The invasion of Ukraine will affect South Africa and skyrocketing oil prices will not be alone. However, there will be more indirect than direct impacts, with global inflation topping the list, although South Africa will also benefit from the opportunity to export more platinum when sanctions hamper Russian exports.
Ukraine and Russia are two of the largest producers of wheat and oilseeds, which have been the main drivers of global food prices since 2020. To write for The conversationWandile Sihlobo, chief economist of the Agricultural Business Chamber of South Africa (Agbiz), said Russia and Ukraine play an important role in the global agricultural market and African leaders should pay attention.
He says African countries imported $4 billion worth of agricultural products from Russia in 2020 and about 90% of this was wheat and 6% sunflower oil. Egypt accounted for nearly half, followed by Sudan, Nigeria, Tanzania, Algeria, Kenya and South Africa.
In turn, Ukraine exported $2.9 billion worth of agricultural products to Africa in 2020. About 48% of this was wheat, 31% corn, and the rest was sunflower oil, barley and soybeans.
Ukraine and Russia in the agricultural market
Sihlobo points out that Russia and Ukraine are major players in the global market, with Russia producing about 10% of the world’s wheat and Ukraine 4%. Their combined production is almost as large as the total wheat production of the European Union (EU) and together they make up a quarter of the world’s wheat exports.
With both countries also major producers of corn, Ukraine and Russia will account for 14% of global corn exports in 2020. They are also leading producers and exporters of sunflower oil, with Ukraine exporting 40% of global sunflower oil exports and Russia 18%.
Sihlobo says he shares analysts’ concerns that an intensification of the conflict could disrupt trade and negatively impact global food stability, especially over the large price hikes of global grains and oilseeds.
These prices escalated due to drought in South America and Indonesia and rising demand in China and India. “Disruption to trade, as a result of the invasion, in the key producing area of the Black Sea would contribute to higher global prices for agricultural commodities – with possible knock-on effects on global food prices. A rise in commodity prices was apparent just days after the conflict.”
Prices for grains and oilseed are already rising
Domestic Safex corn rose more than 5% globally last week and wheat nearly 7%. “In the days leading up to the Russian move, there was a spike in the international prices of a number of commodities. These include corn (21%), wheat (35%), soybeans (20%) and sunflower oil (11%) compared to the same period a year ago. This is remarkable, as the prices for 2021 had already been increased.”
Sihlobo says the invasion will benefit as the impact will lead to price hikes that will benefit farmers now struggling with the high cost of fertilizers, but points out that rising commodity prices are bad news for consumers who already have food. experienced price increases in the past two years.
“Some countries on the continent, such as South Africa, benefit from the export of fruit to Russia. In 2020, Russia accounted for 7% of South African citrus exports in terms of value and 12% of South Africa’s apples and pears. Africa, making it our second largest market.”
Russia’s and Ukraine’s agricultural imports from Africa are marginal, averaging just $1.6 billion over the past three years, mainly for fruits, tobacco, coffee and beverages.
According to the Bureau of Economic Research (BER) at Stellenbosch University, the rand has behaved quite well so far despite the turmoil, losing just 0.5% week-on-week against the US dollar last week.
However, the BER warns that the rand could be negatively impacted if emerging market (EM) sentiment in general deteriorates, as heightened global geopolitical tensions are generally negative for the rand, although it is now considered safer than the rand. some of his usual EM peers.
This also applies to Turkey, which has its own problems with monetary policy. The JSE Alsi also saw a major sell-off on Thursday, which despite a small rebound on Friday meant the stock lost 2.8% week-over-week.
The BER says Friday’s recovery was in line with global market trends, but uncertainty remains. Several countries have already stopped flights to Russia and/or prevented aircraft from using Russian and Ukrainian airspace and, more importantly, banned Russian aircraft from entering their airspace.
This means that, in addition to friction from financial sanctions, global supply chains could be further disrupted as Ukraine and Russia are major players in the air freight markets.
Aside from direct losses from an escalating war, the most immediate impact on the global economy could be that the current high inflation rate persists even longer, the BER said. “In addition to higher global grain prices, the price of Brent crude has crossed $100 a barrel by the end of the week for the first time since 2014.
“Brent crude cost an average of $96 a barrel in February, almost 10% higher than in January and the result is the price increase for domestic gasoline of a substantial R1.46/litre on Wednesday. An environment of ongoing supply shocks that could dampen demand is complicating the future interest rate path for many central banks.”
While central banks generally do not respond to one-off cost pressures, the BER believes that multiple supply shocks carry a greater risk of secondary price effects.
South African trade with Russia and Ukraine
While South Africa’s trade relations with Russia are relatively limited, as the country accounted for less than 0.4% of total goods exports in 2021 and imported goods worth R9.2 billion in 2021, less than 1 % (0.7%) of total imports, some listed companies have more exposure to the country.
The BER says specific sectors, such as citrus growers and fruit exporters, are more vulnerable to downside risks if trade with Russia comes under pressure from sanctions and a likely sharp downturn in the Russian economy.
South Africa’s trade relations with Ukraine are also very limited. “While higher oil prices here will also have inflationary implications, ongoing geopolitical tensions have pushed up the prices of some of our most important export commodities, including platinum group minerals (PGM) and gold. Russia is the largest palladium producer in the world, with SA in second place.”