In a televised interview last week, FM Tarin acknowledged risks to wheat output in the ongoing Rabi season, stating that the government is prepared to step-in to ensure timely imports in case of a shortfall. Global wheat prices are close to a 10-year high, with outlook further worsened by the recent escalation between Russia and Ukraine. Could the outbreak of a conflict in Eastern Europe put GoP’s preparation into jeopardy?
Back in FY21, nearly 83 percent of Pakistan’s wheat imports originated from Russian Federation and Ukraine as per PBS data. Russia and Ukraine are among world’s leading wheat exporters, responsible for as much as 30 percent of exports since 2017-18. Russia is in fact world’s largest wheat exporter, followed by Canada, Australia and Ukraine, respectively. But can a military conflict scuttle grain exports out of Eastern Europe?
That would depend on both the scale, and length of the conflict. This is not the first time during last decade that the two erstwhile Soviet republics have found themselves in the throes of military conflict. Back in February 2014, Russia invaded the Crimean Peninsula in the Black Sea, but the rapid pace of Russian military conquest ensured early victory, even though the cease fire between the two countries was not reached between the countries until September later that year.
The stakes may be different this time, however. First, Russian rhetoric has raised fears that the brown bear may launch a full-scale invasion of Ukraine proper, in sharp contrast with the limited localized conflict witnessed in Crimea and Donbas in 2014. Moreover, if the Western world keeps its commitment and draws a redline against Russia – whether through economic embargo or sanction – there are greater chances of the war turning into a protracted crisis involving rest of Eurasia.
But the chances of those fears materializing are limited, if any. Dependent on Russia for energy supplies, the Western powers across two coasts of Atlantic appear divided over kickstarting a new Cold War. Moreover, only something as drastic as kicking Russia out of the international payment system – SWIFT – or direct armed involvement of NATO powers, has the potential of truly disrupting Russia trade with rest of the globe, given the sheer number of seaports in the world’s largest nation by area – 67! On the other hand, Ukraine is almost fully dependent on its port in the Black Sea for international trade. A naval blockade in the event of war carries the potential of disrupting exports out of country.
So, what does it mean for wheat prices in Pakistan? While local prices may witness high volatility in the event of war, the outlook is not necessarily dark. It is pertinent to remember that the 2014 conflict did not send global wheat prices in an upward spiral as the conflict had remained geographically limited.
Moreover, global stocks to demand position stood at just 25 percent at the time, which has risen to up to 38 percent by MY-21 as per USDA (see graphs).
In fact, local regional situation – especially the risk of famine in Afghanistan – may play a much bigger role in causing a shortfall in Pakistan’s wheat market, especially if the actual output falls significantly short of target, 29 million tons. GoP has good reasons to worry about wheat situation in the upcoming months, especially if the currency faces further depreciation. A Ukraine-Russia conflict can certainly exacerbate the situation, but it is perhaps not the greatest threat to price stability at the moment.
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