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Wednesday, June 29, 2022

Explained: War impact, beyond oil

The economic impact of Russia’s war in Ukraine is not confined to oil. It extends as much to agricultural commodities and fertilisers. What do the soaring prices of these commodities mean for India?

Written by Harish Damodaran | New Delhi |
Updated: March 4, 2022 9:45:07 am
High gasoline prices are posted at a Mobil gas station following Russia's invasion of Ukraine, in California on Friday. (Photo: AP)

The current Russian invasion of Ukraine — unlike previous wars in Iraq and Libya or sanctions against Iran — is having an impact not just on energy prices. The effects of shipping disruptions through the Black and Azov Seas, plus Russian banks being cut off from the international payments system, are extending even to the global agri-commodities markets.

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The reasons aren’t difficult to see: Russia is not only the world’s third biggest oil (after the US and Saudi Arabia) and the second biggest natural gas (after the US) producer, besides the No. 3 coal exporter (behind Australia and Indonesia). It is also the second largest exporter of wheat. The US Department of Agriculture (USDA), in its most recent report on February 9, estimated the country’s shipments for 2021-22 (July-June) at 35 million tonnes (mt), next only to the 37.5 mt of the whole of European Union.

But the story doesn’t end there. At No. 4 position in wheat exports, after EU, Russia and Australia (26 mt), is Ukraine, at 24 mt. Ukraine, moreover, is the world’s third largest exporter of corn/maize, with a projected 33.5 mt in 2021-22, after the US (61.5 mt) and Argentina (42 mt). Ukraine and Russia are also the top two exporters of sunflower oil, at 6.65 mt and 3.8 mt, respectively in 2021-22, as per USDA. If that weren’t all, Russia and its next-door ally Belarus are the world’s No. 2 and No. 3 producers of muriate of potash (MOP) fertiliser, at 13.8 mt and 12.2 mt in 2020, respectively, behind Canada (22 mt).

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How global commodity prices have moved

It should not surprise, therefore, that Russia’s war on Ukraine hasn’t stopped at driving up Brent crude to $110-15/barrel and international coal prices to unprecedented $440/tonne levels. The shutting down of ports in the Black Sea have also sent prices of wheat and corn traded at Chicago Board of Trade futures exchange soaring to their highest since March 2008 and December 2012, respectively.

What does that mean for India?

Skyrocketing global prices have made Indian wheat exports very competitive and in a position to at least partially fill the void left by Russia and Ukraine. Wheat from Gujarat, Rajasthan and Uttar Pradesh is now being delivered by rail wagons or trucks at warehouses near Kandla port at Rs 2,400-2,450 per quintal, as against Rs 2,100 or so hardly 15 days ago. This is above the government’s minimum support price (MSP) of Rs 2,015/quintal for the new crop that will arrive in the markets from mid-March.

High export demand for wheat – India has already shipped out 5.04 mt of the cereal in April-December 2021 – could result in lower government procurement this time, compared to the record 43.34 mt and 38.99 mt from the 2020-21 and 2019-20 crops, respectively. A lot of wheat from western and central India may end up getting exported rather than in the Food Corporation of India’s godowns and, in turn, putting pressure on public stocks: These, at 23.66 mt as on February 28, were the lowest for this date in three years.

“The government might, sooner than later, have to impose some kind of a tariff or other restrictions on exports,” says S. Pramod Kumar, senior vice president, Roller Flour Millers Federation of India. Whether or not required, the situation post Ukraine is a far cry from FCI’s overflowing granaries that enabled, if not forced, free distribution of this excess wheat and rice to some 81 crore people. The free grain scheme, introduced in April 2020 following the Covid-19-induced lockdown, will end this month with the conclusion of state elections in UP.

According to Kumar, the government would hereon need to carefully manage both its own stocks and also the overall domestic availability position in wheat.

The other oil

The Ukraine crisis has also led to prices of vegetable oils and oilseeds skyrocketing. That includes not just sunflower and its immediate competitor, soyabean. Palm oil in Malaysia has hit all-time-highs, even scaling 7,000 ringgits-per-tonne levels briefly in the past few days. The benefits of it should flow to mustard growers in Rajasthan and UP, who are set to market their crop in the coming weeks. Mustard prices are ruling at Rs 6,500-plus per quintal, which is again above the MSP of Rs 5,050.

Brent at $110-115/barrel is also helping lift the prices of cotton (because of synthetic fibres becoming costlier) and agri-commodities that can be diverted for production of ethanol (sugar and corn) or bio-diesel (palm and soyabean oil). High prices (above MSP) and a good monsoon (hopefully) can act as an inducement for farmers to expand acreages under cotton, soyabean, groundnut, sesamum and sunflower in the upcoming kharif planting season. That will serve the cause of crop diversification – especially weaning farmers away from paddy, if not sugarcane.

But there is a flip side. The ongoing Black Sea tensions are impacting fertiliser prices as well. Take MOP, a nutrient that India wholly imports. Out of the total 5.09 mt that was imported in 2020-21, nearly a third came from Belarus (0.92 mt) and Russia (0.71 mt). With supplies from there virtually choked, more quantities would have to be procured from other origins such as Canada, Jordan and Israel.

International prices of other fertilisers (urea, di-ammonium phosphate and complexes) and their raw materials/intermediates (ammonia, phosphoric acid, sulphur and rock phosphate), too, have gone up in the past one month and more. These commodities essentially track crude and gas prices. It doesn’t help when China is also India’s largest supplier of urea (Ukraine was No. 3 in 2020-21, after Oman) and second largest of DAP (after Saudi Arabia).

In short, the challenges that Ukraine will present in the coming days are going to be vastly different from those in the aftermath of Corona. And this war and the associated sanctions are also different from those experienced vis-à-vis Iraq, Libya and Iran. The effects are not confined to oil.

(The writer is National Rural Affairs & Agriculture Editor of The Indian Express and Senior Fellow at the Centre for Policy Research, New Delhi)

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