Home Commodities 100 days of Ukraine war: How India hedged against global commodity-price spiral

100 days of Ukraine war: How India hedged against global commodity-price spiral


New Delhi: At the recent World Economic Forum in Davos, Switzerland, Kristalina Georgieva, the International Monetary Fund’s managing director, told the conference that “the anxiety about access to food at a reasonable price globally is hitting the roof” as prices continue to “go up up up”.

India escaped a potential food crisis this year with some timely actions by the Narendra Modi government, but the war in Ukraine shows how easily food prices can balloon in Asia’s third-largest economy, which can then fuel broader prices.

Within a month’s space, India has gone from export-market hunting for surplus grains to imposing curbs or suspending overseas sales altogether of food items to calm domestic prices and boost availability.

The risks of a global food catastrophe are rising. Supply disruptions with origins in the pandemic and the Ukraine war have splintered up to two-thirds of commodities traded globally. A wheat shortage is threatening to push low-income countries to the brink of hunger.

When Russia invaded Ukraine in February, Brent crude oil prices rose as high as $130 per barrel and continues to trade above $100 per barrel. Crude has risen nearly 20% since the war broke out. Nothing fans prices more than oil inflation.

India is one of the world’s largest net importer of edible oil, oil and fertilisers. It began scouring markets to make good its supplies of oil, cooking oil, fertilisers and cheaper alternatives to other commodities.

The fertiliser crunch

India has finalised critical supply of fertilisers from Russia under a barter agreement, as talks concluded on a multi-year import deal, according to multiple officials.

To hedge against geopolitical flux and globally high prices, India had opened government-to-government talks in February with Russia for the long-term import of fertilisers, despite the war and navigating a minefield of US-imposed sanctions.

India imports most of its fertilisers, which are crucial because nearly half the population depends on a farm-derived income and the conflict had trimmed its fertiliser balance ahead of the crucial summer-sown June-September Kharif season. Agriculture accounts for 15% of India’s $2.7 trillion economy.

Russia will supply crop nutrients via a barter system avoiding dollar transactions, as Russian importers will exchange fertilisers for various Indian commodities, including tea, raw materials and auto parts.

From May 13-15, fertiliser minister Mansukh Mandaviya was in Jordan, striking another deal for a group of fertilisers of which the West Asian nation is a key supplier.

The grains dilemma

In grains, the story wasn’t as straightforward. India was initially looking to double down on wheat exports, taking advantage of a void left by Ukraine and Russia, expecting a bumper harvest of 111.32 million tonnes against an output of 109 million tonnes in the previous year.

The Russia-Ukraine crisis had opened the doors for India to export large quantities of wheat from its stockpiles profitably – a rare chance — as global prices had surged above domestic floor prices.

Supplies from war-torn Russia and Ukraine were shrinking. The two warring nations together account for up to 30% of global wheat exports.

However, a scorching early summer stunted India’s wheat crop unexpectedly. According to the India Meteorological Department, March 2022 was the hottest in 122 years. Yields fell by up to 20%.

India had just signed off on a deal with Egypt, which enrolled the former as an exporter. The government was also preparing to send a delegation to 16 countries to finalise wheat-export deals.

However, widespread reports of poor crop from foodbowl states, such as Punjab and Haryana, prompted the government to cut its output estimates by three per cent to 106 million tonnes against the previous year’s 109 million tonnes.

This means production would also be lower by nearly 5% from the February estimate of 111.32 million tonnes, raising wheat prices by nearly 20%. The country had also exported, in the year ending March, a record 7 million tonnes of wheat. Consumer inflation in April rose to an eight-year high of 7.79%.

At 14%, India’s share in global wheat output is roughly equal to the combined share of Russia and Ukraine. Yet, a billion-plus population means the country’s share in global wheat exports is around 3%.

The government, sensing an inflation double whammy of higher exports and lower output, announced a surprise ban on private export of wheat on May 13.

These actions to tackle surging domestic food prices will drive global prices higher by reducing supplies for international markets. The consequence is already evident. A day after India moved to ban overseas sales of wheat, global prices rose to record levels, with Chicago Board of Trade wheat futures rising 6%, a two-month high.

Indian officials say the country is not contributing to a global shortage by banning wheat export because the country had already exported record levels from existing stocks.

India will continue to allow wheat export for “friendly countries” which are in “serious need”, commerce and food minister Piyush Goyal said in Davos.

The sugar surge

The government took another key step to insulate consumers from a possible price spike of sugar. Despite record production, India on May 24 capped exports of sugar, a surplus commodity, to 10 million tonnes amid record overseas sales. The total output is estimated to be 35 million tonnes.

India is the world’s largest sugar producer and second-largest exporter behind Brazil. Restriction on exports will make more of the surplus sweetener available for domestic ethanol-making, for which the country has set new fuel-blending targets and is a top government priority.

Mixing petrol with ethanol, which is made from molasses, a byproduct of sugar, will help lessen the amount of oil India imports. “In order to find a permanent solution to address the problem of excess sugar, government is encouraging sugar mills to divert excess sugarcane to ethanol,” an official statement on May 19 said.

Some experts, such as economist Ashok Gulati, said India had imposed hasty restrictions on farm trade, which will negatively impact farmers’ incomes.

Escalated fertiliser prices have inflated India’s subsidy bills. The Modi government on May 21 said the government would provide additional fertiliser subsidy of R1.10 lakh crore to cushion farmers from prices. The additional allocation has doubled the government’s total fertiliser subsidy bill to a record R2.15 lakh crore in the current fiscal (2022-23).

“India has rightly hedged itself against a global commodity price spiral by a combination of measures. The restrictions on wheat and sugar exports will lower prices but globally, price pressures continue to build and India will continue to import considerable inflation,” said Ashok Agrawal of Comtrade, a trading firm.

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