The Russo-Ukrainian war has given rise to a new wave of “food protectionism” policies brought about by governments’ endeavors to secure basic food and agricultural commodities for their citizens amid the global shortage of supplies and sharp hikes in prices.
Countries started forming new trade barriers to restrict or completely ban food exports, with expectations of the continuity of those policies throughout 2022, which prompted the United Nations (UN) to warn that such decisions could exacerbate the “food shortage” crisis the world has been going through recently.
India came as the latest in a series of Asian countries that have taken protectionist measures over the past two months, where it decided to ban wheat exports in mid-May, despite the global buyers’ shift to it to compensate for the lack of global supplies that were severely affected by the Ukraine war, which disrupted grain supply chains across the Black Sea. Days later, India decided to impose restrictions on sugar exports, too, to 10 million tons as of 1 June.
Food Protection Policies and Global Crises
Traditionally, food nationalism stands out in times of crises and natural disasters that affect the production of agricultural crops and their price levels, which pushes governments worldwide to adopt inward-looking policies, prioritizing their people without taking into consideration the implications of these decisions on global food insecurity. Data indicates that trade interventions during the 2008 food crisis brought about an increase in global prices of food commodities by 13 percent, causing rice and wheat prices to rise by 45 and 30 percent respectively.
These price hikes have left at least 100 million people suffering food insecurity worldwide, with notable political consequences. Food inflation and the decreased purchasing power of money sparked demonstrations, riots, and political unrest in about 48 countries over 2007 and 2008.
According to recent data from the World Bank, with the outbreak of the Russo-Ukrainian war last February, countries started imposing restrictions on the free trade of food commodities, with 35 countries banning food exports. By the end of March, about 53 trade interventions were introduced, affecting trade of foodstuffs, including 31 ban on food exports of which nine on wheat, as shown in the following figure:
Figure 1: Trade interventions since the beginning of 2022
The majority of these export bans were imposed by countries in Europe and Central Asia in the period from 23 February to 7 April, where they introduced the export quota system or required producers to get permissions before exporting food and consumer goods, particularly wheat, corn, and vegetable oil. Figure 2 shows export bans by region.
Figure 2: Food export bans by region
In many respects, these trade measures would affect the level of supply and drive up global prices, encouraging more countries to impose new restrictions on exports to accommodate domestic price pressures, which will eventually lead to a “multiplier effect” on global prices, let alone the effects of these policies on food-importing countries that depend on imports secure their needs for strategic commodities, as shown in the map below:
Figure 3. Net food imports of domestic food supply worldwide
Source: Global Perspective Studies Unit, the UN Food and Agriculture Organization (FAO)
India was not the first country to impose a ban on exports. Prior to India, Malaysia banned chicken exports, amounting to about 3.6 million chickens a month, stressing that the “government’s priority is its own people.” Indonesia, too, banned palm oil exports that account for about 60 percent of global production. Serbia and Kazakhstan introduced quotas on grain exports, with Kazakhstan setting a quota on wheat exports to 1.3 million tons during the period from 15 April to 15 June. Bulgaria plans to increase its grain reserves by restricting exports. Additionally, the Argentinean Government announced raising the export tax rate on soybean oil by two percentage points to 33 percent until the end of the year. Egypt, too, decided to ban the export of eight basic commodities for a period of three months. Algeria, Hungary, and Moldova have recently taken similar measures for domestic food security purposes.
Back to India, the world’s second largest producer of wheat and sugar and the second largest exporter after Brazil, while its recent decisions to ban sugar and wheat can be considered as “preventive” and aimed at ensuring domestic food supplies, maintaining reasonable levels of supply, and protecting citizens from the risks of spiraling inflation, they came as a surprise to the whole world, particularly being in contrast with announcements by Indian officials, in the wake of war, of the possibility of increasing food exports to bridge the gap resulting from the Russo-Ukrainian war. Additionally, these steps came after India has already taken advantage of the increase in global wheat prices, with its exports increasing by about 250 percent on an annual basis, setting a record of about 7 million tons in the fiscal year ending last March. Here, questions arise about the drivers of India’s deviation from its previous commitments, which can be interpreted as follows:
• Climate Change: In India, crop productivity, particularly that of wheat, has been affected by heat. Over the past two months, the country has experienced high temperatures and cycles of droughts, with temperatures in April soaring to the highest levels since 1901, which resulted in the loss of agricultural crops and reduced production. According to farmers, the impact of climate change on the agricultural yields ranges between 15 and 20 percent, which prompted the government to reduce its February forecasts for wheat production from 111.32 million tons to only about 105 million tons, and then again to about 100 million tons or less, with the increased possibility of the country’s inability to achieve its plan to export about 10 million tons of wheat this year.
This was not the first time India’s agriculture was affected by high temperatures. A study indicated that climate change caused Indian crop yields to decrease by about 5.3 percent between 1981 and 2019, warning that failing to address repercussions of climate change may cost the government substantial economic losses, amounting to $35 trillion over the next half century. Moreover, a UN report warned that India is likely to suffer from more frequent heat waves in the coming years.
• Rising Domestic Prices: The inflation rate in India rose to its highest levels in eight years, recording about 7.79 percent in April. Further, food inflation rate (in urban and rural areas) jumped to its highest level in 17 months, recording 8.38 percent, up from about 7.68 percent in March. This increase was primarily motivated by the rise in wheat prices to record levels in some markets, e.g. INR 25,000 a ton, up from the fixed minimum government subsidy rate price amounting to INR 20,150 a ton. In addition to the rising food prices, there have been continued surges in energy, fuel, transportation, and fertilizer prices, which have been hit by rising natural gas prices. Moreover, the wholesale price inflation rate in India rose last April to its highest level in three decades, reaching 15.08 percent on an annual basis.
These inflationary pressures and the high oil prices contributed to the slowdown in the economic recovery after Covid-19. The gross domestic product (GDP) of the third largest economy in Asia grew by 4.1 percent on an annual basis during the first quarter of this year, down from 5.4 percent during the fourth quarter of 2021 and about 8.4 percent in the third quarter of the same year.
• Building on Past Experiences: India is trying to build on its previous experiences with regard to wheat trade, particularly in light of the crisis it witnessed during the year 2005-2006. Back then, the government thought that having an abundance of wheat might enable it to feed its citizens and the world, which led to an unintended depletion of the public reserve. Between 2000 and 2004, the government supported exports significantly, which led to the government’s deeper involvement in international trade and the sale of large quantities of wheat without meticulous planning and without considering the domestic production, which brought about a decline in the wheat stock to its lowest levels since 1964 to 2 million tons, i.e. about half the stock needed at that time. Ultimately, the government had to import about 7 million tons of wheat during 2006-2007 to secure its needs of strategic commodities.
Notwithstanding the underlying causes behind the protectionist measures of the Indian government as well other Asian countries over the past month, they resulted in many negative consequences that may affect the entire world, including the exacerbation of the inflationary wave and food insecurity, which can be clarified as follows:
• Risks to Global Food Security: Banning Indian exports of wheat and sugar is likely to exacerbate the global food shortage crisis resulting from the Russo-Ukrainian war, given the relative importance of Moscow and Kiev in international markets, being the largest suppliers of wheat in the world. India’s decisions could create trouble for other South Asian countries, particularly Bangladesh, which depends heavily on Indian imports. Figure 4 shows countries’ dependency on Indian wheat imports.
Figure 4: Countries’ dependency on Indian wheat, March 2021 – February 2022 (%)
As is shown in the above figure, imports of Indian wheat accounted for 55.9 percent of the needs of Bangladesh, followed by Sri Lanka, the UAE, and Indonesia at 7.9, 6.9, and 5.9 percent, respectively –which are low percentages compared to Bangladesh that will face the challenge of finding alternatives to secure its needs of wheat.
Moreover, India’s export bans may push other countries to follow its example by imposing restrictions on grain exports to safeguard their food security, which would create a vicious cycle of export restrictions and price increases, resulting in the exacerbation of the global hunger crisis that has reached new heights, with the number of people suffering from acute food insecurity doubling, going up to 276 million from 135 million before Covid-19.
• Exacerbation of the Inflationary Wave: The decline in supply will result in continuous price increases, as has been evidenced by wheat prices recording their highest levels in two months following India’s ban decisions. Wheat futures in Chicago rose by 5.9 percent to $12.47 per bushel while sugar futures rose by 1 percent to $556.50 per metric ton, i.e. up to 26 percent increase compared to the same period last year. However, the ban imposed by India could result in wheat price shocks due to the lack of supply and other countries’ imposing similar bans. The end result? More supply shortages and more pressures on world prices. Against this, the World Bank expected food prices to rise by 22.9 percent this year, driven by a 40 percent increase in wheat prices.
• Gains for the Competing Countries: The picture wasn’t gloomy for all countries. Some exporter countries managed to capitalize on the ban decisions to achieve huge gains. These markets ended becoming of the few remaining alternatives that have not yet imposed export restrictions. One prime example of this is Thailand, a major exporter of sugar, chicken and rice, which is expected to reap record gains as food protectionism increases.
Forecasts by the Thai government indicate that food exports will rise to THB 1.2 trillion ($35 billion) and sugar exports by at least 40 percent in the 2021-2022 season. Moreover, exports of Rice, which is one of Thailand’s major agricultural exports, will rise to its highest level in four years, reaching 8 million metric tons by the end of this year.
In short, in periods of uncertainty over prospects for the global economy, countries resort to the use of the “food weapon” by taking strict and self-interested political measures, prioritizing domestic security over global food security, which is a logical step in times of crisis for countries to ensure stabilization of the local food supply and effective management of rising inflation rates.
Perhaps this serves as an alarm for countries that depend on food and basic commodities imports to adopt strategies aimed at increasing their agricultural and food production and diversifying the alternatives that they rely on to secure their needs from abroad.