How has India’s export ban affected global wheat markets?

India’s decision to ban wheat exports has come amid a deepening food crisis. Severe bottlenecks have plagued the global agricultural supply chain for years, even pre-dating the pandemic.

High fuel prices, swine flu, El Nino, increased government stocking, and biofuel demand contributed to food inflation. Important producers such as the USA, Morocco, and France are facing drought-like conditions at the moment.

However, the Ukraine war has further tightened the market. In March, shortly after the invasion, the UN Food and Agriculture Organization’s Food Price Index leaped 12.6% to the highest level on record.

War and Wheat

Russia and Ukraine together account for a third of global wheat production. As per the USDA, they are the largest and 7^th largest exporters in the world, shipping 33 million tons and 19 million tons in 2021/22, respectively. Given wheat’s centrality to nutritional security, the war and subsequent sanctions have caused severe challenges for vulnerable nations.

The G-7 countries have not taken kindly to India’s May 13^th announcement. The international market reacted swiftly. At close on the 12th of May, wheat futures stood at 1174.50 ¢, but raced to 1,277.50 ¢, a rise of 8.8% in 3 trading sessions. Prices have retreated somewhat to 1,172.50 ¢ at the time of writing. Wheat futures have risen 32.8% since the invasion, and 51.5% year-to-date.

Why did India ban exports?

Although the ban is usually attributed to rising temperatures, this does not seem to be the entire story. For instance, the vital agricultural state of Uttar Pradesh has so far avoided the very worst of the weather. According to the central government, the measure was to check rising domestic prices due to the age-old problem of hoarding.

After Russia’s invasion, global wheat prices have skyrocketed, ensuring such dark trading activities became profitable. Due to buying pressure, local prices were approximately 14% higher year-on-year as of May 9th. In addition, corporations have purchased record wheat stocks anticipating higher prices in the future.

Public procurement has fallen 30% since last year, threatening welfare schemes that cater to 800 million people.

All told, this is a sharp reversal from India’s earlier announcements of aiming to export 10 million tons of grain following a strong crop.

The export of food grains has always been a highly political issue in India. Unsurprisingly, with farmers benefiting from higher prices, the decision had its detractors at home too.

Will this impact the global market?

Despite the uproar, the Indian ban would likely have a muted impact on global supply. The majority of India’s wheat production, which accounts for about 13% of global output, is consumed domestically by its 1.4 billion citizens, or a little over 17% of humanity. In terms of exports, India is a relatively small player. In 2020, it accounted for 0.5% of all global wheat trade, up from 0.1% in 2016. Over 54% of exports are sent to Bangladesh.

On May 17^th, amid international pressure, the government clarified that wheat deliveries that were already at customs would be eligible for export. Secondly, shipments destined for Egypt and Turkey would continue unhindered. The government has also agreed to negotiate with other countries that require food grains. In case letters of credit had been secured earlier, measures would be relaxed.

This suggests that fairly normal business can resume at least in terms of trade between governments.

Following the announcement, international wheat prices shed almost 100 ¢ by the end of the week.

Key Exporters

Export controls are not uncommon. Russia has imposed limits and taxes on wheat exports since 2021. Egypt, Iran, Serbia, Argentina, Turkey, Kazakhstan, and Indonesia are among the other countries that have enacted measures, on wheat and a host of other food items. Vegetable oil prices soared in response while US corn prices touched six-and-a-half-year highs.

Contrary to expectations, the USDA forecasts that Russia’s exports would increase by six million tons in 2022/23 absorbing some of Ukraine’s former customers and accounting for 20% of global exports.

Favorable harvesting conditions have led to an improvement in wheat production in Russia and Canada. Australia’s forecasted percentage decline is due to a bumper harvest in the previous season.

Import Vulnerabilities

Other than countries such as Somalia, Sudan, DR Congo, Senegal, and Tanzania which rely heavily on Ukraine and Russia for wheat imports, the supply chain delays and price distortions affect countries globally.

For instance, Iraq and Morocco are projected to expand wheat imports in 2022/23 by 900 tons and 1,700 tons, respectively, or by 34.6% each above 2021/22 levels, following poor harvests.

The Foreign Exchange Reserves ($bn) to Estimated Wheat Imports (‘000 tons) is a rough measure of the country’s vulnerability to international price shocks. Thailand and Mexico have sufficient financial backing for wheat purchases throughout 2022/23, compared to their peers.

Due to limited reserves, Iraq, Morocco, Kenya, Algeria, Egypt, and Turkey may be financially pressured. In Turkey, food inflation has reached a suffocating 90%, while in Iraq it is almost 44%.

Outlook

In the near term, jittery markets may face volatility in either direction. However, a combination of strained logistics, sky-high shipping costs, elevated oil prices, costly fertilizers, heatwaves and droughts, and practices such as hoarding, will likely ensure crop prices remain sticky.

With Finland and Sweden looking to join NATO, geopolitical uncertainties may be exacerbated. The severity of the monkeypox outbreak is unclear, which may lead to additional disruptions.

Usually, food items constitute a very high proportion of consumer price baskets in developing countries and experience a higher inflation risk from food components.

Wheat importing developing countries with a high food weighting such as Nigeria and Bangladesh (64% and 58%, respectively), may be forced into accelerated monetary tightening or increased rates if wheat prices trend higher in local currency terms.

This could have devastating social effects in already fragile economies, with the IMF’s Social Unrest Index spiking to the 3% mark, from being below 0.5% pre-pandemic.

With inflationary pressures rising, the dollar is unlikely to weaken making international re-payments more difficult to service. Sri Lanka has suffered its first-ever default, while food inflation has touched 40%. There are concerns that this is the first in a long line of countries that may be forced to renege on their commitments.

Although India has certainly spooked the markets, this effect will likely be temporary. Structural impediments and supply disruptions will continue to drive prices higher, threatening import-dependent countries.