Forget gas prices. Watch the price of bread

This clash of economies may also turn into a test of who breaks first – Americans and Europeans over high gas prices or Russians over loss of access to the West, global banks and benefits. of modern life.

It will also be important to see how other countries ultimately react.

“Putin’s Price Rise”

This is the term President Joe Biden used when he announced a ban on Russian oil imports into the United States. He acknowledged that the move could lead to even higher oil prices. Europe, which depends on Russian oil, has not yet turned off its tap.
Oil prices actually fell on Wednesday after the United Arab Emirates, possibly sensing an opportunity to grab the European market from Russia, suggested it would encourage other OPEC cartel countries to increase their production.

Bet on Russia

According to CNN Business, Chinese retail investors are “buying stocks with the slightest link to trade with Russia as they bet on closer economic ties between the two countries following the unprecedented Western sanctions against Moscow.”

Oil is only part of the plot. Ukraine and Russia are both major players in the world’s wheat supply, and together they supply close to 30% of world wheat exports, according to one estimate.

Ban on export of agricultural products

Ukraine will now ban exports of key agricultural products, including wheat, corn, grains, salt and meat, according to a Cabinet resolution adopted on Tuesday.

Who are we asking about the price of wheat?

I spoke to Berna Karali, a professor of agricultural and applied economics at the University of Georgia, after Google led me to her article, “Supply Fundamentals and Grain Futures Price Movements,” which was authored with two other academics, Scott H. Irwin of the University of Illinois at Urbana-Champaign and Olga Isengildina Massa of Virginia Tech.

My conversation with Karali, conducted via email and slightly edited, is below.

What does Ukraine’s wheat supply have to do with the United States?

WHAT MATTERS: The US Department of Agriculture says Ukraine will export less wheat and corn because of the war. Ukraine has halted all wheat exports. Why should its wheat exports affect the United States?

CARALI: Lower wheat exports from Ukraine are affecting global wheat availability, putting upward pressure on the world wheat price. Since financial markets do not like supply uncertainty, they have already priced this risk premium into the futures markets, causing wheat futures prices to rise by more than 40% in one week. This is a massive increase.

What about sanctions against Russia?

WHAT MATTERS: The United States and other countries have imposed sanctions on Russia, another major wheat supplier. Will the sanctions also affect global food markets?

CARALI: Yes, the sanctions will have effects on world food markets. Since Russia is unable to export wheat (either due to sanctions imposed by the countries or due to the reluctance of financial institutions to finance trade in Russian commodities), this will limit the global availability of the product, putting upward pressure on the world price of wheat.

Moreover, as Russia also imposes self-sanctions (limiting its exports to certain other countries), the supply of other commodities, such as corn and sunflower oil, will also be limited, causing higher prices. prices in world food markets.

How could this war affect the food supply?

WHAT MATTERS: How big could the disruption of the global food market and supply be?

CARALI: Although it is difficult to predict the magnitude and duration of the disruption, it is safe to say that if the conflict continues until mid-summer, it will have an impact on agricultural production for the next marketing campaign.

For example, all of the winter wheat planted (which is still in the ground) may not be harvested in Ukraine due to the conflict, reducing next year’s wheat supply. This would impact world wheat prices for another year.

If the Russian oil embargo expands and has teeth, it will limit the supply of oil in the world and in particular in Europe, which will put upward pressure on production costs and, consequently, in food markets.

How will Americans feel about this disruption?

WHAT MATTERS: Will all of this affect ordinary Americans in ways other than higher prices for a loaf of bread?

CARALI: The price will be the most tangible impact felt by American consumers, farmers and businesses. Although a shortage of staples is not expected in the United States, the prices of most staples, not just bread, will most likely rise in restaurants and grocery stores where Americans dine and shop. .

This will be due to the combined effect of increased global uncertainty leading to volatile food prices and higher oil prices leading to higher production costs.

What else could happen?

WHAT MATTERS: If this war drags on, are there different longer-term effects that could come into play?

CARALI: US farmers are urged to increase wheat and corn production, at least for the next marketing year, to take advantage of higher grain prices.

However, these planting decisions will be affected by rising fertilizer and fuel costs, so it is difficult to predict how long the incentive to increase grain production will last for US farmers.

Another impact concerns oil production. As already promised by some European countries, countries could draw up plans to reduce their dependence on raw materials from high-risk geopolitical areas.

This goes somewhat against the philosophy of trade where comparative advantage should be the determining factor for self-sufficiency in relation to global trade. However, after witnessing prolonged supply chain disruptions since the start of the Covid-19 pandemic combined with the Ukraine-Russia conflict, there may be more incentive to reconsider the way we do things..

Separately, don’t panic about high oil and gas prices

Gasoline prices, more than bread, likely shock U.S. consumers more for now, but CNN Chief Business Correspondent Christine Romans gives three reasons not to panic:
  • No. 1: US household savings are strong. Take a deep breath, she writes. Gas prices in the United States are technically at record highs, but adjusted for inflation, they’re not there yet. Many families may be able to weather the higher prices through savings.
  • #2: The United States is less dependent on Russian oil and natural gas than Europe and has more diversified supplies. According to Capital Economics, Europe is facing its third recession in two years due to its huge dependence on Russia. But Russia only accounted for 8% of US energy imports last year.
  • No. 3: It’s not the 1970s. The United States uses energy more efficiently today. And the United States is now the world’s largest oil producer.

War may not affect U.S. rate hikes

US banks, meanwhile, appear to have relatively little exposure to Russia, meaning this massive global hiccup may not affect the Federal Reserve’s plans to raise interest rates, according to Paul R. La Monica from CNN.

The big fear, he writes, is always that the economy will slow down and inflation will spiral out of control. This is the definition of “stagflation”, which, along with an oil embargo, caused unease in the 1970s.

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