Global trade to suffer for at least 6 months due to war in Ukraine
Global trade is going to suffer for at least 6 months, said Rabobank in a recent analysis of the security crisis in Eastern Europe. The assesment is quite mild if we take in account that it was based on a no-sanctions scenario, so the impact could be much higher.
However, analysts have explored the potential impact on the global food market based on these three scenarios: a) Russia invades Ukraine and no sanctions were applied by the West (we adopt a relatively small overall rise in the global investment risk premium, comparable to the rise seen after the annexation of Crimea in 2014); b) war and effective sanctions (we increase the global investment risk premium to match the increase seen during the second Gulf War in 2003); c) the West also imposes effective secondary sanctions on China and other non-compliant economies.
In the global food market, the war will have a significant impact on prices, whatever scenario is discussed. In terms of grains:
- Scenario A, war, would stop Ukrainian wheat, barley, and corn exports. With very tight global markets, this would drive prices up even if 2/3 of the season’s wheat and barley and 1/3 of the corn crop has already been exported. We expect a 30% rise in wheat and 20% in corn prices.
- Scenario B, war and effective sanctions, would be worse. Russian wheat and barley have also been 2/3 exported this season, but Russia and Ukraine account for 30% of world wheat exports, which would drive global prices up 30% if removed. If sanctions were still in place by July, when harvesting of the next crop begins, it would cut deeply into global grain availability. Demand rationing would be forced via higher prices: wheat would then double, and corn rise 30%. By autumn 2022, northern hemisphere farmers (where most wheat is grown) could extend their wheat area by cutting back on other crops, especially feed grains; but only by mid-2023, when those crops are harvested, could the wheat market somewhat rebalance.
Feed grain prices depend on China’s trade with Russia. China imports massive amounts of feed grains (corn, barley, sorghum) from world markets: it can buy these volumes almost exclusively from Russia/Ukraine. China could also buy more Russian/Ukrainian wheat for animal feed to replace global corn/barley, while global buyers could buy from origins previously serving China’s needs. In such a scenario, the impact on corn/barley would be relatively small. However, if China cannot buy from Russia/Ukraine, harvested volumes in Russia have to go into storage, and China buying from world markets would see a further global shortage, driving prices up, albeit not as much as for wheat. We project corn and barley to rise 30% in scenario B.
Vegetable oil
Global vegetable oils markets are also very tight, and while sunflower oil is not massive in the global context, Russia and Ukraine still account for 15% of total global vegetable oil exports. Key buyers from the region are China and India, again leaving the question whether China can import from there or not. If China can’t import, global markets will have to cut demand via significantly rising prices. We assume a 20% rise in vegetable oil prices in scenario B, analysts are saying.
Fertilizers
While prices are currently very high, a further increase cannot be avoided if key exports from Russia/Belarus are disrupted. As natural gas is a key price driver for fertilizer production, world producers would also transfer higher input costs to their finished fertilizer product, driving prices up further. We assume fertilizer prices rising 20% in scenario A and 40% in scenario B. However, China would again be insulated in scenario B if it can trade with Russia.
Unquantifiable Scenario C
Scenario C means war, the West imposing effective sanctions on Belarus/Russia, and then effective secondary sanctions on China other economies that deal with Russia.
Crucially, this would have such a disruptive effect on global trade flows that macroeconomic models cannot capture it: no model of the globalised international economy today can describe its political-economy bifurcation closer towards that which prevailed during the Cold War. However, we can describe it qualitatively. As a contemporary example of this isolation, look at the economic disruption being experienced by Iran; of the US-China trade war; the supply-chain impact of Covid; the border headaches caused by Brexit; or the sudden loss of Chinese export markets experienced by Australian wine producers. A combination of all of these would result from Western sanctions dividing the world into countries ‘with us or against us’ (which is how a former US administration categorised its own military action against Iraq two decades ago).
Markets are unprepared for such outcomes – as they were for Brexit, the US-China trade war, and Covid, etc. As such, some European economies are nervous about being too tough on Russia, and even the present US administration is cautious about how far it can realistically go in imposing sanctions that others will comply with globally.
(Photo source: Mental Floss)
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