The coming wheat shortage – 10 May 2022
In the same way motor mechanics aren’t qualified to be doctors, retirement fund advisors aren’t qualified to comment on the political and military aspects of the Russia-Ukraine war. Retirement fund advisors are expected to shed light on how the war could affect our economy and investments.
The impact of the ongoing war on the global economy will probably be more severe than anticipated and it is the ordinary consumers that will likely suffer most. UNCTAD (United Nations Conference on Trade and Development) estimates that the Russia-Ukraine war will reduce global economic growth by 1% in 2022.
Many NATO-aligned countries instituted sanctions against Russia. These countries include the United States, United Kingdom, Canada, Australia, New Zealand, Japan, Singapore, South Korea, Taiwan and most European countries (Belarus, Bosnia & Herzegovina, Moldova and Serbia are the exceptions).
Not one African or South American country, and no other Asian countries (except for the four already mentioned, who are to some degree dependent on the US for their strategic defence) joined in the sanctions against Russia.
At the last count, 53 countries out of the 219 territories in the world, representing 15% of the global population, instituted sanctions against Russia. Some of these countries have large, powerful economies, so it has a major impact on the global discourse.
Sanctions have been imposed against Russia and many companies operating globally such as Audi, Coca-Cola, Gucci, McDonalds and Versace announced that their Russian operations are being curtailed. This may have a limited effect.
However, Russia is a major exporter of natural gas, oil, metals, agricultural commodities (especially wheat) and related products (most notably potash, ammonia, and phosphates for fertiliser).
Russia produces approximately 12% of the world’s oil and the price of oil has soared from US$70 a barrel (before the outbreak of hostilities) to US$105 a barrel.
Click to view the latest Brent crude oil in US$ a barrel chart
Russia may be vulnerable to oil and metals embargoes, but less so when it comes to natural gas, agricultural commodities and related products. The world needs Russian wheat and Europe continues to warm itself with Russian natural gas.
There is simply not enough natural gas, wheat or fertiliser available in the world to replace Russian sources of production. Prices have already skyrocketed on fears that the supply of natural gas, wheat and fertiliser may be curtailed. The price of natural gas rose from US$3.50 before the outbreak of hostilities to US$5.75/MMBtu now while the wheat price increased from US$8 before the invasion to US$10/bushel now.
Click to view the latest Natural gas in US$ a MMBtu chart
The current price of natural gas is much higher than in the past, but then the world, and specifically Europe, had not been as dependent on natural gas as it is now.
It is important to understand that we are currently consuming last season’s wheat crop and that April is the planting season in the Northern Hemisphere. Failing to plant now may result in shortages later in the year, and in 2023. Along with an already high oil price (jumping from US$70 to US$105/barrel), higher food and energy prices could see added pressure on consumers towards year-end.
Click to view the latest Wheat in US$ a bushel chart
To date, the capacity to produce either oil or natural gas has not been destroyed in the war. Should hostilities cease at some point, oil and natural gas prices can be expected to come down to lower, if not pre-war levels. This will alleviate some of the pressure on inflation and on consumers.
It is difficult to see the price of wheat recover as easily. It is unclear how much less acreage is being planted at the moment. This could become a pressing issue once the 2021 crop has been consumed. In addition to the risk of a smaller crop in Ukraine, it should be noted that Russia is the world’s major producer and exporter of fertiliser, ammonia, potash and phosphates used to produce fertiliser elsewhere. Without adequate supplies of fertiliser, crop yields in other parts of the world and in other food crops could be lower than in the past. Even if we see an early end to the war, this phenomenon could continue into the 2024 growing season.
How sensitive is South Africa to wheat imports?
Ukraine produces 10% and Russia produces 20% of the world’s wheat exports. Russian production could possibly continue despite the war, but if Ukraine cannot produce wheat in 2022 for delivery in 2023, the deficit could push grain prices higher. Grain South Africa expects approximately 43% of South Africa’s wheat consumption for the current season to be imported from abroad (±1 500 000 tons). Wheat is imported from several countries including Russia, the US and Canada. As much as 40% of South Africa’s wheat imports comes from Russia. South Africa does not import significant quantities of wheat from Ukraine. It is economically understandable why South Africa has not imposed sanctions against Russia, as it imports approximately 600 000 – 700 000 tons of wheat from Russia annually (16.5% to 19% of annual consumption).
The wheat price will push up inflation should it continue to rise into 2023. Wheat is not only used for bread, a staple food in South Africa, but also in cereal products, animal foods, meat substitutes, fat replacement products, adhesives, paper, cosmetics and even furniture.
The coming wheat shortage may be less acute in South Africa than some other countries in the world. The price of wheat and wheat products (e.g. bread) will still increase. When the rising oil price caused a sharp increase in the petrol price, the South African government demonstrated its willingness to take measures to reduce the impact of rising prices on its population. It is not impossible that Government may follow a similar approach if rising wheat prices push up the bread price in South Africa. Some other countries may not be in the same position.
Rising prices increase alarm for food security and political stability
Wheat prices will impact on the cost of staple foods in South Africa, but not necessarily push inflation above 6%. If the oil price comes down to under US$80 a barrel towards the end of the year, the upward pressure on overall inflation may be reduced, but food prices are likely to remain higher.
Despite (or even because of) Ukraine’s plucky resistance and the larger narrative put forward in NATO-aligned countries, the war and its impact on the global economy are not over yet.
Information for this article obtained from several sources: UNCTAD based on data from Thomson Reuters (Bloomberg Commodity Index), Macrotrends.net, Simeka Consultants and Actuaries