"India, the world's second largest wheat producer, abruptly banned wheat exports", "the world's largest food crisis after World War II"... In recent times, as the situation in Russia and Ukraine continues to gel, the topic of grain has become a major hot spot in the media circles at home and abroad.
Judging from the trend of the agricultural futures market, Dashang Douyi (soybean No. 1 futures contract with edible quality non-GMO soybeans as the subject) rose from a low of 5773 yuan / ton on January 14 to 6252 yuan / ton at the time of writing (13:00 on May 18), an increase of about 8.3%; in the same period, the price of corn in Dashang was about 12.8% higher than at the beginning of this year.
Economically and socially, a sharp rise in food could create the following problems:
(1) Internal inflation increased. In addition to being people's staple food expenditure, grain is also an important raw material for poultry meat products and other non-staple foods, and the rise in grain will greatly drive the prices of these commodities, seriously weakening the purchasing power of the people, and causing inflation to continue to rise. Taking the United States as an example, Professor Lian Ping, chief economist of Zhixin Investment, recently said that if food prices rise sharply from the second half of this year to the first half of next year, and the global food market is greatly affected, it will be difficult for the Fed's monetary policy to suppress its impact on US inflation even if it is tight.
(2) The famine crisis in the world's poorest countries has risen, and the risk of humanitarian disasters has increased significantly. The poorest countries tend to be the most sensitive to food prices. On May 4, a joint report released by the United Nations and the European Union showed that in 2021, about 193 million people in 53 countries or regions will experience a "food insecurity" crisis. That's an all-time high compared to 2020 figures, an increase of nearly 40 million people. Some 570,000 people in Ethiopia, southern Madagascar, South Sudan and Yemen have experienced what has been classified as the worst "acute food insecurity" disaster and requires urgent action to avoid widespread collapse and death.
So, what are the main reasons for the rise in international food prices? What about international food prices in the near future?
Underlying driver of rising international food prices
As of mid-May, world wheat prices have soared more than 40 percent so far this year, according to Bloomberg data; rice prices have soared more than 15 percent. Prices in major food markets such as wheat, corn and vegetable oil are reaching new highs and driving inflation around the world.
The worrying food upward trend is the result of the interaction of multiple factors, which we can roughly classify as three types: regional conflicts, extreme climate and environmental crises, and economic crises.
According to the report of the United Nations Global Network to Combat Food Crises, regional conflicts remain the most important drivers of food insecurity. We must note that this conclusion was drawn from data from the pre-war wars in Russia and Ukraine.
The report found that the war has highlighted the interconnectedness and fragility of the global food system, with serious consequences for global food and nutrition security. The report notes that countries experiencing the world's worst famine in 2021 are particularly vulnerable to food shortages caused by the risk of war in Eastern Europe, particularly because they are highly dependent on imports of food and agricultural products and are highly vulnerable to rising global food prices.
After surveying all relevant countries worldwide, the report concludes that the underlying drivers of rising global food prices in 2021 and food shortages in some countries are:
(1) Regional conflicts. This driver puts some 139 million people in 24 countries in severe food insecurity in 2021, a significant increase from the figure of about 99 million people in 23 countries in 2020.
(2) Extreme climate. This driver in 2021 has exposed more than 23 million people in 8 countries to food insecurity or crises.
(3) The impact of economic deterioration. In 2021, more than 30 million people in 21 countries will be affected by food insecurity or crises caused by this factor. This is mainly due to the impact of the COVID-19 pandemic on the economy.
At the end of February this year, there was a large-scale war conflict and financial and economic confrontation between Russia, Ukraine and NATO countries that were rare after World War II. Combined with the data of many mainstream investment research institutions in the world, these conflicts and wars have played a key role in the rise in global food prices this year.
According to a research report by JPMorgan's Research Department, Russia and Ukraine accounted for about 30 percent of the world market before the war, as well as 80 percent of sunflower oil production; in addition, Ukraine alone supplied about 20 percent of the world's corn market.
The war's obstruction of agricultural logistics in Ukraine could leave the liquidity of the country's agricultural trade in a state of chaos for some time. The first half of each year is generally a seasonal offsea period for wheat exports from the Black Sea region, but the current pre-promised supply of Russian wheat is leaving Russian ports.
Because of the war and sanctions, are food importers around the world more cautious about prices and sources (such as with Russian exporters)? In this regard, the old Xing next door has not been able to find a precise conclusion.
The first half of each year is usually a more active production period for maize and sunflower oil in the Black Sea region, but this year's exports of maize and sunflower oil from Ukraine have not started smoothly.
Ukraine's main seaports are still closed, hampering the export of its goods, while the war that continues to gel at home will also put Ukraine's upcoming corn and sunflower planting season at great risk of uncertainty.
According to the Ministry of Agricultural Policy and Food of Ukraine, as of May 2, the area planted in the spring crop has reached 4.7 million hectares, accounting for more than 30% of the predetermined area. Ukraine's non-governmental agricultural cooperatives estimate that 70 percent of Ukraine's arable land is currently available for cultivation, and that the planting of corn and sunflowers, the main spring crop, may eventually approach about half of what it would normally be.
As of May 2, only 37 percent of the 4.4 million hectares of land planted with corn and sunflowers in Ukraine had been reportedly completed.
Ukrainian officials recently published a note on the current state of agriculture on the front lines of the conflict, showing the actual situation of Ukrainian farmers in times of war. The report notes that while there is no shortage of economic challenges to overcome, agricultural farming is one of the national priorities.
At the moment, a Ukrainian farmer may be risking his life to grow food, but the current shortage of diesel supplies for farming may be a big problem for him. In addition, the biggest difficulty faced by Ukrainian agriculture is that farmers cannot obtain agricultural credit in the context of rising domestic agricultural stocks. The main reason for the rise in domestic agricultural stocks is that Ukrainian seaports remain closed, impeding export sales indefinitely.
The impact of war on world food security is not trivial. According to the latest report of the Observer Network, Russia and Ukraine also said that the peace talks between the two countries have been "indefinitely shelved" and that the situation that does not improve may continue to raise world food prices.
Food prices are likely to continue to rise
According to the comprehensive report of the International Investment and Research Institute, by the first half of next year, the national grain price will remain high, mainly because the conflict between Russia and Ukraine will continue to affect the risk factors on the world food supply side. JPMorgan Research estimates that corn remains the most vulnerable to the Conflict between Russia and Ukraine in agricultural products, and the corn market will face a shortage risk in the medium to long term due to challenges to spring sowing of maize in Ukraine (April-May).
In addition, climate change, particularly la Niña, will complicate the unprecedented supply-side challenges facing agricultural markets. This year, the "La Niña phenomenon" (the persistent cooling of sea surface temperatures) lasted longer than originally anticipated, having earlier wreaked havoc on grain and rapeseed production in South America and now threatened spring crops in the United States.
The National Oceanic and Atmospheric Administration (NOAA) recently said seasonal climate patterns that have not faded for much of the past two years have driven rainfall and temperature anomalies across the Pacific tropics and will continue into the northern hemisphere summer this year.
The latest climate models suggest that the "La Niña phenomenon" may occur in the above-mentioned areas and affect the autumn, thus harming new crops in Latin America. Under the seasonal La Niña model, higher fertilizer prices combined with uncertainty over fertilization rates will pose important challenges to the reduction of agricultural production potential and the rise in abandonment rates in these areas.
In the case of the United States, droughts in the winter plains have taken root, a typical manifestation of the "La Niña phenomenon." According to the outlook of U.S. government meteorologists, the drought situation could intensify in early summer, especially in the Southwest, parts of the plains and Texas, especially putting pressure on winter wheat, cotton and corn yields. JPMorgan recently said the market will continue to see the risk of further price increases in milled wheat under continued severe crop growth conditions in the United States.
JPMorgan also expects wheat prices to rise the most of all agricultural markets in the coming months, with the potential to rise by more than 40 percent. The main reason is that consumers have limited forward contract protection and people are buying under the forecast of a deteriorating wheat production outlook.
Similarly, the vegetable oil market is even more bullish after Indonesia's decision to ban the export of edible oil, including palm oil, from April 28, as the policy will cascade into global exports of soybean oil and rapeseed as substitutes. This makes the export loss of Ukrainian sunflower oil even worse on the world market.
India, the world's second-largest wheat producer, abruptly announced a few days ago that it would immediately ban wheat exports due to rising domestic commodity prices.
Earlier, India took advantage of the rebound in wheat prices caused by global tensions between Russia and Ukraine to export a record 7 million tons of wheat in the fiscal year ending March, an increase of more than 250% year-on-year. In April, India exported a record 1.4 million tonnes of wheat, and in May it has signed an agreement to export about 1.5 million tonnes.
The story of Indian wheat is not over, Xinhua quoted Reuters New Delhi news, the Indian government announced on the 17th local time, will relax the wheat export ban issued on the 14th, allowing wheat exports waiting for customs clearance. Wheat exports that are submitted to customs inspection and filed with the customs system on or before 13 May are allowed. The Indian government will also reportly allow wheat exports to Egypt.
Receiving this news, on the 17th, Chicago wheat futures dived in response. When the news of India's ban on exports was released on the 15th, the main contract of Wheat in Chicago had opened up and down, and the market's sense of smell for food news was extremely sensitive.
If India follows up with a fairly strict export policy, who will fill this big hole in wheat? It is estimated that it is only through price increases.
The situation is slightly better for corn, and JPMorgan Research is still maintaining its forecast of 23 million tonnes of Ukrainian corn exports in 2021/2022. But the agency has also said it will proceed with caution because whether new crop cultivation is hampered by the war remains a major risk as the planting season begins in April and May.
According to the May global agricultural product forecast report released by the USDA, global corn and wheat production and inventory pre-reduction in 2022/2023 compared with 2021/2022, with global ending stocks of 305 million tons and 267 million tons, respectively; global soybean production and inventory pre-increase, global ending stocks of 99.6 million tons; global rice production pre-increase, inventory pre-reduction, global ending stocks of 186 million tons.
With regard to the mainland's grain production situation, according to Red Star News, on May 16, at a press conference held by the State Council's new office, Fu Linghui, spokesman for the National Bureau of Statistics, said that since the beginning of this year, with the efforts of all parties, the overall situation of grain production on the mainland has tended to improve, and there are many favorable conditions for grain supply to remain stable. First, summer grain production has continued to improve; second, spring sowing and spring management have progressed smoothly; third, the overall impact of the epidemic is limited; and fourth, there are good conditions for stable grain production throughout the year.
Epilogue: How to deal with soaring food prices?
On this issue, a recent McKinsey report titled "The Rising World Food Crisis" mentions several ways to respond, and I'll summarize some of the key points for your information:
- Major food-producing countries should avoid policies of export bans that exacerbate world food shortages and soaring prices. Because the ban on the export of food will have many side effects even for the country, domestic agriculture will lose foreign exchange earnings and domestic imports will be restricted.
- With 18% of the world's corn crops currently used as fuel and biochemicals, can we consider reducing this proportion when a food crisis arises?
- At present, Europe uses 10-15% of the land on reclaimed land for the maintenance of species diversity, and if the world food price is out of control, can this part of the world's land be temporarily expropriated?
- Building a sustainable food supply-consumption model worldwide. Can farmers save on food costs by using less fertilizer and input? Can the people be more economical in food and not wasted?
- In the field of scientific and technological innovation, we should expect the investment community and the science and technology innovation community to work together to bring us more food alternatives to food, as well as the great development of high-tech agriculture such as vertical agriculture.
- More essentially, countries should make greater efforts to address climate change in order to reduce the food problems caused by climate change.
Do readers have any thoughts on the soaring food prices? Welcome to leave a message.
This article originated from the financial breakfast