Date: 6/10/2022
Author: Mr. X
As this is written, we don’t yet know what the Consumer Price Index for May will tell us. However, we can make an informed opinion about the way markets will react. If core inflation (which excludes food and gas) is higher than expected, the Federal Reserve may begin raising interest rates much more quickly. If lower, it will show that inflation may have seen its high point. In that case, if oil prices can be brought under control, so can prices in general.
Yet it’s something that’s not included in core inflation that’s especially worth looking at. What could be the biggest story in a few months is a global food shortage because of the current war in Ukraine.
Before the war, Ukraine provided about six percent of the food calories traded worldwide. Russia traded about three times that.
Ukraine simply can’t export its food because its ports have been damaged and the Russian navy can lock down what’s left. Recent airstrikes have also damaged Ukraine’s internal transportation infrastructure.
In Russia’s case, there will be supply problems because of extensive Western sanctions. Russia and Ukraine combined were responsible for more than a quarter of the world’s wheat.
That alone will have a major impact on global food prices, but some places will be hit harder than others. For example, Ukraine and Russia combined constituted 74% of Turkey’s wheat imports in 2021. Egypt is also an important market.
Some countries can simply step-up production, like India. However, earlier this year, India banned wheat exports to control domestic prices. More than a dozen other countries have bans on certain food exports this year. The more restrictions we see, the more desperate the global food security situation.
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This isn’t new, but the premise many investors may have had all along was that the war would end relatively quickly. They weren’t alone in that – it seems President Vladimir Putin thought the same thing. Of course, wars begin when you will but don’t end when you choose.
And that applies also to trade wars. The United States and its allies have been trying to choke off Moscow through trade restrictions. However, the countries that are willing to buck Western pressure and still trade with Russia are binding themselves into a group of nations with shared interests. Many of these nations are in the developing world. These are also the countries that may be most vulnerable to a food shortage.
The Kremlin denied reports that there is a deal between Ukraine, Turkey and Russia to allow grain to reach global markets. Russia currently has Ukrainian ports blockaded. In this particular case, there’s a dispute over 22 million tons of grain. Ukraine has accused Russia of stealing grain; Moscow denies it. The American Secretary of State said Moscow is attempting to “blackmail” the world. However, it’s Ukraine that hasn’t agreed to a proposal for ports to be de-mined in exchange for Russia letting ships pass.
This is very understandable – it would be a massive security problem if Odesa suddenly lost some of its naval defenses. Yet for the rest of the world, it’s the question not just of the 22 million tons of grain governments are arguing over now but all the grain needed in the future.
The premise global leaders have taken for granted since the end of the Cold War is that nations will act based on rational economic motives and the pursuit of efficiency. Yet nations, no less than people, are driven by pride, identity, and ambition. Those things can be irrational, but they are part of the human experience, even in statecraft.
For that reason, I remain skeptical of food supplies in Russia and Ukraine being able to easily make it to market. Furthermore, the global supply disruptions that result from nations putting up sudden trade barriers haven’t’ been fully accounted for by most traders. We may soon see more trade restrictions on a far wider range of products, all of which will make food more expensive.
The conspiracy-minded amongst us might notice that there has been a series of fires and disasters at various food processing plants over the last few months. Trust me, it’s very weird. However, what I find most significant is that these issues are being covered at all. As Americans, we’ve never really had to worry about food production or what happens to a factory we’ve never heard of. Suddenly, prices are up and supplies itself are at risk.
Think about it. Barring a natural disaster, when’s the last time you, as an American, worried about whether the grocery store would have a staple food?
If even Americans are noticing this, developing nations sure have. The World Food Programme and the Food and Agriculture Organization reported back in January that 20 countries were at risk for food insecurity this year. That number is likely to increase. If you add in the current ongoing civil war in Ethiopia, millions of people are at risk for starvation and famine.
The result may be a huge wave of desperate migrants seeking survival, a challenge Europe might find hard to handle given the already ongoing Ukrainian refugee crisis. With rising tensions between Iran and Israel, and something of a shadow conflict of assassinations and sabotage already underway between those countries, another war may also be in the cards.
We should remember things can get much worse. The world may be more stable now than it will be by winter.
In fact, the war in Ukraine may not even end this year. Thus far, Ukraine remains resistant to even discuss the idea of ceding territory in exchange for peace. While the country frustrated Russian plans for a quick victory, Russia is still blasting its way through Donbas. Securing Donbas and the land bridge to Crimea could be just enough for President Vladimir Putin to declare victory.
He can certainly never lose and politically survive. For any leader in his position, that’s far more important to him than the cost in lives or rubles. His regime would collapse, and perhaps Russia itself. We’d see tactical nuclear weapons before retreat, unless there’s a pro-Western coup.
For that reason, if it starts losing territory, it’s more likely Russia formally declares war than suddenly evacuating Ukraine, admitting defeat. The territory that Russia has seized is not going back. It would require Ukraine to wage an offensive campaign with forces it simply doesn’t have. Yet Ukraine’s government has consistently framed this war as all-or-nothing. For that reason, even if the Kyiv government formally acknowledged the loss of just Crimea, it could face a coup from within.
For these reasons, even pessimistic projections of global food supplies could still be getting it wrong. Things could get much worse very quickly. ETFs that provide exposure to global food prices, including WEAT, CORN, SOYB (soybeans), and the general sector fund TILL could benefit as trading networks are disrupted and destroyed.
Meat, milk, and eggs are becoming even more expensive than vegetables. For meat specifically, we have iPath Bloomberg Livestock Subindex Total Return [COW], among others.
Of course, the pessimistic picture changes quickly with events that seem possible but unlikely short-term. President Vladimir Putin dies of natural causes and a new government pulls out of Ukraine. Ukraine concedes territory and the public accepts it in exchange for peace. Anything that ends the war in the short-term could help bring food prices down.
However, few see that happening. Fewer still will predict the disaster that follows.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com to bring you news on what those with power are debating, planning, and doing.
