, prices of farm products have risen and are likely to stay on an uptrend. Europe accounts for nearly two-thirds of the world’s wheat production. Russia and Ukraine contribute about 30% of this crop’s global supply. Ukraine has about 25% of the world’s ‘chernozem’ or black soil suitable for grain cultivation because of its high concentration of humus; its wheat yield is 40% higher than India’s in terms of kg per hectare. With the large-scale displacement of Ukrainians (some 10 million of Ukraine’s 44 million people), it will take a long time after the war ends for this country to re-attain significant wheat output.

The largest importers of wheat are Egypt, Indonesia, Turkey, China and Nigeria. Each of these countries is scrambling to come up with alternate foodgrain sources. Egypt is incentivizing local wheat production, Turkey is reaching out to South America, and China has negotiated wheat shipments by rail from Russia’s far east despite phytosanitary concerns. Adding to the difficulties, China recently announced that its winter wheat crop would be the “worst in its history". China can address this partially because it maintains an 18-month inventory of wheat supply as a strategic reserve.

India is a modest net exporter of wheat. After a record year of wheat production in 2021-22, India is stepping into the breach caused by the war. India’s production is likely to exceed 111 million metric tonnes of wheat this year, allowing it to export over 10 million tonnes. This is only a small fraction of the world’s annual consumption of about 780 million tonnes, but can defray some of the lost wheat exports from Russia and Ukraine of an annual 50 million tonnes.

India has already begun to work on alternate sources of fertilizer supply, particularly from Canada and Israel. The task is not easy because India typically uses the prices it sets with Belarus and Russia as benchmarks in its negotiations with other countries. India needs about 30 million tonnes of fertilizers a year, as estimated. Not only is the fertilizer mix important, but also its procurement timing, as we have both kharif (summer) and rabi (winter) crops on our calendar.

India’s path forward this year in agriculture will have to be navigated very carefully. While the country gains modestly from additional wheat exports, it suffers heavily from increases in the prices of crude oil and fertilizers. On balance, this will be negative for India’s balance of payments and will add to domestic inflationary pressures. If the Reserve Bank of India responds with some monetary tightening, as it should, then the true cost of all this would have to be borne by way of lower economic growth.

P.S. Mary Antoinette is said to have said, “Let them eat cake," in response to a bread shortage in 18th-century France. Perhaps substituting corn for wheat flour can provide one answer to the current problem.

Narayan Ramachandran is chairman, InKlude Labs. Read Narayan’s Mint columns at www.livemint.com/avisiblehand

 

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