Russia's invasion of Ukraine has "rattled and shaken" global grains markets in the here and now, but potential longer-term structural changes should also be on the radar as governments respond to the crisis.
In particular, the crisis has spurred on an already-growing trend of government involvement in markets, it has raised the possibility of a wind back of biofuel policy in the northern hemisphere and the sanctions imposed on Russia could have a larger-than-expected impact on the country's ability to produce and export grains and oilseeds.
Accelerating food prices and geopolitical instability has led to an increase in government intervention around the world, from export taxes to de facto semi-nationalisation of the grain trade in some countries. Rapidly-rising inflation has already led to a slew of export constraints being implemented, from Indonesia's temporary ban on palm oil exports to Russia's implementation of export taxes last year.
There is also an increase in government-to-government trade, and a shift away from trade facilitated by the private sector. The most recent example has been India's export ban, which then saw half a million tonnes of wheat sold by the Indian government to the Egyptian government not long after India's export "ban" was implemented. The result of genuine export bans is relatively straightforward: trade flows are disrupted and global prices become more volatile. The result of governments becoming participants in the grain trade is more grain moving where the exporting government sees the most political benefit rather than where the highest price is offered or via the most efficient export pathways.
The growth of biofuel demand for grains and oilseeds globally has had a significant impact on global markets over the past two decades. In Europe - Australia's biggest canola export destination - as a consequence of the Russian-Ukraine war impacts, government are re-examining the use of crops to generate fuel. It is becoming politically difficult to justify the use of vegetable oils in fuel to reduce emissions as opposed to leaving more for food. If the biofuel policies are wound back, so would be the demand for canola and other oilseeds. The "catch-22" is that any movement away from biofuels puts Europe at the greater mercy of Russian energy, the last thing currently needed. Nonetheless, if policies changed towards permanently seeking to preserve grains and oilseeds for food, it would alter the fundamental basis of the global oilseeds market.
Lastly is the possible impact on Russian agricultural production as a result of its invasion of Ukraine. The first impact is straightforward - a lack of new machinery and parts, as well as crop genetics and some agrichemicals, will start weighing on agricultural productivity.
A less straight-forward impact is the possible reduction in government support for Russian farms as a result of reduced government revenues. Russian farmers reportedly receive a range of benefits, from cheaper fuel than other domestic industries to cheaper loans. If government revenues shrink due to sanctions, this support could be cut back, which would theoretically reduce the competitiveness of grains and oilseed production in Russia and in the export market.
While these three changes are by no means locked in, the potential impacts would be significant due the structural effect they could have on the global grains industry.
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