By Peter Timmer*
The Russian invasion of Ukraine and the widespread devastation of the country raise the specter of a new global food crisis. Asia suffered badly during the last food crisis of 2007-2008, mainly due to panicked behavior in the region’s rice markets.
It is too early to know the full impact of the Russian attack on Ukraine’s grain supply and infrastructure, on prospects for a reasonably normal winter wheat crop, and then on spring wheat planting, corn, sunflower and other commodities for which Ukraine is a major exporter. The country is known as “the breadbasket of Europe” for a reason.
But what is clear is that the global food economy is on the brink of another major crisis, perhaps as disruptive as that of 2007-2008. Important lessons have been learned from the last food crisis, and avoiding these mistakes will be key to keeping the region’s food economies reasonably stable this time around. Of particular interest to Australia is how developing Asia will fare as food supplies tighten.
World grain markets are looking for direction. Africa is already suffering from the loss of access to Ukrainian wheat. Corn and barley exports to China have been disrupted. An already tight oilseed market is now threatened by the loss of Ukrainian sunflower oil. India has asked Indonesia to ease its restrictions on palm oil exports.
Wheat prices in futures markets had risen in anticipation of the Russian invasion of Ukraine, and prices were already high due to supply chain disruptions caused by COVID-19. But there has been no sustained spike since the start of the war on Feb. 24, 2022. Prices have been high and volatile, with wheat futures trading up and down from daily limits since the start of the war.
If a crisis materializes, there will be serious short- and long-term repercussions in developing countries in Asia-Pacific.
Some of the short-term consequences are already in play. Modern agriculture relies heavily on energy inputs, both directly as fuel for farm equipment, and also to power supply chains for farm inputs and production. Equally important is the dependence of high-yield grain production on synthetic nitrogen fertilizers – natural gas plus electricity plus capital-intensive machinery equals urea. Vaclav Smil calculates that a third of the world’s population depends directly on cereals produced with this urea and other synthetic nitrogen fertilizers.
High energy prices mean high fertilizer prices, lower applications and yields, and higher grain prices. In the short term, this means more hunger in poor countries. Even if rice prices from Asian exporters remain at their current high levels, there will be more hunger in Timor Leste, Laos, Cambodia, Myanmar and possibly Indonesia. Papua New Guinea and most Pacific island countries will be hardest hit as they are heavily dependent on food imports.
The longer-term consequences are perhaps more troubling, but are much more difficult to analyze with the war still in its early stages. Historically, the structural transformation of developing economies leads agriculture to decline in relative importance while the modern industrial and service sectors, mainly in urban areas, are growing much faster. It was the only sustainable way out of poverty. All the forces that slow down this process, or even stop it, also slow or stop the reduction of poverty and hunger. These forces can be internal, such as hostile political environments, or external shocks, such as wars and food crises.
The sharp rise in the terms of trade between rural and urban areas caused by the food crises is considerably slowing down structural transformation. More agricultural workers stay on the farm, and fewer workers move on to more productive jobs off the farm or in urban areas. Rural poverty is increasing, agricultural productivity is stagnating and the country remains mired in poverty. Much of sub-Saharan Africa is caught in this trap, and a number of Asia-Pacific countries remain vulnerable if the food crisis continues.
Can anything be done now to prevent this dismal scenario from unfolding? If there is anything Western allies, or China, can do to prevent Russia from pursuing a scorched earth campaign in Ukraine, they should try.
The most important thing is not to panic. There is enough wheat, rice and other foodstuffs in warehouses around the world or awaiting harvest in the northern hemisphere that no one will starve. But “don’t panic” implies a level of confidence in world grain markets to deliver needed supplies in a timely manner. This confidence will depend on some degree of cooperation between participants in the world rice and wheat markets.
The rice crisis in 2007-08 was caused by panicked importers and exporters and hoarding by small participants along the rice supply chain. Prices have skyrocketed. Once the reality adequate supplies emerged after Japan announced that two million tons of US long-grain rice would be available for re-export from Japanese storage silos on June 2, 2008, rice prices fell very rapidly. The global rice market stabilized within a few weeks, remaining fairly stable ever since. Confidence in the global rice market has been restored, at least among most Asian players. ASEAN has played a surprising role in establishing and maintaining this trust.
A full and detailed accounting of current grain supplies by major exporters would go a long way to preventing a repeat of the price panic of 2007-2008. A commitment by these exporters to allocate supplies to customers who need it most would eliminate importer fears, build confidence and stabilize the world grain economy. If the war in Ukraine ends quickly enough without destroying its farms and grain marketing infrastructure, a global food crisis can be averted.
*About the author: Dr. Peter Timmer is the Thomas D. Cabot Professor Emeritus of Developmental Studies at Harvard University.
Source: This article was published by East Asia Forum