The wheat of the matter: Disruption of supply chains due to Ukraine war has implications for India’s food security

 The wheat of the matter: Disruption of supply chains due to Ukraine war has implications for India’s food security

According to the Food and Agriculture Organization, the Food Price Index has increased by 30 percent in the year 2021-22. The last time it had increased in a similar proportion was in 2010-11. This phenomenon was one of the factors that led to the Arab Spring. Currently, at a time when the Covid-19 pandemic had already disrupted the food supply chains around the world in 2020, tensions are exacerbated by Vladimir Putin’s war on Ukraine: Russia and Ukraine represent 27 percent of the world market for wheat, 16 per cent for corn, 23 percent for barley, and 53 percent for sunflower.

In peacetime, the Black Sea ports, now blocked, account for about 95 percent of grain exports from Ukraine. Railways could have taken over, and Ukraine certainly has a rather exceptional railroad network. Unfortunately, the gauge of the railway tracks built by the USSR in Ukraine is not the same as in neighboring countries. As a result, wagons have to be transferred one at a time at the border.

Twenty-six countries, mainly in Africa, West Asia and Asia, depend on Russia and Ukraine for more than 50 percent of their wheat imports. India wanted to fill in this gap and, in April 2022, the Prime Minister said that “India can feed the world if the WTO allows it”. However, just one month later, New Delhi banned wheat exports to control rising domestic prices amid concerns over production due to the heatwave and uncertainty about existing reserves due to private sector hoarding.

This is not a new phenomenon. In 2009, the International Assessment of Agricultural Knowledge, Science and Technology for Development (IAASTD), a World Bank initiative, in a report — Agriculture at a Crossroads — observed that speculation with agricultural commodities on the commodity futures exchanges was one of the main reasons for the spike in food prices. The original purpose of futures markets was that farmers could transfer the price risk — a “future” contract would allow them to sell the produce at the current price but for delivery in the future. This safeguarded both sellers and buyers against any excessive price jumps — for example, those caused by the vagaries of the weather or conflicts and war. It was a mechanism to ensure that the basic livelihood and survival of farmers were not jeopardized. However, the arrival of large pension funds, hedge funds and investment banks in these markets has resulted in excessive speculation. The derivative markets set a benchmark for the prices in the real world, and this is where excessive speculation became a problem. The logic of the markets has changed as price evaluation is not dictated by supply-demand or quality of the markets but by major financial actors’ bets on higher prices, which leads other actors to also speculate. While large financial actors bet on the futures markets and cause price volatility, when food prices rise, they endanger the food security of millions of people around the world.

An investigation by Lighthouse Reports, a non-profit media outfit, concludes from this phenomenon that no lessons had been learned from the food crisis of 2008. It reports that the influx of speculators can be observed in the Paris milling wheat market, the benchmark for Europe: Speculators’ share of buy-side wheat futures contracts has increased from 23 percent of open interest in May 2018 to 72 percent in April 2022. Therefore, by April 2022, “Seven in 10 buyers of futures wheat contract were speculators in the form of investment firms, investment funds, other financial institutions and commercial non-hedgers whose aim was to profit from the rise in prices.”

In India, even though the year-long farmers’ protests have forced the Modi government to repeal the infamous farm laws, the growing role of the private sector in agriculture has increased the risk of speculation. For 2022-23, the government has already lowered wheat purchase estimates to 19.5 million tonnes — down by 50 percent compared to the previous year and the lowest in 13 years. Union Food Secretary Sudhanshu Pandey said this sharp decline was due to huge buying by private players. India faced a similar situation during the 2008 global food crisis but managed to weather the storm due to the APMC food stock reserves.

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Today, food inflation is a major cause for concern for food security in India. Declining incomes because of the pandemic have already raised hunger levels in India — India ranks 101 among 116 countries in the 2021 Global Hunger Index. According to the Hunger Watch Report conducted in February, 45 percent of respondents reported running out of food in the preceding month. The situation could be even more precarious now because of the spike in prices.

So, what should be done? The Indian government could ensure more transparency on food stocks and regulate the private sector. For that, there is a need to set restrictions on the reserves that the private sector can hold, as they often tend to hoard food stocks to later sell at a profit. This will help prevent the opaqueness of private sector reserves, which often fuels speculation by large international financial actors. Internationally, positional limits could be set on speculators but that would require a multilateral agreement, a topic which should be on the agenda at the next G-20 meeting.

Jaffrelot is senior research fellow at CERI-Sciences Po/CNRS, Paris, professor of Indian Politics and Sociology at King’s India Institute, London, and non-resident scholar at the Carnegie Endowment for International Peace. Thakker is a student of environmental policy with specializations in agriculture policy and African affairs at the Paris School of International Affairs, SciencesPo

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