The food crisis is real
I'm back! Sorta
Today I want to talk about grains, specifically wheat.
As you may know, I’ve been ‘stacking less on account of my new job at Grid, where I report on economics. At Grid, which launched earlier this year, we’ve been focused on collaboration across beats and desks. I’ve been able to work with our global desk to cover stories about the economic fallout of the Russian invasion of Ukraine and, just today, published a look at the global food crisis.
I don’t need to tell you that Ukraine is the “breadbasket” of Europe, that its rich soil (the “black earth”) has been an object of desire for nationalists, imperialists, eliminationists and collectivists the world over.
And while Ukraine has a hugely productive agricultural sector to this day, it’s not really for Europe (Romania and France grow a lot of wheat), but for the Middle East and North Africa.
Here, I want to more directly address an issue that was only hinted at in the story itself.
The thread below, by the agronomist Sarah Taber, went about as viral as these things can go. Actually, she argues, while you may hear that a quarter of the world’s wheat comes from Ukraine and Russia, it’s really a quarter of the world’s exports, and only 1% of the world’s actual wheat that’s available for consumption.
So, 25% of the world’s wheat crop hasn’t disappeared, she argues. Instead, the futures market was already signalling high prices, so a bit more wheat was grown and supplies will remain consistent. Only around 1% of the global wheat crop is currently inaccessible to end users.
Only a few tweets later does she get to the nub of the issue: while the world wheat supply will likely come into balance as more wheat is planted and harvested in the U.S., Canada, Australia, Argentina and India (this process will take over a year according to Daniel Laborde of the Interntional Food Policy Research Institute), that doesn’t help out Egypt and Lebanon right now, considering the former is canceling tenders for grain because they can’t get a satisfactory price.
As we reported, this is truly the big problem right now, and the timeframe for solving it is in the several-months-to-over-a-year range. Taber also suggests that just talking about a wheat shortage has made this problem worse by seeding fears of a shortage, and thus making grain even more expensive for those who rely on it.
So why am I walking you, my readers, through a Twitter thread framing I disagree with, but conclusions I more or less accept?
Well, for one, while I was writing this story, people I know and consider smart shared this thread in a “I just listened to a podcast or read a magazine article about X and now realize that X isn’t a problem, or at least not a problem in the way everyone else thinks it is,” fashion.
As someone who was investing quite a bit of time and effort in explaining why X indeed was a pretty serious problem for the obvious reason, this annoyed me. And what’s Substack for if not to work out your social media annoyances for the benefit of your subscibers?
But there’s a serious point here. Taber draws a distinction between a “shipping shortage” — the grain counted on by Middle Eastern and North African countries is not being shipped out of Black Sea ports — and a “wheat shortage” — the productive capacity of the world’s wheat growers has permently shrunk. This distinction reminded me of something I frequently encountered in my past life as a finance journalist.
A financial entity with debts and assets can die two ways.
One way is when the value of its debts exceed the value of its assets and it is no longer able to service the debts through the cash generation of its assets. The second way is when the assets are worth more than the debts, but the institution’s ability to turn the assets into the cash necessary to make debt payments has been obstructed.
Now, you may say, Mr. Zeitlin, aren’t these the same thing? Are your assets really worth more than your debts if, during a crisis, you can’t turn them into cash to make your interest payments? Well with that attitude, you’ll never be a financial regulator!
To vastly oversimplify roughly 150 years of thinking about bank regulation, in the first scenario, a central bank is supposed to stay put, in the second scenario they are supposed to lend money to a struggling bank knowing that they’ll be good for it.
To turn an insolvent bank into a solvent one, central bankers say, is to make “grants” — a big no-no as that power should be reserved for the fiscal authorities who collect taxes and operate under the aegis of the legislature or elected executives — while the central bank makes loans.
As Fed Chair Jerome Powell put it when asked about Fed aid following the coronavirus shutdown: “These are lending powers. We can’t lend to insolvent companies. We can’t make grants.” Or, perhaps more…astrigently: “Lehman Brothers in 2008 was not a bankrupt company” and “You have to have enough liquidity to ride out the storm. Been there. Done that. No comment,” — Dick Fuld, the last CEO of Lehamn Brothers.
Fuld was arguing that Lehman’s assets were worth more than they were being valued at by the market. If they had been given a long enough leash from the government or private lenders, they would have worked everything out without the devastating knock-on consequences of Lehman’s uncontrolled bankruptcy. Considering the lenient treatment that institutions-that-were-even-less-bank-like-than-Lehman ended up getting, due precisely to the fear that their chaotic collapse would imperil the global economy, one might say he has a point. There are smart and serious people who more or less agree with him.
Now, I know what you’re thinking. “Matt, why are you doing financial crisis 101, we’re talking about Ukraine. Bagehot? Seriously?” Bear (Stearns) with me for a second.
I think we’re seeing what the connection is. The Bank of France usefully suggests that liquidity problems are a measure of flow (get it, liquidity) i.e. the ability of a bank to turn their assets into cash (or use their assets as collateral for loans) that then flows to their lender. Solvency is a stock problem — does your stock of assets cover your liabilities?
When banks face liquidity problems, what they need is money, in the form of a high volume of loans, collateralized by their existing asset base that is temporarily unable to do its normal work due to the crisis. The nifty thing about central banks is that they can produce the money with a few strokes on the keyboard.
Grain that’s in storage can take weeks to get to a new destination (the convenient thing about Ukrine is that it’s quite close to Egypt, not so much India, Australia or Argentina). And the grain needed to bring the global market into balance is literally not in the ground yet. Taber argues that the high prices are caused by “investors” (I would say traders if I were advancing this argument, even “speculators”) who are making things harder for the Egypts and Lebanons of the world.
But what are high prices if not a sign of flagging supply? The grain is supposed to be going from the countryside to the Black Sea to the Middle East and it isn’t.
So is Egypt experiencing a grain solvency or liquidity problem? Their ability to store and distribute grain has not been degraded by the crisis in Ukraine, their ability to acquire it has.
If the grain could be replaced by stores in other countries, the problem would abate. They only need, Laborde estimates, 15 or so months, assuming Ukraine remains out of the market or degraded in their ability to produce and distribute grain.
But, if you’re running a bank or procuring grain for your largely-poor citizenry, what counts is your ability to raise money and acquire grain now. And now is always.
Egypt’s first great policy entrepreneur, Jospeh, solved this problem by
writing blogs interpreting dreams about the need to convert Egypt’s flows of grains grown during seven years of plenty into stocks of grain to be drawn upon during seven years of famine. Today, Egypt has about 2.5 months of grain in storage.
What Joseph understood is that stability, predictability, and availability of basic commodities was a key government function. In today’s interconnected, globalized world, that responsibility is assigned to a complex intermixture of governments and market actors, where the heavy lifting is done by trade, exchange, and flow, with storage as a backup (if you’re thinking now, as I often am, about the electric grid, you’re not entirely wrong to do so).
Now, I’ll be honest, I’ve lost track of exactly how this metaphor works: are Egypt and Lebanon experiencing a problem of liquidity, of food flow, or a problem of food solvency and storage and availability? The answer is clearly a combination of both, just as it often is with banks in the midst of crisis. This is a problem that gets expressed in high prices and realized in people deciding between feeding themselves and penury.
If you were to say we have a global grain crisis, you would be correct.