On Bread & Butterflies – Ripples of War?

It is still not clear if war is coming – although there is certainly that ominous building of tension that comes before the thunderstorm. How much of that is manufactured by media hysteria and hawks as opposed to reality is an open question. Nonetheless, I wanted to write a quick piece on some of the potential consequences of war breaking out over Ukraine.

I should stress that hear I’m not necessarily going to talk about boots on the ground and the risk of an escalation to a full on West/Russia confrontation – I personally see that as unlikely, although there is certainly the risk of such an escalation to that level. Instead, I’m going to address some issues that the average citizen may not have considered yet. And to that I need to discuss bread and butterflies (or, rather, butterfly theory).

Bread

Ukraine is a major exporter of wheat, as well as other agricultural products. Of course, they have other exports, but their primary export is cereals – corn, rye and wheat. And of that, they’re the fifth largest wheat exporter in the world. And Ukraine’s primary wheat production is in eastern Ukraine, the most likely site of any war.

Additionally, several countries that surround the Black Sea are also major wheat exporters – think Russia (17.7% of global production), Romania (2.1% of global production) and Bulgaria (1.6% of global production), the worlds number one, eleventh and thirteenth top wheat exporters. Combined with Ukraine those four countries alone account for about a third of global wheat production, which much of it exported via ship through the Black Sea. Additionally, land locked Kazakhstan, the ninth largest exporter of wheat (2.5% of global production), ships a huge amount of its wheat via the Black Sea through Russian ports.

Any outbreak of fighting in Ukraine will most likely disrupt global wheat supply through not just the impact on Ukraine (8% of world production) but the likely disruption of trade through the Black Sea.

On top of that disruption from war, there have been major wheat crop failures in other major wheat production areas of late – Kansas and Oklahoma, the two main US (14.1% of global wheat production) wheat producing areas, have suffered major droughts recently greatly impacting wheat production, as has Australia (6% of global production) and Canada (14.1% of global production).

So, what does all this mean? Well, when the price of a raw material goes up, so does the price of products made from it. When it comes to wheat, that means bread, pastries, pasta, pizza and beer. Now, it’s not a one to one correlation – the price of bread doesn’t increase in direct proportion to the increase in the price of wheat. That’s because there’s other factors involved other than just wheat. However, the price does go up all the same. And indeed, if you look at the price of wheat recently, you’ll see it has largely gone up in conjunction with tensions in Eastern Europe and droughts:

As of Monday, January 24th, 2022

What does this mean for the average consumer? Well, that depends where you are. For us in Bermuda, the main impact is going to be a slightly higher grocery bill and restaurants. An added frustration on top of already increasing cost of living thanks to supply chain disruptions.

Basically, supply of wheat is already down, and war in Ukraine risks greatly reducing supply even more. At the same time, demand is largely static. There’s some elasticity in terms of switching to other starches (other cereals, potatoes, etc.) but that just increases demand for those. Either way, prices will go up. Which brings me to butterflies…

Butterflies

Anyone who’s read or watched Jurassic Park is likely familiar with butterfly effect of chaos theory:

Basically, a small change in one thing can lead to a chain of reactions ending in a large change elsewhere. Admittedly, I’m using more the popular conception of the concept rather than the original concept. Nonetheless, I feel it applies for my purposes.

For the average consumer in the West any increase in the price of wheat will be seen as an annoyance, if we even register it at all, beyond a general recognition that the cost of living is increasing – and it’s not just your food bills either, in as much as it can increase the cost of labour to compensate for the cost of living, leading to an all round increase in all prices. Annoying, yes. But, all things considered, not that big a deal in the West.

In other countries though, especially those countries particularly dependent on Ukrainian wheat, and especially those already experiencing challenges (drought, war, oppression), the increase of wheat is going to have a much greater impact. So, what countries are particularly exposed to Ukrainian wheat – and for whom any war in Ukraine will cause a major economic shock? The top ten are:

  1. China
  2. Egypt
  3. Indonesia
  4. Spain
  5. Netherlands
  6. Turkey
  7. Tunisia
  8. Bangladesh
  9. South Korea
  10. Libya

In addition, there are countries that are not major importers of Ukrainian wheat, in absolute terms, but whose consumption of wheat is relatively major. If we were to look at which countries are particularly dependent on Ukrainian wheat in terms of percentage of wheat consumed, we get:

  1. Lebanon – 50% dependent
  2. Libya – 43% dependent
  3. Malaysia – 28% dependent
  4. Indonesia – 28% dependent
  5. Yemen – 22% dependent
  6. Bangladesh – 21% dependent
  7. Egypt – 14% dependent

On this, we should take note that the Arab Spring which began just over a decade ago, was in many ways sparked by increased food costs. Many of the countries that are particularly exposed to Ukrainian wheat were also part of the Arab Spring – even if almost all are now undergoing the ‘Arab Winter’. Many remain relatively unstable, even if coups have installed new authoritarian regimes. In countries with ongoing conflict (Libya, Yemen) the disruption of Ukrainian wheat may potentially trigger famines, and in other countries we may see renewed conflict (Egypt, Tunisia, Turkey). Other countries are less vulnerable, but still at risk – such as Morocco and Algeria, but also Iraq.

Potentially, war in Ukraine could see far-reaching ripples far beyond the shores of the Black Sea, and potentially destablize major regions of North Africa, the Middle East and South-East Asia. These in turn have the potential of sparking conflicts elsewhere – for example, it could reignite conflicts between Iran and Saudi Arabia in a chain reaction.

Of course, there’s a lot of what if’s in all of the above. All the same, it’s worth considering the potential ramifications. And in the meantime I’m going to plant a lot of corn and sweet potatoes in my backyard, as well as stock up on some pasta…

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