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Asia faces steep grain prices due to Ukraine-Russia conflict

The Russian invasion of Ukraine is having wide-ranging effects on the global economy and the situation is likely to deteriorate further as the conflict progresses and Russia is sanctioned. While it may seem that the war is inconsequential to some, it has in fact put undue pressure on global food security which is already reeling under the effects of climate change.

Russia and Ukraine are key suppliers of oil and gas and various agricultural commodities. As key producers of grains and fertilizers, the war between the two nations is very likely to cause global food shortages. Schroders in a report said Russia and Ukraine account for 30% of the world’s wheat exports.

The conflict in Europe has caused great uncertainty for the global grain trade, and Asian buyers are scrambling to find alternate sources. The UN Food and Agriculture Association recently said that poor countries in Asia, Africa and the Middle East were at risk of food shortages as the conflict is driving up grain prices.

Why are grain prices rising?

The United States Department of Agriculture in a report said wheat, corn and barley are the major grains supplied by Ukraine and Russia. However, replacing sources of grain is not the only issue, as Russia is also a major exporter of fertilizers such as urea, potash, nitrogen and phosphate.

“Farmers are now entering a crucial stage in the agricultural season in which input factors such as fertilizer, seeds and water will determine the yield of the coming harvest,” a recent statement from Norwegian fertilizer company Yara read.

Wheat prices were at an all-time high last week as supplies from Ukraine have dried up. Wheat prices have risen 41% in the first week of March, as per data from Bloomberg.

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These issues come in combination with some existing supply concerns. Earlier this year Reuters said corn exports to Asia from South America would be lower as drought is likely to affect output. Brazil, the world’s biggest exporter of soybeans, is reeling from a prolonged drought, which some farmers expect will wipe out 90% of their harvest.

Wheat inventories across the world are expected to shrink to a three-year low in 2022 as harvests in Canada and the US are poised to decline in 2021-22 growing season due to high temperatures and dry season, writes Nikkei Asia. Exports from the two countries would be limited as they would focus on domestic availability.

Asian buyers and sellers emerge

The Bloomberg Commodity Index (BCOM) has risen 44.51% in the past year, with most of the gains coming in the past few weeks.

The primary issue is that shipments from Ukraine and Russia are on standstill, which is driving up the prices of grains in anticipation of an upcoming shortage. Feed buyers in Asian countries such as Thailand, the Philippines and South Korea are already picking up new cargoes from alternate sources such as Australia and India, writes S&P Global.

Asian firms are booking grains well ahead of the curve of supply tightness and higher prices anticipating a shortage. China is on a grain-buying spree for food security and is scooping up US corn and soybeans to reduce the impact of the Russia-Ukraine conflict and drought in South America, as per Bloomberg. China’s imports of corn, soybeans and wheat have soared to record levels, increasing its exposure to the sky-high prices of the commodities. The country is the world’s largest importer of corn and receives 30% of Ukraine’s corn exports.

“With the current situation removing a key region, he [buyers] may not be able to be as short term with his thinking and buying,” said trading company Viterra’s grains trading manager, Simon Gellert, as quoted by S&P. “So I think it will drive a longer-term shift towards consumers covering further out.”

Australian sellers are seeing a surge in demand for wheat and other grains from Southeast Asia, however, the exports are unlikely to rise in the short term as logistics and supply chains in the country are already under pressure. Australian suppliers are looking forward to maximizing their export programme after a record-breaking harvest of about 37-38 million metric tonnes in the marketing year 2021-22.

The country has received record demand from China for wheat, followed by Indonesia, the second-largest consumer of Ukrainian wheat exports. Due to China trying to lap up Australian wheat, other global buyers are now trying to book wheat in advance for fear of short supply and higher prices, per S&P.

Indian traders too are having a field day with deals to export half a million tonnes of wheat in recent days, with more contracts in the pipeline to take advantage of record-high global prices, said a Reuters Explainer.

Fallout from the rise in grain prices

The Food and Agriculture Organization of the United Nations in a report said the global supply gap of food and feed may result in prices jumping by 8-22% above their currently elevated levels. The agency sees the Ukraine crisis to impact economically vulnerable populations and increase the number of undernourished people by 8 to 13 million.

At least 50 countries depend on Russia and Ukraine for 30% or more of their wheat supply, and many developing countries in northern Africa, Asia and the near east are the most exposed.

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