June 21, 2024: Global News Roundup
Dispatch from the wheat market—Free trade, import dependence, and self-reliance
The Global News Roundup collects news stories from entirely international (non-US) media sources on variety of pressing global issues and events.
Good Morning, I’ve recently started a new research project, building on my prior research about globalization, finance, food and agriculture. In the past, I’ve explored markets for coffee, broiler chickens, mortgage-backed securities, marijuana, fentanyl and other opioids, and derivatives contracts. This time, I’m building out a new case study, about wheat, the world’s most widely cultivated crop and which accounts for about 20% of humanity’s annual caloric and protein intake.
The discussion below relies on a mix of international media sources, as well as expert reports, articles, and books that I’ve compiled so far.
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One dynamic I’m tracking and tracing for the new project is the gradual movement from free trade policies and import dependence to trade protectionism and greater self-sufficiency in global wheat production and trade.
The general idea behind free trade is that you shouldn’t try to make at home things you can more cheaply buy from abroad. If transportation is sufficiently cheap and governments allow it, free trade helps every country use it’s scarce resources efficiently and get what they need and want for the lowest cost.
But not all goods and services are created equal. It’s one thing to rely on imports to procure toys or luxury sedans or nail polish, but it’s quite another to depend on a supplier thousands of miles away for basic necessities like insulin or wheat flour. What if trade is disrupted by war? What if the enemy uses trade sanctions? What if my country’s exchange rate collapses or there’s a drought in Australia and bread suddenly costs 3 times as much?
Import dependence is a potential source of risk, potentially contributing to shortages, price volatility/inflation, and vulnerability to manipulation by suppliers abroad. For this reason, countries have historically often opted to protect themselves and their local industries, to varying degrees, by encouraging local production capacity and reducing reliance on imported goods.
I’ve discussed a few examples in prior articles, including Egypt wrestling with debt and food insecurity linked to its dependence on imported wheat and Ethiopia struggling with reliance on imported fertilizers and seeds (see here for more examples). I’ve also discussed some of the US’s and Europe’s trade-related vulnerabilities. China has cut off US access to goods and materials essential for industrial/military production, including bans on geranium and gallium exports, bans on exports of bullet proof vests and plane parts, and bans on graphite exports. And, the EU’s shift from dependence on Russia to dependence on the US and Norway for natural gas supplies is a central dynamic in the Ukraine War.
Turning to events of the past month, the wheat market provided good examples of import dependence and other trade-related risks, as well as renewed efforts towards greater self-sufficiency. Starting in Russia, where officials have just declared a federal emergency owing to frost-damage to the wheat crop, Grain Central reported last month that Russia is now the world’s leading wheat exporter, with a roughly 25% share of the global export market.
Fascinating in the trade policy context is that, as recently as 1999, Russia was a net wheat importer with a relatively unproductive agricultural sector. The reversal partly owes to a long-term, calculated effort by the Russian government to support and manage domestic agricultural production, setting “food self-sufficiency” as a long-term goal critical to national security in its 2010 Food Security Doctrine. A new Food Security Doctrine, enacted in 2020, set a “minimum threshold share of domestic production in domestic consumption” of 95%, meaning that domestic producers are expected to meet at least 95% of domestic wheat demand each year.
In recent years, Eastern Europe and Western Asia appear to have more or less taken over the global wheat market, wresting control from the US (which used to be the world’s largest exporter with a 25-30% share and now ranks 3rd), and to a lesser extent Australia (where market share has held steady at around 10-15%). Today, Russia, Ukraine, and Kazakhstan together account for almost 40% of global wheat exports.
While Ukraine still maintains a relatively large share of the wheat export market, its production and export capacity has fallen dramatically since the war with Russia began in spring 2022. The Kyiv Independent reported last week that wheat exports for crop year 2024-25 are expected to fall to their lowest levels in a decade. The article pointed to wartime blockades, transport disruptions, Russian occupation and looting, and shifting wheat trade policies in the EU to explain the decline:
Russia's full-scale war against the country and its attempted blockade of the Black Sea forced Ukrainian exporters to seek alternative routes and markets, which in turn led to clashes between Ukrainian and European producers.
The EU implemented a free trade regime with Ukraine in 2022 to alleviate its economy, but subsequent import bans and border blockades in eastern member states forced Brussels to implement additional "safety mechanisms" to protect local farmers.
Ukraine's losses are further compounded by the destruction wrought by Russia's war and by the occupation of parts of its territory, where Moscow continues to loot local resources, including grain.
Caitlin Welsh and Joseph Glauber, researching and writing with CSIS, noted the impact of export reductions on the Ukrainian economy: “Ukraine’s GDP contracted by more than 29 percent in 2022 compared to 2021, and the value of agriculture as a proportion of Ukraine’s GDP was 39 percent lower in 2022 than 2021.”
One of the most interesting parts of the political-economic picture around wheat and the Ukraine war is that Russian wheat exports to the EU actually increased over the course of the war, even as the EU moved to block wheat imports from Ukraine. In other words, imports from the enemy increased, while those from a supposed ally decreased, complicating the EU’s position on the conflict. According to Al Jazeera, “Figures from the Eurostat statistics office show imports grew from under 120 million euros ($130m) in 2020 to 290 million euros ($314m) in 2021 and 440 million euros ($477m) in 2023.”
France24 attributed rising EU wheat imports from Russia to the different statuses of Russia and Ukraine in the World Trade Organization (WTO) and the different obligations the EU thus had to each. Whereas WTO rules require Russia to be treated by the EU as a “most favored nation”, Ukraine’s relationship with the WTO and EU permit different policies.
The more likely explanation seems to be that, similar to the recent situation in oil markets, Russia has been selling wheat internationally at a discount since the war began, which has helped it capture market share. While the US and EU never specifically sanctioned wheat or fertilizers, confusion around the sanctions regime, combined with sanctions on leaders of Russian agribusiness and sanctions on maritime insurers and shipping, conspired to reduce Russia’s export opportunities. Russia accumulated a wheat surplus and, so, began offering discounted wheat, competitively priced well below the international price. With no explicit sanctions, it seems likely that the EU just imported more of the cheaper product.
To this point, Reuters reported last fall that, “With Russia having a huge surplus, shipments from war-torn Ukraine curtailed and drought reducing harvest prospects in other exporting countries, the international market looks more reliant on Russian wheat this season.”
But, whatever the reason for growing reliance on Russian wheat in the EU (I’ll keep you posted if I discover more on this in my research), officials in the EU decided last month to take a harder line:
European Union trade ministers have agreed to impose prohibitive tariffs on grain and other agricultural products from Russia and Belarus from July 1…
Vincent Van Peteghem, the finance minister of Belgium, which holds the rotating presidency of the EU, said the new tariffs were intended to stop imports of grain from Russia and Belarus into the EU “in practice”.
“These measures will, therefore, prevent the destabilisation of the EU’s grain market, halt Russian exports of illegally appropriated grain produced in the territories of Ukraine and prevent Russia from using revenues from exports to the EU to fund its war of aggression against Ukraine,” he said.
Some of the research I’ve been reading argues that Russia has been weaponizing its grain surplus to consolidate its international position and achieve geopolitical goals (see, e.g., this report from CSIS). It’s a fair point, though certainly not a practice that is unique to Russia (unfortunately, food is used often as a strategic tool in international relations). In some cases, as with Eritrea and Somalia and Burkina Faso during the 2022-23 food crisis, Russia made a showy gift of its surplus wheat, building international rapport and solidifying alliances. In other cases, Russia’s wheat power has increased its capacity for retaliation and economic warfare, for example a 2021 “ban on importing agricultural products from countries that apply economic sanctions against Russia”.
In related news, China—the world’s largest producer of wheat (17% of total world production in 2020) and the world’s largest/2nd largest importer of wheat (depending on the year)—has developed a set of techniques that allow producers to grow wheat in the desert, part of a push to combat desertification, boost local incomes, and improve food security. A write up in Chinese state media noted, “It's not easy to plant wheat in the desert. The Taklamakan Desert is constantly shifting, so the land needs to be quickly planted with vegetation after leveling; otherwise, a sandstorm could revert it to its original state.”
(Image: “A harvester is working in the desert wheat field, with the Taklamakan Desert visible in the distance. [Photo by Yang Jun/for chinadaily.com.cn]”, here.)
The push for more local production comes at an interesting time. While in 2022/23, China became the world’s leading wheat importer, it has also been cancelling wheat shipments from the US over the past several years, indicating that “China can get wheat cheaper from others” (e.g., Russia and Australia) and also, perhaps, that China is reluctant to keep depending on an increasingly hostile international rival.
However, China isn’t just retooling its wheat trade network in response to market and geopolitical dynamics, it’s actively pursuing more domestic self-reliance. Earlier this month, the government enacted its first food security law, “aimed at achieving "absolute self-sufficiency" in staple grains [and] reinforcing efforts by the world's biggest agriculture importer to lower its reliance on overseas purchases.” Recollecting China’s historical system of “ever-normal granaries”, the one that eroded in the late 19th century as European colonizers made trade inroads into Asia, the law “stipulates the formation of a national grain emergency plan and a food security monitoring system.”
Likewise, import-dependent Egypt is also developing new plans to “reclaim the desert”: “The Mostaqbal Misr Project and other reclamation initiatives symbolize Egypt’s resolve to achieve self-sufficiency in food production and secure a sustainable future for its growing population.” Brazilian agronomists have developed new “wheat varieties that can be grown in hot and dry areas, typical of the tropical climate”: “The expectation is to make Brazil self-sufficient in the production of wheat, the only agricultural commodity that the country needs to import.” And, last, the government of Burkina Faso banned wheat imports in April “to encourage significant investments in the agricultural sector, aiming to increase wheat yield and self-sufficiency.”
Things I’m keeping an eye on:
1. Petrodollar agreement expired? I’ve been trying to verify this for several weeks now. The news I’ve seen is that Saudi Arabia’s deal with the US to sell oil in dollars and reinvest the proceeds into US debt/asset markets, the same deal I discussed in my October 2023 article on de-dollarization, has lapsed. If so, this is big news. But I’m annoyed by the fact that I can’t find an official government source on it (neither US nor Saudi), and further annoyed by my inability to verify it via international media (a lot of competing narratives and incompatible facts). I’ll keep you posted.
2. Leadership turbulence: What a month for world leaders. Iranian President Ebrahim Raisi was killed in a helicopter crash last month, Mexico’s newly elected President Claudia Sheinbaum became the first woman to ever hold the position, German Chancellor Scholz and French President Macron took a beating at the polls this month, losing ground to parties on both the far left and right, and the South African ANC lost its majority for the first time in 30 years, though President Cyril Ramaphosa was ultimately re-elected as part of a “coalition deal”.
3. Russia-North Korea mutual defense pact: Wow. North Korea is a Chinese client state, and China is Russia’s most important ally. Under no circumstances would North Korea or Russia sign such a pact without having been given the green light by China (perhaps this happened when Putin visited Beijing last month to seek support in the Ukraine war?).
4. Wheat prices: The FAO’s May 2024 report noted cereal prices had risen by 6.3% year on year, “with wheat prices increasing the most.” Unfavorable growing conditions (i.e., weather) and damage to Black Sea shipping infrastructure were cited as major factors.