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The Big Conversation

Episode 125: Export bans and a potential food crisis

This week Jamie McDonald looks at the dramatic moves in agricultural commodities as a result of various export bans, the most recent coming out of India. Will similar announcements from China, Serbia, and Indonesia spark a cascading response from other exporters and risk further inflationary pressures?  With policymakers squarely focused on taming inflation, investors might wish to reconsider their traditional asset allocations.

  • Jamie [00:00:00] Over the weekend, India banned the export of wheat. Why? You may quite rightly ask, well because keeping it domestic is how they have decided to deal with a tsunami of food inflation hitting and about to hit all of our economies. Now, here's the real gut punch. India are the second biggest producer of wheat on the planet. So what happens now? Do the third and fourth follow suit or even worse, does this domino into other commodities more so than it already is? That is today's Big Conversation.

    Jamie [00:00:39] If battling COVID over the past two years has been the priority for policymakers around the world, then inflation is likely in pole position for the next two. It's here and it's not going away overnight. The question is how is each and every country going to react to it? So let's actually recap what happened. A few days ago India's government imposed a ban on all wheat exports, its rationale to combat surging domestic food prices. Now, to the casual observer, this might seem like a logical step. A government using its policies to ensure domestic price stability. While their intentions are fair, the fallout from an export ban by the world's second-largest wheat producer could have severe and wide-ranging implications. For starters, in the immediate aftermath of India's announcement, Chicago Wheat Futures jumped by almost 6%. And they're now approaching the recent highs set back in early March of this year. Now to be clear, India is not the first to announce a commodity export ban. This latest move out of New Delhi follows a similar effort by China that limited the exports of fertilisers as the government sought to secure domestic supplies in June of 2021. Also Serbia announced in March of this year that it would ban exports on wheat, corn, flour and cooking oil to counter price increases. And Indonesia, the world's largest exporter of palm oil, announced a ban on exports of the edible oil just last month. You see, the risk with these types of policy responses is that they have the potential to create a snowball effect. They're not solitary in nature, and in many ways they are provocative. While there's always the possibility that these bans could be lifted once a country determines it has built up storage to a healthy buffer, we can see how one ban tends to lead to another ban and then another. Was India's latest manoeuvre simply a response to surging food prices that had unfolded due to export bans from Serbia? Or was it a function of surging fertiliser prices due to export bans and elevated energy prices that feed into the overall food production process? More importantly, what does this all mean for major global exporters of wheat like the US, Canada and France? Remember, the United States has already floated the idea of an oil export ban as one potential measure to ease the pain of surging energy prices. So a similar response to a potential food crisis is not out of the question. As investors, this most recent development should be front and centre. Inflation is the conversation right now, and keeping an eye on any export bans is critical to predicting when we could see surges. So far in 2022, both equities and bonds have posted steep declines, which has led to a disaster for traditional 60/40 portfolios. If these rolling export bans fuel further food inflation and a resulting strain on consumers, it's likely that the economy is in far worse condition than most forecasters are currently predicting. And investors across both of those asset classes will need to be careful. Slowing growth and hawkish central banks will serve as major headwinds for equities, while elevated inflation is likely to maintain upward pressure on bond yields. In short, the risks of stagflation appear to be rising, and thus investors might wish to increase their exposure to commodities.