Panicky Markets Are the Greatest Danger to Global Food Supply

You might have seen some shocking numbers about how the Russian invasion of Ukraine has affected the global food supply—about how, for instance, Ukrainian and Russian wheat makes up a combined 20-30 percent of the world’s wheat exports. Yet the truth is there’s plenty to go around. We’re not facing a shortage; rather, we simply have enough wheat when we’re used to silo-busting gluts. The situation calls for math and common sense. But instead, wealthy countries have panicked. The fallout has landed on poor countries dependent on food imports, concentrated in the Middle East and North Africa. These countries now face hunger and political instability—not because there’s not enough food in the world but because wealthy countries lost their cool.

The export shortfall from the 2021-2022 Black Sea wheat crop, between Russia and Ukraine, is forecast at only 7 million metric tons. While that’s 20-30 percent of global exports, it’s just 0.9 percent of global wheat production (around 700-800 million metric tons per market year). More often wheat is eaten in the countries it’s grown in, sometimes by the people who grow it. And producers can read the news like anyone else. As early as last November, farmers around the world started planting more wheat in their fall-planted crops due to the Russian military buildup on Ukraine’s borders.

There’s also lots of wheat in global stockpiles. China, India, the United States, and many other nations have enough wheat stored to last their large populations six to 12 months or more. These countries can tap into their stores to dodge high prices, putting slack into the global supply.

India has been growing its wheat exports rapidly for three years. In the 2021-2022 wheat export year, India added 5.75 million metric tons to the global wheat trade that didn’t exist the previous year, nearly covering the shortfall from Ukraine and Russia single-handedly. Australia also had a record-breaking 2021 wheat crop, which is still being exported, and so far is set for a solid 2022 wheat export crop as well thanks to good weather conditions in early 2022. About 27.5 million metric tons of wheat exports are expected from Australia’s 2022 crop at this time—5-10 million metric tons more than their 2015-2020 crops.

Other wheat exporters such as the United States, Canada, Argentina, and South Africa have already increased their wheat acreage in response to Russia’s war in Ukraine. Of course, droughts may affect yields. Due to how wheat grows (usually planted in fall and harvested in late spring), it’s a favorite cash crop for areas prone to summer droughts. Thus, managing drought risk is already baked in to the global wheat supply. That’s why there are so many wheat-exporting regions. In any given year, some wheat regions are hit by drought. Collectively, they manage to churn out enough wheat anyway. That’s not to say it’s impossible for droughts to impact global supply—it’s just a caution to keep drought in one or two wheat regions in perspective. That’s normal. The planet has lots of wheat-exporting regions for a reason.

Thanks to growing wheat production outside Ukraine, the 2022 world wheat crop is actually expected to exceed consumption for the first time in two years. Worldwide wheat gluts in 2020 led nations to slowly work their way through stockpiles rather than plant large crops. Like droughts, occasional gluts followed by a few years of lower production are a normal part of the global grain trade. The Russian invasion occurred when production was already at a post-glut low and headed for an upswing. And, it’s not just wheat. Similar adjustments in crop acreages are already underway around the world to make up for shortfalls in sunflower and other Ukrainian export crops.

So, if there’s enough wheat, why are Middle Eastern and North African (MENA) countries at a very real risk of famine? The reason is a familiar one: supply chains. While the Ukrainian and Russian shortfall is a small part of the global trade, it’s a big part of the supply for countries heavily dependent on imports.

The Black Sea is conveniently central for the MENA region. But India, Australia, and other wheat exporters aren’t. Switching to other wheat sources takes time and storage capacity that many importing nations don’t have. For example, it takes about a week for a ship to take wheat from the northern Black Sea to Lebanon. But it takes the same ship two weeks to haul grain from India to Lebanon and perhaps a month to move grain from Australia to Lebanon. With voyages taking two to four times as long, the same number of ships moving grain from more distant ports can only move 25 to 50 percent as much grain as they could moving it from the Black Sea. But there aren’t the same number of ships available to move grain. Russia is blockading Black Sea grain ships from leaving and serving other routes. In a time when we need more ships to move grain, we have fewer.

The problem is not a lack of wheat. It’s a lack of enough ships to move it around—and a lack of funds to buy it, thanks to panic-driven spikes in wheat prices.

Countries with lots of grain on hand—stored in silos, port handling facilities, rail depots, and so on—can ride out supply chain crunches. They can use stored wheat while ships make their way from other regions to move grain around the Indian Ocean. But much of the MENA region doesn’t have that luxury. Lebanon’s sole grain storage facility was destroyed in the 2020 Beirut port explosion. Yemen and Syria have lost much of their storage and transportation infrastructure to years of war. Infrastructure and financing challenges have kept MENA nations dependent not just on wheat imports but on constant, rapid-turnaround imports with little margin for error. They’re like a supermarket that depends on just-in-time deliveries; any interruption hits hard and fast.

MENA’s grain supply chain crunch didn’t have to spark a crisis. It was foreseeable and relatively easy to fix: move shipping capacity to serve new, longer-distance grain routes before hunger kicks in. India did just that. India’s wheat exports had already been growing rapidly the last three years. But as soon as Russia invaded Ukraine, India kicked its grain export infrastructure development into high gear. Within weeks of Russia’s invasion, India was already shipping grain to replace the Ukraine-MENA export trade and in talks with several more countries to set up supply chains.

In contrast, the West—despite U.S. intelligence warning for months of a Russian invasion—seems to have been taken by surprise by the trade fallout. Government and private bodies alike responded with panic. They could have taken a rational look at grain stocks, harvest forecasts, and the very real supply chain problems for the MENA region and responded accordingly. But instead, Western decision-makers, both private and public, simply started hoarding grain. Panicked brokers with little experience in grain markets drove prices up to untenable levels (nearly $13 a bushel, about 60 pounds of wheat), when experienced crop analysts believe a slightly elevated price of $7.50 to $8 a bushel reflects actual global supply conditions.

These price spikes hampered movement of grain because experienced traders knew the prices couldn’t be relied on for the multiweek time periods the grain trade moves on. The gulf between Wall Street’s price expectations and farm reality made it impossible for some farmers and grain buyers to make transactions. Irrationally high prices also threaten to bankrupt already shaky governments. And once private markets panicked, governments began issuing protectionist policies that restricted grain from leaving their countries—including net wheat exporters such as Argentina and Bulgaria.

Governments’ protectionist policies do nothing to protect their own countries because the wheat shortage exists largely in panicked investors’ imaginations. Wealthy economies have not faced a wheat shortage since 1972, well before any of today’s traders began their careers. Financial professionals in wealthy countries have never seen anything besides a wheat glut. Faced with rumors of a shortage, far too many didn’t know how to tell if the shortage was real, how serious it might be, or who to talk to in the grain trade.

Meanwhile, experienced grain traders and the farm industry benefit from rising grain prices. While they have better forecasts and understand where wheat is available, they have no incentive to downplay panics. They benefit from information asymmetries. Markets can only find the proper price for goods when everyone has access to good information and can understand it—a condition that rarely exists in real life.

The panic was totally unnecessary. But it made the very real supply chain problems in the MENA region worse. Meanwhile, many Western governments and donors are so focused on the military conflict in Ukraine that the wider repercussions of the war have fallen off the radar. After the invasion, expected contributions to U.N. food aid programs to Yemen evaporated, leaving Yemenis even more exposed to famine than they would be purely from losing shipments from Ukraine.

If the West wants to avoid deadly errors like this in the future, the steps needed are clear. First, end grain-hoarding protectionist policies. Second, include shipping in humanitarian plans, not just purchasing grain. Third, take panicky markets with a grain of salt. Markets aren’t oracles. They’re influenced by human beings, often acting on bad information and given to groupthink.

In the long term, the West needs to reinvest in crop forecasting. The U.S. and other governments used to hire crop scientists to forecast global yields. But they don’t anymore. Wealthy countries have long had enough food that they’ve stopped imagining there could be a problem. And even in the West, autocrats don’t want good information: The Trump administration gutted the U.S. agricultural statistics department because it failed to generate data that supported then President Donald Trump’s claims. Unless rich countries correct course and invest in information and infrastructure, we may yet see famines and toppled governments. And it won’t even be because of supply shortages—but because the finance industry spooked, like a horse that saw a paper bag blowing in the wind and was sure it was a wolf.

Foreign Policy

Tags: global food supply, Ukraine, Russia, exports, grain prices, trade, Production, wheat, forecast, Black Sea, shortage