by: Ian Sheldon, Professor and Andersons Chair of Agricultural Marketing, Trade, and Policy, Agricultural, Environmental, and Development Economics, Ohio State University and Chris Zoller, Associate Professor and Extension Educator, Agriculture & Natural Resources, Ohio State University Extension – Tuscarawas County
Use of Commodity Export Policies
With Russia and Ukraine alone accounting for 12 percent of total calories traded (IFPRI, April 13, 2022), continuation of the war has intensified the vulnerability of developing countries to food insecurity, the G7 countries recently predicting 43 million people were being pushed towards famine (The Guardian, May 14, 2022). The impact of Russia’s invasion of Ukraine on exports from the Black Sea region of staple foods such as wheat, corn, and vegetable oils, has had a significant impact on world food prices, adding to the impact of supply chain disruption due to the pandemic, and drought-reduced yields in 2021. The UN Food and Agriculture Organization (FAO) reports that its food price index stood at 158 points this April, 30 percent higher than in April 2021, and its highest level since 1990, (UN/FAO, April 2022).
Like past food price crises, notably the grain price spikes in 2007-2008 and 2010-2011, many countries are responding to higher food prices and shortages with restrictions on exports of key commodities. As of April 2022, 16 countries had imposed export restrictions, including Ukraine, Russia, Indonesia, Argentina, Turkey, Kyrgyzstan, and Kazakhstan, affecting about 17 percent of total calories traded, the key commodities being wheat, palm oil, corn, sunflower oil, and soybean oil, affecting 36, 55, 17, 78, and 6 percent of their exports respectively (IFPRI, April 13, 2022). As is already the case with the announcement of proposed ban on all Indian wheat exports (Bloomberg, May 13, 2022), more countries are likely to respond to increasing food prices in this way. Unfortunately, this has the potential of creating a “collective action” problem, i.e., countries have a unilateral incentive to reduce domestic food prices by using export restrictions, but if enough countries implement such policies, it simply exacerbates the rise in global food prices. At the same time, the World Trade Organization (WTO) lacks an effective means to discipline use of such “beggar thy neighbor” policies.
The Case of Vegetable Oils
Prior to Russia’s invasion of Ukraine, between them the two countries accounted for 73 percent of global exports of sunflower oil. By late-April, there had been a 25 percent reduction in traded sunflower oil, and there is also uncertainty about how much sunflower seed has been planted in Ukraine this spring (New York Times, April 30, 2022). Even though sunflower oil accounts for only 9 and 12 percent of global vegetable oils production and consumption respectively (USDA, April 12, 2022), the global price of vegetable oils has already risen to an all-time high this year (Financial Times, May 9, 2022), with canola, palm oil, sunflower oil, and soybean oil prices rising by 72, 61, 44, and 41 percent respectively in the past year (Wall Street Journal, April 7, 2022). Not surprisingly, with limited stocks and rising prices, vegetable oils are even being rationed to consumers by major grocery retail chains in developed countries such as Belgium, Spain, and the United Kingdom (New York Times, April 30, 2022).
The rise in vegetable oil prices has also been exacerbated by Indonesia recently banning exports of palm oil to protect its domestic consumers (Reuters, April 22). The expected global impact of the ban is not surprising given Indonesia accounts for 59 percent of global palm oil production, palm oil accounting for 35 and 33 percent of global vegetable oil production and consumption respectively (USDA, April 12, 2022). Add to this the fact that substitutes such as soybean oil and canola are not readily available due to recent drought conditions in Argentina, Brazil, and Canada (Reuters, April 23, 2022), which is putting further pressure on vegetable oil prices. For example, soybean oil prices on the Chicago Board of Trade had risen by almost 50 percent by end of April this year (Reuters, April 22, 2022).
Implications for U.S. and Ohio Soybean Farmers
The Russian invasion of Ukraine has driven home a fact we have always known – agriculture operates in a global environment. Access to export markets is critical to U.S. agriculture, especially for soybeans, the number one export for U.S. agriculture. According to the USDA Foreign Agriculture Service (FAS), in 2020, U.S. soybean exports to the world reached a record $25.7 billion in value.
The May 2022 World Agricultural Supply and Demand Estimate (WASDE), available here: https://www.usda.gov/oce/commodity/wasde/wasde0522.pdf changed its soybean outlook, including raising the 2022/2023 average price from $13.25 per bushel to $14.40 per bushel. A projected increase in U.S. soybean production will result in an increase of 6.1 million tons of oilseed production compared to 2021/2022. WASDE also forecast global soybean production to increase, with Brazil representing more than one-half of the increase. The Brazilian soybean crop is expected to be a record 149 million tons, with Argentina adding another 51 million tons. As is the case in the U.S., weather can have a significant impact on soybean production in South America.
It is difficult to think about planning the 2023 crop when we are behind schedule getting this year’s seeds in the ground, and much can and will change between now and the 2023 planting season. However, you may want to consider an analysis conducted by the University of Illinois examining production and profitability from double-crop soybeans. The article is available here: https://farmdocdaily.illinois.edu/wp-content/uploads/2022/05/fdd051722.pdf. We provide a summary below.
The authors of the article evaluate a wheat-double-crop-soybean rotation for 2023 and find this production practice to be more profitable than growing either corn or soybeans, especially in southern Illinois. The authors note that in the long-run, yield increases are necessary before there will be widespread adoption of this production practice. Much of the projected profitability is related to higher prices because of the war in Ukraine. In addition, more acres planted to wheat would likely drive down its price.
The authors note that these technological advances may be useful:
- Development of wheat varieties that could be harvested earlier.
- Higher yielding wheat varieties.
- Double-crop soybean varieties with higher yield potential.
If interested in reading more of the specifics of this analysis, click the link above.
There are several uncertainties related to soybean prices, including how long the war continues, weather, production, demand, fertilizer price, etc., that are out of your control. We encourage you to manage what you can control and consider the following:
- How might global events impact your business
- Know your cost of production.
- Develop budget scenarios. As of this writing, soybean futures for November 2023 closed at just over $14.00 per bushel.
- Utilize OSU Extension Crop Enterprise Budgets: https://farmoffice.osu.edu/farm-management/enterprise-budgets#2022
- Talk with your agronomist, Extension Educator, lender, and other advisors.