In recent years, rising food prices and the increasing frequency and intensity of floods, droughts and other extreme weather events have prompted warnings of looming grain shortages that could potentially spell disaster for the world’s poorest and most vulnerable communities.
Although climate change poses the greatest threat to global food security in the medium to long term, the Russian invasion of Ukraine is often cited as the immediate cause of the current hunger crisis. But that’s a red herring.
Certainly, the war disrupted wheat exports from both Russia and Ukraine, two of the world’s top producers, and upset key trade ties.
But while the global wheat price index rose by around 23% in the months following the Russian invasion, prices started falling in June 2022. In December they returned to pre-war levels. While this trend has been acknowledged, it has been attributed to the success of the Black Sea Grain Initiative (BSGI), a United Nations-backed accord that lifted the Russian blockade on Ukraine’s grain exports. Conversely, Russia’s recent decision to withdraw from the deal has raised concerns about the potential impact on global grain trade.
These concerns are wrong for two reasons:
First, world wheat supply (both total production and traded quantity) has remained stable since the beginning of the war. In particular, the total wheat supply exceeded capacity utilization by up to 275 million tons. This excess challenges the dominant narrative of global scarcity. Likewise, global supply is estimated to have exceeded demand between July 2022 and June 2023.
Second, governments and the media tend to highlight specific regional bottlenecks while ignoring increases in production and trade in other parts of the world. In reality, wheat is produced globally, meaning shortages in one region could be offset by increased production in another.
So what caused wheat prices to rise? To answer this question, we must follow the money. The global grain market functions as an oligopoly, with Archer-Daniels-Midland, Bunge (which recently merged with Viterra), Cargill and Louis Dreyfus controlling more than 70% of the market, and Glencore accounting for another 10%.
In the early stages of the Ukraine war, specifically between March and June 2022, the Big Four grain traders made record profits and revenues. Cargill’s annual sales rose 23% to $165 billion, while Louis Dreyfus’ profits rose 80%. These gains reflected price increases that did not match real demand and supply.
Additionally, grain futures markets saw some activity between April and June 2022. Financial investors, including pension funds, increased their share of long positions in the Paris wheat futures market from 23% in May 2018 to 72% in April 2022. Ten “momentum-driven” hedge funds reportedly earned $1.9 billion dollars by benefiting from the rise in food prices triggered by the Russian invasion of Ukraine. Instead of preventing or curbing such financial maneuvers, regulators in the United States and European Union have allowed them to continue unabated.
Surprisingly, most of Ukraine’s grain exports did not go to the world’s poorest countries. Instead, 81% of the 32.9 million tonnes exported under the BSGI went to high- and middle-income countries, mainly European countries such as Spain, Italy and the Netherlands, as well as China and Turkey. Low-income countries received 3% of Ukraine’s grain exports and 9% of its wheat (most of it went to Bangladesh).
The BSGI appears to be more concerned with facilitating exports from Ukraine than tackling world hunger. In addition to the Russian blockade of their sea routes, Ukraine’s land routes have been hampered by the implicit import restrictions imposed by Poland, Bulgaria, Hungary, Slovakia and Romania, aimed at protecting distressed local farmers from competitively priced Ukrainian grain. But, as others have pointed out, the BSGI primarily serves the interests of the agribusinesses trading in Ukrainian grain and the financiers supporting them.
Although global hunger has increased sharply in recent years, this is not due to grain shortages. Instead, collapsing exports, falling foreign exchange earnings, capital flight and higher debt servicing costs have reduced many countries’ ability to import food.
To address these challenges, we must change our focus. Rather than handing out grains for charity, global policymakers must mitigate impoverished countries’ foreign exchange vulnerabilities and take action to support increased domestic and regional production of essential food. We can still win the battle against world hunger, but only if we recognize the real causes of our current predicament.
Jayati Ghosh, Professor of Economics at the University of Massachusetts Amherst, is a member of the Club of Rome’s Transformational Economics Commission. A version of this article previously appeared in the Bangkok Post and has been reprinted by special arrangement.
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