Putin Uses Food and Fertilizer as Weapons
One Year Wheat Futures
When we looked at how the war in Ukraine would affect commodity prices, we discussed how the war would affect planting, harvesting, and exporting corn, wheat, and sunflower seed oil from Ukraine. But there is more to this as Putin uses food and fertilizer as weapons. Not only has the war affected Ukraine’s entire agricultural system but at the same time Putin has cut off exports of grains and fertilizers. The first effect of this has been to drive up commodity futures and the later effects will involve starvation, social unrest, political unrest, and war in poorer nations who do not submit to Putin’s demands.
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A Glimpse at a World Ordered by Vladimir Putin
Vladimir Putin yearns to reconstitute the Soviet Union and extend its reach and power. He is leveraging the war in Ukraine to achieve goals far beyond the borders of Ukraine. When we muse about the actions of the “DRINCs” namely the Democrats, Russia, Iran, North Korea, and China we want to anticipate the effects of their actions on the world and then on the markets. Ukraine and Russia made up a quarter of all wheat exports in 2020 (Russia = 17.4%, Ukraine = 8%). The US and Canada each accounted for 14% of exports, France 8%, and Australia 6%. Countries that will need to look for other sources of wheat include Egypt, Indonesia, Pakistan, Bangladesh, and Lebanon for Ukrainian wheat. For Russia wheat the countries are Egypt, Turkey, Nigeria, Bangladesh, and Pakistan. The question is whether Putin will let these nations suffer the consequences of no wheat imports or support Russia in its war in Ukraine to avoid starvation and social and political unrest. The damage being done to Ukraine is horrific but the chaos that could spread around the world with food riots and toppled governments could drive an already weakened economy and market into freefall.
The Green Revolution and Fertilizers
Norman Borlaug was an Iowa boy who went to the University of Minnesota. A professor influenced Borlaug to be less interest in wrestling for the Minnesota Gopher NCAA squad and apply himself to his studies. Borlaug’s life’s work became one of increasing agricultural yields to avert world hunger. He started by developing an ultra-resistant wheat strain in Mexico and ended up increasing crop yield two and three fold. He received the Nobel Prize in 1970 for these efforts. While Borlaug’s work helped feed a growing world it greatly increased the need for fertilizers. Fertilizers increase crop yields by thirty to fifty percent in temperate zones and by more in the tropics. ( Our World in Data)
Cutting off fertilizer exports from Russia will decrease world supply by about 12%. Brazil receives 21% of Russia’s fertilizer exports followed by China at 10%, the US at 9%, and India at 4%. China is unlikely to get shorted by Putin and India might strike a deal like they did with oil and natural gas. The US will see prices go up. Brazil imports 85% of its fertilizers and could be hurt the worst. (Watch the EWZ.) And Putin could use the situation to extract concessions from Brazil as well or simply relish political unrest that results from food shortages.
The Demise of Globalization?
Last year China cut its fertilizer exports in order to decrease domestic prices. While Russia accounts for 12% of world exports China accounts for 11% or did before they both cut exports. Together they count for nearly a fourth of fertilizer exports. As major exporters quit exporting because of domestic reasons, trade wars, or wars like in Ukraine it starts the rollback of an interconnected global trade setup. Someone with the long view of history might think of Barbara Tuchman’s book The Guns of August which recounted how Europe slowly but surely slide from a local crisis with the assassination in Serbia to an all out war that destroyed empires and European world hegemony.
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