Putin’s energy shock is becoming a world food crisis. Brace for rationing.https://www.smh.com.au/business/markets/putin-s-energy-shock-is-becoming-a-world-food-crisis-brace-for-rationing-20220304-p5a1m8.htmlThe world faces what amounts to a commodity “black swan” across the gamut of primary resources. Oil, gas, coal and the “ags” are all spiralling higher together, with metals catching up fast. It is a systemic stagflation shock, an intractable problem for central bankers. It acts like a war reparations tax on the economies of importing nations and is ultimately contractionary.
Natasha Kaneva, from JP Morgan, said inventories of tradable commodities are critically low and the world is running out of safety buffers. This is a recipe for “non-linear price increases”, she said.
Unlike the West, China is prepared. It has been stocking up for months and holds 84 per cent of the world’s copper, 70 per cent of its corn and 51 per cent of its wheat. “China has bought enormous quantities of US soy in recent weeks,” said Rabobank. One might ask if Xi Jinping knew something in advance.
Record food commodity prices are an ordeal by fire for some 45 poorer countries that rely heavily on food imports: the Maghreb, the non-oil Middle East, swathes of Africa, Bangladesh or Afghanistan. The World Food Programme warned of “catastrophic” scarcity for several hundred million people last November. The picture is worse today.
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Energy and farm commodities are interlinked. Natural gas is a feedstock for fertiliser production in Europe, and lest we forget, Russia and Belarus together account for a third of the world’s exports of potash. Rocketing oil prices are driving a switch to biodiesel in south-east Asia, further tightening the global market for vegetable oils.
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Roughly a third of world exports of barley come from Russia and Ukraine combined, 29 per cent of wheat, 19 per cent of maize, as well as 80 per cent of sunflower oil. Much of this is usually shipped through the Black Sea ports of Odesa, or Kherson - scene of hand-to-hand street battles until it fell on Wednesday - or Mykolaiv, where a Russian missile hit a Bangladeshi-flagged bulk carrier this week and killed one of the crew.
“Loading is at a standstill. It is not just the ports: you can’t get a ship in there. Nobody wants to get stranded,” said Mr Abbassian. Lloyd’s List reports that the northern Black Sea and the Azov have been declared “warlike operations areas’, implying double pay for crews, if you can get them.
Insurance rates are prohibitive and banks are refusing letters of credit, even though grains, fertilisers and energy products are exempt from sanctions. Shippers are scrambling to find out what it means for a counterparty to be “connected with Russia”.
Everybody is wary of the US Treasury’s sanctions police, known as OFAC (US Office of Foreign Assets Control). The US law firm Crowell and Moring said clients fear that they may be caught in the net inadvertently, given that targeted oligarchs control much of Russia’s agro-industrial nexus in one way or another. Every transaction has to be screened to the finest detail.
“Russian and Ukrainian wheat are not being offered. Critical corn flows to the world are being stymied. If Ukraine farmers do not plant substantial quantities of corn next month, the supply crunch will be very severe,” said Rabobank.
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Smaller farmers in Russia have been shut out of the domestic credit market just before planting season. Emergency tightening by the central bank has lifted average loan cost to 27 per cent this week.
Chicago wheat futures have hit an all-time high of $US1,131. The squeeze is worse for the rest of the world because the broad dollar index is up 30 per cent since the last peak in 2008.
For good measure, Rabobank says we must contend with intense La Niña weather patterns and drought in Brazil and Argentina. “Grain shortfalls are likely to be so pronounced as to require demand destruction, or rationing,” it said.
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