Who is affected the most by the wheat supply shock caused by the Ukraine conflict?
Russia's invasion of Ukraine has sparked major concerns over the global supply of wheat, prompting a surge in international wheat prices. Northern Africa and Egypt, in particular, face politically sensitive bread supply risks after Russia's invasion of Ukraine closed off access to the lower-priced Black Sea grain, which the country is heavily dependent on. It is a well-known fact that Egypt is the world’s largest importer of wheat. According to Reuters, around 50% of Egypt’s state imports and 30% of Egypt’s private imports came from Russia and Ukraine. Egypt's state buyer, the General Authority for Supply Commodities (GASC), provides heavily subsidised bread to more than 60 million Egyptians. The GASC has cancelled two tenders since Russia's invasion. Australia could potentially start supplying South East Asia, and India could also fill some of Russia and Ukraine’s supply void. However, Ibrahim Ashmawy, Deputy Supply and Internal Trade Minister, said that Egypt would look to the EU to fulfil its wheat supply needs, adding that the country will not exclude other exporters, including the US, Kazakhstan and Romania. Authorities say Egypt's stocks are enough for at least four months as it seeks alternative suppliers and bigger local harvests while studying a reduction of the subsidy system that was proposed before the conflict
Turkey produces about half of the wheat it consumes; however, it has become increasingly reliant on imports, 85% of which come from Russia and Ukraine. Ankara’s wheat imports from Ukraine reached record levels in 2021. The Turkish government says that the country has the production capacity to make up for the loss in wheat imports, but this will significantly push up the costs. Rising prices and insufficient supply have already affected economically-depressed countries in the Middle East and North Africa that buy the bulk of their wheat from Russia and Ukraine, bringing them to the brink of crisis.
Who can potentially fill the void of Russia and Ukraine supplies?
India could quickly become a major player in the wheat market. After a bumper crop last year, they are in a position to export up to 7 MMT this market year. Their wheat, however, is low-quality, often used for feed. But this year, it could go to countries that simply cannot afford the normal milling grades. Indian farmers harvest in April, and the crop looks good so far, so they could soon be bringing in another potential record crop.
India is the second-largest wheat producer globally, but only accounts for 1% of exports. The majority of its harvest is typically used domestically. Following a few years of bumper crops, courtesy of high-yielding seed varieties, efficient farm mechanisation, and favourable weather conditions, India has a cumulative surplus wheat stock to fill some of the void left by Russia and Ukraine.
Australia had good rains last year, resulting in this year’s crop estimate being at a record high. Australia could potentially fill a part of the void in the availability of wheat due to the conflict. However, Australian wheat is more expensive than Ukrainian and Russian wheat. In 2012 Australia accounted for 60% of the South-East Asia market, and the current conflict could lead to them becoming the dominant supplier of Southeast Asia again.
Bottom line: Even though countries like India and Australia could potentially fill the wheat supply void that Russia and Ukraine could leave, neither of these countries have long-term policies in place that allows for smooth overseas sales. This will likely add to supply disruptions for the time being until contracts are approved. Another factor that will continue to support wheat prices is increasing fertiliser prices, resulting in higher input costs. As can be seen in Egypt, there is no substitute for wheat. Therefore, governments will have to absorb the increased price of wheat or come up with methods to lower global wheat prices.