We live in a complex, economically interconnected world, but international politics still have a major impact on individual households and businesses in most countries.
Edward Lotterman
This is happening now as trade in grain, oilseeds, energy commodities and non-ferrous metals is being physically shut down by fighting in Ukraine and resulting economic sanctions against Russia. Such disruptions to normal trade and finance are sure to affect households and businesses in European countries close to the war, particularly Finland, Poland and Germany. They also affect people in our country and can hit families in places as far away and totally uninvolved as Zaire, Myanmar or Bolivia.
The most likely impacts that are already emerging relate to food and energy prices. For food, the most immediate impact is on items containing wheat flour or cooking oil. Ukraine is a major wheat exporter and the world’s largest exporter of sunflowers. When it comes to energy, people around the world see it on gas pumps and in airline tickets.
However, the effects vary from commodity to commodity. This applies to international trade disruptions, including the trade wars that President Donald Trump started early on. Therefore, it makes sense to consider what is causing the differential price impact between commodities such as natural gas, crude oil and refined gasoline, cheese, chicken and soybeans.
Start with the degree to which goods are “fungible goods”. This refers to how much a unit of the good from one source can replace that from other sources.
Number 2 yellow corn, 87-octane unleaded gasoline, refined white sugar, and all-purpose 12 percent protein wheat flour are all extremely interchangeable. It doesn’t matter if the gas in my car comes from a refinery in Minnesota, Texas, Alberta or Saudi Arabia. The yellow corn can come from Mower County, Minnesota, Parana, Brazil or South Africa. The sugar can come from cane grown in Florida or the Dominican Republic, or beets grown in Renville, Minnesota. Whether the flour was ground and blended from hard red spring wheat from the Red River Valley or winter wheat from Oklahoma, Argentina or Ukraine, it works fine in my cakes and breads. In all cases, you would need a fairly sophisticated lab to find differences.
Other items that we find in the store are not very fungible. Gouda cheese from the Netherlands and Colby from Pine Island, Minnesota are allowed to be traded internationally but taste different. Ditto for commodities we don’t see but are used along the production line: heavy sour crude from Venezuela versus light, sweet crude from Kuwait.
Navel oranges from California, Florida, Mexico and Israel seem reasonable to me, but not for a fruit broker. When I buy asparagus at the supermarket, I remember telling a Peruvian agronomist in 1982 that his country would never be successful as an asparagus exporter. Now we often eat Peruvian asparagus and can’t tell it apart from California or Mexican asparagus. It’s all fungible to consumers.
Fungibility also refers to available substitutes. Asparagus isn’t cauliflower or Green Giant Niblett’s, but when people can’t get one vegetable among many, it doesn’t irk them as much as gas going up a dime. If Thai rice exports were halted, North Americans could eat more potatoes or pasta. That would be more difficult for rice-importing countries in Asia.
Transportability and storability are added to fungibility. Crude oil can be transported cheaply over long distances. Pipelines are a well-known technology everywhere, as are tankers and storage tanks. Natural gas can also be transported inexpensively over long distances in pipelines. However, because it needs to be compressed and liquefied, shipping it between continents and storing it in tanks is much more difficult and expensive than crude or refined petroleum.
Grains and oilseeds are handled in bulk and transported in long trains, barges or huge ships. Most grains and some oilseeds can be stored for years, if necessary in dry storage or silos. Cheese, citrus fruits and most vegetables need to be transported and stored refrigerated. Apples can be stored for months, asparagus only weeks, lettuce even less. Bottled wines are not justifiable – quality, price and availability depend heavily on the climatic year and region – but they can also be stored for decades.
The more fungible, transportable and storable a raw material is, the fewer disruptions to global prices and markets caused by wars or natural disasters. However, these same factors ensure that the impacts, even if mitigated, can spread around the world, even to countries that never import anything from directly affected sources.
Crude oil isn’t perfectly fungible like soybeans, but it’s fungible enough that reducing Russian exports will affect fuel prices around the world. Magnitudes will not be identical, but no one will escape. Transportation and storage difficulties mean that a Russian halt to natural gas exports would hit Western Europe, particularly Germany, hard. There is some regional production and pipelines from Algeria, but adjustments would be difficult. As with all goods, adjustments are more difficult in the short term than in the long term.
A related issue concerns the impact of trade embargoes on export producers, rather than the impact on consumers.
Soybeans are a good example. In 2016, Trump railed against us about the perfidy of China’s trade surpluses. Early on as President, he unilaterally ended NAFTA and limited imports from China. China retaliated by limiting imports from us, including agricultural products, particularly soybeans.
Experts proclaimed gloom and doom for US farmers. A Purdue ag economist predicted that US soybean farmers would face 30 percent lower prices while Brazilians would prosper. I knew and respected him deeply, but his prediction was amazing. Soybeans are highly fungible, easily transported and inexpensive to store. Markets are very efficient. Growers, traders and users can hedge at futures markets in Chicago and Sao Paulo or Dalian, China’s largest bulk import port. How might a big long-term difference unfold?
It has not. A dataset comparing cash prices in Chicago to those in Brazil from 2006 to 2022 shows that the very close price relationships before and after the start of the US-China trade war have not changed at all. Corn dates appear to be similar. Still, the US Treasury made $28 billion in special payments, known in my hometown as “Trump bribes,” to compensate US farmers for phantom losses due to Chinese perfidy.
If war or natural disasters destroy production or halt exports for an extended period, as Russia is trying to do with Ukraine, and as the US and Europe are trying to do with Russia, the price impact for producers and consumers around the world will be greater than one Trade war between two countries. Russia’s invasion of Ukraine will push up food prices around the world and similarly push up fuel prices as overall Russian oil exports fall. But in all cases the fungibility of the product in question will be an important factor
St. Paul economist and writer Edward Lotterman can be reached at [email protected]
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