2022 Theme: Rising Grain Prices: Protectionism Grows

In early March, as the implications of the Ukraine war became clear, we wrote that we had many concerns about the developing crisis but our greatest fear was a surge of protectionism and interventionism from countries towards their agriculture production.

The final straw for global food supply could be a zero sum, "everyone for themselves" approach.

Here is what we wrote then on the subject of Russia's tendency to use "wheat diplomacy" to bestow favorable grain supply on friendly countries:

"The concern is that other countries will follow and we begin a cycle of "beggar-thy-neighbor" protectionist policies that piles pressure onto commodity markets and add a dose of inefficiency and a pinch of politicization to global food supply at precisely the wrong time."

And here is the post, now published on our blog.

Flash forward a few months and our worst fears are coming true.

Here are a few data points:

India joined the above this week by announcing that it was banning wheat exports citing what is becoming a familiar refrain of food security and rising prices.

The move happened after a punishing stretch of weather in much of Northern India. Record setting heat (7 straight days over 40 degrees in New Delhi and 5 distinct heatwaves since March - ouch!) ensured that this has been the hottest spring in 122 years.

There have been similar issues in Pakistan that is suffering an even worse combination of high temperatures, high inflation and low electricity availability - a truly awful 1-2-3 which we may return to in the weeks ahead.

The Indian ban has sent wheat future prices soaring once again:

  • Wheat futures reached $12.84 per bushel Wednesday, a level that has been seen in only 5 other times. Prices had surged 15% over the previous 4 sessions, first on an expected tightening of global supplies over the next year, and then on India's export ban.

The reason this decision was so important? Well, India is actually the world's second largest producer of wheat but it exports far less than other major producers. Most of its production obviously must go towards feeding its incredibly large population.

But this year the country had - just weeks ago! - promised to try and export more to alleviate the supply crunch brought about by the war in Ukraine. Here is their Prime Minister, Narendra Modi:

  • "We already have enough food for our people but our farmers seem to have made arrangements to feed the world."

Now, with this year's harvest hammered by the heatwave and leading to fears of lower yields the country has swiftly reversed course. The export ban has removed an amount equivalent to 20% of what Russia or the US export in a typical year from the global market.

  • This is a classic collective action problem brought to a terrible life.

A collective action problem is a situation in which all entities or individuals would be better off cooperating but fail to do so because of conflicting interests that discourage joint action.

In other words, if the world's nations worked together there would likely be enough food grown in 2022 to feed the world - though at higher cost. But if each country's government is trying to stabilize their own internal market it is entirely likely that their actions will harm the ability of the global market to operate efficiently and productively.

By prioritizing the local, we may destroy the global.

That is a very real problem!

And yes, these concerns may be pretty far away from most Western consumers and investors. Most of us are very fortunate not to have to worry about the cost of basic staples.

However, as the next topic reveals, this type of outcome from sloppy government interventions in how the market operates, is not something that is confined purely to the poor and unfortunate.

"Resiliency" doesn't just have different definitions depending on your perspective but it also has downsides as well.


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