Food Security: wheat exports as a weapon

Food insecurity was top-of-mind throughout 2022 as the fallout from the conflict in Ukraine effected crop production and shipments. Diplomacy helped as the agreement of the Black Sea Grain Initiative restarted exports from Ukraine. 

International organizations such as the World Bank, IMF, the WTO and others heightened surveillance of export controls on food and called for governmental restraint. Political appeals notwithstanding, the «Global Trade Alert» (GTA) recorded the implementation of 180 new export curbs in agricultural products last year, but 233 steps were taken to liberalize imports.

What about 2023? There is no end in sight to the armed conflict in Ukraine. Using reputable, December 2022 forecasts for wheat harvests during the 2022/23 season, this column presents evidence on the extent of Russia’s leverage of the world wheat market and its incentives to weaponize wheat.

Means and motives of the Russian government 

The Russian government has three means to weaponize wheat exports:

1. For more than a decade Russia has applied export bans, export taxes and export quotas to its wheat shipments. 
2. Russia could refuse to renew the temporary Black Sea agreement. As of this writing, Russia is pushing for a quid pro quo for doing so. 
3. Russia has intervened in the wheat market through the Kremlin-owned trading company UGC since 2009. To withhold grain from the world market, UGC purchases domestically grown wheat for its stockpile. Reuters reports that UGC has offered the Kremlin to buy 3 million tons of wheat by 2024. In July 2022, the Russian Ministry of Agriculture announced that it had purchased 1 million tons of wheat.

Identifying possible motives for weaponization isn’t hard either. These include:

1. Russia needs to finance the conflict in Ukraine. Estimates of Russia’s military expenses vary but they are all in the range of tens of billions of US dollars. Taxes collected on the exports of billions of dollars of wheat help finance the invasion of Ukraine at a time when other revenues are at risk;
2. The mere threat of blocking Ukraine’s exports reduces the incomes of Ukrainian farmers, discourages the incentive to plant for future seasons, with knock-on effects for Kyiv’s government revenues and, therefore, its capacity to finance its military campaign.

Big changes in wheat production forecast for 2023

The extent to which Russian weaponization of wheat disrupts world markets and food security will depend on factors beyond Russia’s control, including the size of the global wheat harvest. The fact that wheat prices did not spiral out of control last year may be more down to good luck than good policy. Glauber et al. (2022) point out that Argentina and Brazil were able to expand their wheat exports by 6.6 million tons during the first half of 2022. Luck may be running out according to the well-regarded forecasts by the U.S. Department of Agriculture (2022 a,b). In its December 2022 update, the USDA foresees:

• stagnant global wheat production (from 779.3 million tons in 2021/2 to 780.6m tons in 2022/3);
• declining wheat production among major growers including Ukraine (by 12.5m tons), Argentina (9.7m tons), and the European Union (3.9m tons);
• rising wheat production in Russia (by 14.8m tons), Canada (by 11.1m tons), and Kazakhstan (by 2.2m tons) as well as in Brazil, China, Iran, Turkey, and the UK (by between 1m and 2m tons each).

To put these forecasts in context, recall that prior to the conflict in 2020/21, Russia accounted for 19.2 percent of world wheat exports. Our simulations (Evenett & Muendler, 2023) predict that, in the absence of any weaponization of wheat trade, Russia would supply 22.8 percent of world wheat exports this year. Similarly, the U.S. Department  of Agriculture (2022b) forecasts a 20.4 percent share. In contrast, the nations sanctioning Russia are expected to see their net production rise by only 0.9 percent of the world total. If Russia keeps its additional wheat production off world markets in 2023, Western wheat cannot easily replace it.

Simulating Russian leverage over the world wheat market

To make matters concrete, we considered scenarios where Russia blocks different percentages of Ukrainian wheat exports and where Russia decides to cut its own wheat exports by up to half. Our simulations show how much leverage the Russian Federation could have on world wheat prices and what threat Moscow poses to food security, principally in developing countries. 
If the Kremlin withholds a quarter of Russia’s wheat exports, for example, it takes 10.8 million tons of wheat off the world market. Preventing all Ukrainian wheat shipments in the Black Sea, in contrast, only leads to small increases in Russian exports while larger shipments from other suppliers result in little change in total wheat supplies to the world market (Evenett & Muendler, 2023). Russia’s diplomatic niceties with respect to Black Sea transportation should, therefore, not be mistaken for good intentions towards the wheat market overall.

We also studied potential export tax regimes to assess the Kremlin’s incentives to manipulate world wheat markets. For instance, a Russian export tax regime that cuts one-quarter of Russia’s wheat exports generates for the Kremlin tax revenues equivalent to almost a third of the Russian wheat industry’s value added. Naturally, the economy-wide cost to Russia of the resulting market distortions is large, and amount to more than one-third of wheat value added. But in a war economy this loss may matter little in comparison to the Kremlin’s prospective use of any additional export tax revenues.

Here are key policy-relevant findings from our simulations (Evenett & Muendler, 2023):

• Given wheat production forecasts for this year, no matter how much Ukrainian wheat Russia allows to pass through the Black Sea, 2.5 million tons more wheat will be supplied to world markets than before the conflict began. This limits the resulting wheat price hikes during 2023. Even a near-complete Black Sea transport ban on Ukrainian wheat would raise the wheat price in the median importing nation by 4.2 percent. But sourcing patterns are such that wheat prices in the Philippines, Indonesia and Tunisia, for instance, would rise by more than 27 percent.
• If Russia raised export taxes high enough to cut its wheat exports by one-quarter, and assuming farmers across the two hemispheres respond to the intervention within the year, then total world wheat imports will drop by about 2 million tons in total. This means other wheat exporters can only partially replace the lost Russian wheat exports. Under this scenario the imported wheat price paid by the median importing nation rises 5.2 percent. Moreover, the Kremlin’s export tax collection amounts to 29.7 percent of the Russian wheat industry’s value added in the absence of export restrictions.
• If Russia goes further and raises export taxes so as to cut its wheat exports in half, then total wheat imports fall by 3.4 million tons and the median importer pays 9 percent more for wheat than before the conflict. 

More comprehensive monitoring needed

As Moscow scrambles to finance its military campaign in Ukraine, the temptation to weaponize wheat exports will grow. A larger harvest next year strengthens Russia’s leverage over world wheat markets. Russia’s influence on world wheat prices will be greater if it hikes export taxes as compared to refusing to extend the Black Sea Grain Initiative. Several developing countries with large populations are at risk should Moscow weaponize exports – and contingent financing to help could be lined up now. Russian wheat growers will also be victims of weaponization, diminishing their incentive to plant in future seasons.

Foreign governments and international organisations should monitor not only Russian export tax changes but also Moscow’s state purchases of wheat from Russian farmers. The Black Sea deal is important but, as far as global food insecurity is concerned, it isn’t the only game in town.

Professor Simon Evenett is the trade policy expert responsible for creating the Global Trade Alert (GTA), the world's leading independent monitor of government policies that affect international commerce. 

Marc-Andreas Muendler is a professor of economics focusing on international trade, international finance and development economics at the University of California, San Diego.

This article was originally published on vox.eu, a portal designed to promote research-based policy analysis and commentary by leading economists. All the references used in this article are given in the original version.

References:
Evenett, S J and M-A Muendler (2023), “Weaponizing Wheat Moscow’s Menace to Food Security in 2023”, cBrief 3, University of San Diego Globalization and Prosperity Lab and the St.Gallen Endowment for Prosperity through Trade, 9 January.

Glauber, J, D Laborde, V Pineiro and A Tejeda (2022), “Can agricultural exports from Southern Cone countries make up for global supply disruptions arising from the Russia-Ukraine war?”, IFPRI Blog, 14 November.

U.S. Department of Agriculture (2022a), “World Agricultural Production”, World Agricultural Outlook Board, WAP 12-22, December.

U.S. Department of Agriculture (2022b), “World Agricultural Supply and Demand Estimates”, World Agricultural Outlook Board, WASDE 631, December.

Image: Adobe Stock / artjazz