4 ms·

I do not agree with the author's analysis - the impact on supply and demand are enormous, and the 1% number does not matter. Effectively, the wheat buyer in Eg

I do not agree with the author's analysis - the impact on supply and demand are enormous, and the 1% number does not matter. Effectively, the wheat buyer in Egypt (and other importers) needs to pay high enough prices such that: 1. Industrial wheat consumers in Europe/US and elsewhere substitute wheat with other products, making more wheat available for exports. 2. Previously untapped stocks get exported instead of stored. Is there enough wheat worldwide? Yes. The question is what price Egypt needs to pay to secure its supplies, and if Egypt can afford to pay that price. More details for the interested: Ukraine exports around 20 million tons of wheat each year. https://www.indexmundi.com/agriculture/?country=ua&commodity=wheat&graph=exports https://www.indexmundi.com/agriculture/?country=ua&commodity.... We have to assume that Russian wheat will continue to be exported - there is no way that countries like Egypt will sanction Russian wheat. In the worst case scenario Ukraine will not ship any wheat for a year due to port closures and destroyed infrastructure, so the world loses 20 million tons of wheat exports. There are two ways to solve the issue - by increasing supply or rationing demand. High prices help with both. Supply solution: 1. Increase physical supply: It is not easy to source this amount of wheat elsewhere, especially not within a year. Most wheat in the northern hemisphere was planted last fall, meaning higher prices will not trigger a supply response for 1.5 years. Argentinean and Australian farmers can still increase their wheat plantings, but this will not be exported until November 2022 at the earliest. At the same time, the Ukrainian exports are missing right now. 2. Draw down global wheat stocks: Higher prices can make previously uneconomical exports profitable, pulling wheat from every available storage. The backwardated futures curve that helps with that - it makes storing wheat uneconomical. Stocks everywhere will draw down further, which means that wheat prices will remain elevated and susceptible to any further supply shocks (bad weather). Demand destruction: High prices destroy demand for wheat. Human consumption is relatively inelastic, meaning higher prices have little impact on consumption (and catastrophic consequences). However, wheat is also fed to animals or used for ethanol production, where demand is more sensitive to prices. Source: Working in wheat trading.

thehappypm 5y ago
How do you argue that wheat demand is inelastic? Demand for food as a whole is inelastic, but wheat is just one of many, many food sources. Wheat is a cheap food. The second is stops becoming cheap people will shift to other cheap foods like rice or potatoes. I see a more modest increase in demand for alternatives that pulls all prices up, but it’s hard to see how prices skyrocket.
- jacobolus 5y ago
  You are expecting everyone in a country that usually consumes ~5–10x more wheat than rice or potatoes to flip their whole food culture overnight? Do you have any historical examples of that happening? How did it work out? Where are they going to ship the tens of millions of extra tons of rice/potatoes from that won’t be just as big a logistical change?
  - thehappypm 5y ago
    The best example is the Irish potato famine. Happening in the mid 1800s. You’d hope today’s more robust diets and supply chains would improve things
- log1_aa 5y ago
  You are right in that there are countries where wheat as a food source can be substituted with other sources of calories in case of relative price differences. These are usually countries where wheat is not a traditional food staple, but where wheat products (cakes, cookies, bread) have started to replace local food supplies in a growing middle class. Unfortunately the big Middle Eastern importers of wheat have traditionally had a wheat heavy diet, and it is very hard to change dietary customs. And as another commenter said, it is not easy to replace 20mt of wheat with 20mt of rice or potatoes.

thehappypm 5y ago

How do you argue that wheat demand is inelastic? Demand for food as a whole is inelastic, but wheat is just one of many, many food sources. Wheat is a cheap food. The second is stops becoming cheap people will shift to other cheap foods like rice or potatoes. I see a more modest increase in demand for alternatives that pulls all prices up, but it’s hard to see how prices skyrocket.

jacobolus 5y ago
You are expecting everyone in a country that usually consumes ~5–10x more wheat than rice or potatoes to flip their whole food culture overnight? Do you have any historical examples of that happening? How did it work out? Where are they going to ship the tens of millions of extra tons of rice/potatoes from that won’t be just as big a logistical change?
- thehappypm 5y ago
  The best example is the Irish potato famine. Happening in the mid 1800s. You’d hope today’s more robust diets and supply chains would improve things
log1_aa 5y ago
You are right in that there are countries where wheat as a food source can be substituted with other sources of calories in case of relative price differences. These are usually countries where wheat is not a traditional food staple, but where wheat products (cakes, cookies, bread) have started to replace local food supplies in a growing middle class. Unfortunately the big Middle Eastern importers of wheat have traditionally had a wheat heavy diet, and it is very hard to change dietary customs. And as another commenter said, it is not easy to replace 20mt of wheat with 20mt of rice or potatoes.