Baba’s Explainer – Ukraine War and the Global Food Crisis

• Many countries were facing growing food insecurity even before Russia’s war.
• Climate shocks, conflicts and the COVID-19 pandemic had disrupted supply chains, pumping up prices of both commodities and crops. The war in Ukraine has aggravated this situation.
• As of June 1, 2022, the Agricultural Price Index was 40% higher compared to January 2021, according to the World Bank.
• Maize and wheat prices rose 42% and 60%, respectively, from the levels of January 2021.
• Global food, fuel and fertilizer prices are projected to be sharply higher this year and will remain elevated into 2024, the Bank estimates.
• Almost all economies in the world have been hit by higher food prices. Across the western world, there’s a cost-of-living crisis with food and energy prices rocketing.
• In the U.K., inflation numbers have already hit a 40-year high. Almost 90% of emerging markets and developing economies experienced food price inflation greater than 5% this year.
• Low-income countries that are reliant on imports for basic food consumption, are the hardest hit. According to the UN World Food Programme (WFP), Ethiopia, Nigeria, South Sudan and Yemen remain at ‘highest alert’ as hotspots with “catastrophic conditions”, as Afghanistan and Somalia are added to this category.

• Before the Russian invasion of Ukraine started, Ukraine had the capacity to export up to six million tonnes of wheat, barley and maize a month, mainly through its ports in the Black Sea/Sea of Azov.
• In the eight months before the war, some 51 million tonnes of grain were exported through Ukraine’s Black Sea ports. But exports have collapsed since the invasion as the Russian war effort is entirely focused on Ukraine’s eastern and southern parts along the Black Sea/Sea of Azov coast.
• Now, several Ukrainian port cities, including Mariupol, Kherson and Berdyansk, are under Russian control.
• Although the southern cities of Mykolaiv and Odessa, which is known as the ‘Pearl of the Black Sea’, are still with the Ukrainians, commercial ships cannot dock at these ports because of two reasons —
  • Ukraine has mined the waters around these ports as a deterrent against potential Russian attacks and
  • Russia has enforced a naval blockade in the waters of the Black Sea.
• These factors have in effect brought exports from Ukraine to a grinding halt. According to Ukrainian authorities, more than 20 million tonnes of grain are stuck in warehouses and containers.
• June marks the beginning of a harvesting season in Ukraine and this season, the country is expected to produce some 30 million tonnes of corn, wheat and sunflower oil, half of which are meant to be exported.
• But unless the blockade is lifted and Ukraine starts exports, Ukraine would not even find enough warehousing capacity to store this year’s harvest. This would make the food crisis worse.
• Besides the blockade, the western sanctions on Russia are also contributing to the crisis. Russia, besides being the world’s top wheat exporter, is also a leading exporter of fertilizer, an essential commodity for food production.
• Russia and its ally Belarus together account for some 38% of potassic fertilizers, 17% of compound fertilizers, and 15% of nitrogenous fertilizers. Fertilizer prices are also on the rise, which would make food production costlier.
• Russia’s food and fertilizer sectors were not directly targeted by western sanctions, but the sanctions on its financial sector, which made payments difficult for Russia, has complicated its exports, including food grains.
• Also, the targeted sanctions on Russian oligarchs have choked finances for the agricultural industry.

• Russia has suggested that it would resume exports (not sure whether Ukrainian or Russian grains) from the ports on the Sea of Azov that it controls (Mariupol and Berdyansk) and that it would open a corridor for commercial vessels in the Black Sea if Ukraine demines the ports it controls (mainly Odessa and Mykolaiv).
• But these proposals, which were discussed in Turkey recently, could be implemented only as part of a deal between russia and Ukraine, with blessings from the West as Russia seeks sanctions relief in return for opening the maritime corridor.
• Ukraine, however, is sceptical, saying it doesn’t trust Moscow. No breakthrough has been achieved so far.
• Ukraine has little good options to ship its grains out of the country if its ports remain blockaded. One option is to transfer the grains overland to the Baltic states, either through Poland or Belarus, and then ship them out from the Baltic Sea ports. However, Ukraine has dismissed the proposal to seek help from Belarus, a Russian ally that also faces western sanctions.
• Moving them overland via Poland is challenging because the rail track gauge in Poland is smaller than that of former Soviet countries such as Ukraine and the Baltic states — this means cargoes will have to be moved to different trains at the Polish-Ukraine border and then again at the Polish-Lithuania border to start exporting them from the Baltic ports
• So, the only practical solution to take Ukrainian grains to the global markets is to open the Black Sea routes. And to ease the pressure on global food items, Russia will also have to step up exports of both grains and fertilizers. For this, Ukraine and its allies may have to strike a deal with Russian President Vladimir Putin.

• The Government has banned wheat exports with effect from May 13, with some minor exceptions for those who have irrevocable letters of credit or where the governments of importing countries request the Indian government for food security purposes.
• Significantly, the order came two days after the Government had decided to send trade delegations to a number of countries to explore possibilities of export of wheat
  • India had set a goal of exporting 10 million tons of grains in 2022-23, looking to capitalize on the global disruptions to wheat supplies from the war and find new markets in Europe, Africa and Asia.
• Reasons for Export Ban by India
  • Low Domestic Production: The revised estimates of wheat production are much lower than the estimated 111 mmt (million metric tonnes), primarily attributed to record shattering heat waves across India. Lower surplus forces India to curb exports.
  • Thin Procurement: Government wheat procurement is likely to end up at around 19 to 20 mmt by June-end against 43 mmt last year indicating less wheat reaching govt procurement centres. In such a situation, government has to prioritise domestic needs over export opportunities.
  • Rising Wheat Prices domestically: Another factor could be that the April ’22 wheat inflation is at 9.59 per cent (y-o-y) against overall cereal inflation of 5.96 per cent. Increasing domestic supply by curtailing export will help calm down the prices.
  • Food Distribution Obligations: Government announced free food until Sep 2022 under PMGKAY. Hence, food procurement is essential for fulfilling its promise & to meet nutritional security of the Nation.
• Curbs on Sugar Exports
  • The government has recently decided to “restrict” the export of sugar. The curbs, the first such move in four years is done in the backdrop of turbulence created in the commodity markets in the world due to Russia’s invasion of Ukraine
  • The government has moved export of sugar from the ‘open category’, which requires no government intervention, to ‘restricted’ category.
  • This means that export of sugar is allowed only with specific permission from Ministry of Consumer Affairs, Food & Public Distribution.
  • Unlike wheat, where export has been banned, sugar would continue to be exported, but from June 1, permission would be required to send the shipments out.
• Reasons for putting curbs on Sugar export now
  • Exports can continue unabated given the international demand. But for the government, a possible worry is low stocks at the beginning of the next season. This can lead to supply constraints for around three months.
  • The sugar season officially starts in October, but picks up momentum only after December. If there is scarcity of back-up stocks during this period then prices can escalate in the domestic market.
  • When inflation, especially food inflation, is beyond the expected range, further rise in sugar prices will hurt India’s economic recovery process.
  • The country has seen a bumper sugarcane crop. It is expected that the country will see production of 350 lakh tonnes of sugar. Around 34 lakh tonnes of sugar have already been subsumed for production of ethanol. India’s domestic consumption is pegged at 260 lakh tonnes.

• G-7 condemned India’s decision amidst rising prices would worsen the situation.
• The export ban also reflects poorly on India’s image in playing its shared global responsibility when the Russia-Ukraine war is creating uncertainty in global commodity markets.
• It conveys that India doesn’t have any credible export policy as it can turn its back at any instant.
• It also reflects a deep-rooted consumer bias in India’s trade policies.
• Imposition of export restrictions reduces their possible avenue of increasing their income (farmers are getting just 10 per cent higher price than MSP in global market)

 Indian government argues that the ban on wheat exports & curbs on sugar exports is not a crisis-driven situation but a calculated measure to ensure adequate domestic supply & to keep domestic prices in check.