Originally Published 2022-05-30 09:46:02 Published on May 30, 2022
The Russian attack on Ukraine’s agricultural industry has largely destroyed the agricultural supply chain. The impact has been felt on the Indian economy as well.
Why India's food value-chain needs better risk management instruments amid Ukraine war
The last few years proved extremely volatile for the food value-chain due to issues ranging from the pandemic-induced supply chain disruptions to the impacts of climate change on agriculture. To add to the already existing woes, the escalation of the Russia-Ukraine conflict has inflicted a major blow to the foundations of the global food security agenda. Ukraine and Russia are the world's ‘breadbaskets’ producing more than 30 per cent of the world's wheat and barley, 20 per cent of the global maize produce, and more than 50 per cent of the world’s sunflower oil. This has resulted in increase in household expenditure on food by 34 per cent over the previous year. The situation is slated to aggravate further with the trade restrictions and sanctions - making the access to these essential agricultural commodities extremely difficult for a host of countries. The biggest victim of the war is agricultural infrastructure whose functions are disrupted due to targeted strikes. The Russian strategy to damage Ukraine's agricultural industry by targeting the country's farms, agricultural equipments, warehouses, markets, highways, bridges, and ports has largely destroyed the agricultural supply chains. This has made its impacts felt on the Indian economy. As Russia is one of the world’s largest producers of sunflower oil and wheat, the sanctions on these food products have spiked up their prices contributing to the ongoing inflationary pressure in the Indian economy. Right at the onset of the war, the prices of sunflower oil, wheat and flour had increased by 19.9, 2.2 and 1.7 per cent respectively, between February and March 2022. On the other hand, while Russia accounts for approximately 18 per cent of India’s tea exports, the supply chain disruptions, logistical hurdles, and a steep fall in the value of Russian Ruble against the US dollar have made exports expensive and uncompetitive.
The Russian strategy to damage Ukraine's agricultural industry by targeting the country's farms, agricultural equipments, warehouses, markets, highways, bridges, and ports has largely destroyed the agricultural supply chains.
Therefore, the concern is all across the food value-chain beginning from the primary producer to the end consumer. The geopolitical developments, therefore, have been inimical to G20’s Matera Declaration in 2021 that focuses on New Delhi’s concerns of food security through farmer welfare and recognising agricultural diversity. One may, however, have a contrarian viewpoint as well. This is because the war, through value-chain disruptions, has made the imports largely uncompetitive in the domestic market. Though axiomatically, the war in that sense has created an “organic protection” for the domestic producers by increasing the tangible and intangible costs of imports, it needs to be seen whether the domestic producers can grab such an opportunity to capture the large Indian market through better capacity utilisation and spurring up their production. This may help create the basis for self-sufficiency in a range of agricultural products. However, the problem is not merely with production as far as the Indian food sector is concerned. The age-old agricultural marketing issues keep on plaguing the sector. As price and event shocks impede the food value-chain, there hardly remain much risk management options to combat such risks. Crop insurance and weather derivatives are largely the instruments that combat production risks. They have nominal penetration in the Indian farm sector. Even if they have, they are not the ones to help the cause of risks emerging from an external sector like that of the Ukraine-Russia war. There is no doubt that the Indian farm sector is no more like the one that used exist in the 1990s: an insulated system with nominal exposure to the vagaries of international trade and finance. Rather, the farm value-chain gets affected by international trade and events, ever since the late 1990s. Under such circumstances, an economy is generally left with two response options: risk management responses from governments by disbursing the buffer stocks through the public distribution systems thereby ensuring access of food for all, and second, risk management through market-based instruments like derivatives, e.g. forwards, futures, options, etc.
Crop insurance and weather derivatives are largely the instruments that combat production risks. They have nominal penetration in the Indian farm sector.
Let us come to the first point. During the pandemic, the government has played a critical role to enable food access through its various distribution channels. But, interestingly, some conditions that contributed to food stresses globally during the initial Covid-19 lockdowns can also be witnessed now. These include supply chain disruptions and high “transaction costs” of imports. However, one needs to note here that high dependence on governmental systems only cannot make the food sector stand on its feet. Buffer stocks and norms have failed in many parts of the world (e.g. Papua New Guinea) earlier. This brings to the fore the importance of market-based risk management instruments. An UNCTAD report of 1996 highlighted the importance of commodity derivatives trading in India in view of the liberalising agricultural trade. The idea was that as Indian agriculture becomes more and more liberalised and exposed to the external vagaries, there will be a need to hedge against such risks. One of the motivations for setting up demutualised commodity derivatives exchanges was to provide a platform for hedging (risk management) and price discovery especially for food items. Unfortunately, despite two decades of their operations in India, the roles of derivatives exchanges in provision of these two services in the agricultural domain still remain under question for most food items. Of course, the importance of such market infrastructure institutions cannot merely be confined to hedging only, but also extends to price dissemination and market integration. Yet, given the fragmented nature of the agricultural markets in India, as also due to the extensive digital divide, electronic markets have largely failed in India to bring about any form of market integration. Even over the last six years, initiatives like the electronic spot market, E-Nam (a pan-India electronic trading platform), has also failed to emerge as a platform for market integration and price stabilisation. It has often been stated that the failures of the commodity exchanges in India to emerge as platforms for price discovery, risk management and price stabilisation and integration across markets should be attributed to the inefficiencies existing in the spot and physical markets. This has also been hindered due to lack of product innovation for risk management across the food value chain.
One of the motivations for setting up demutualised commodity derivatives exchanges was to provide a platform for hedging (risk management) and price discovery especially for food items.
Therefore, if India had to take advantage of the condition of this “organic protection” of its food and agricultural sector and ensure food security, spurring up of production will not help without right marketing and distribution strategies. Historically, governments have played important roles during emergencies like the outbreak of war, or a pandemic. An essay by Amartya Sen during the initial stages of the lockdown reiterated the need for equity and the distribution aspects of development by quoting the example of how life expectancy at birth in England and Wales increased during the war (Financial Times, April 15). He stated, “ The positive lessons from pursuing equity and paying greater attention to the disadvantaged helped in the emergence of what came to be known as the welfare state”. However, the modern economy cannot rely entirely on governments to emerge as “bail-out” institutions. Rather, it is upto governments to create enabling conditions so that even during “thunder, lightning and rain” the marketing channels are rationalised to the extent of creating the best possible distribution networks and can take advantage of “organic protections”. Better risk management instruments, better product innovation, and efficient market infrastructure institutions are becoming increasingly important for India not merely to combat emergencies like pandemic or war: they are also important because India contemplates to sign free-trade agreements (like the proposed Comprehensive Economic Cooperation Agreement (CECA) with Australia by the end of 2022) that will expose Indian food sector to greater external exposures and competition.
This commentary originally appeared in India Today.
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Authors

Nilanjan Ghosh

Nilanjan Ghosh

Dr. Nilanjan Ghosh is a Director at the Observer Research Foundation (ORF), India. In that capacity, he heads two centres at the Foundation, namely, the ...

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Soumya Bhowmick

Soumya Bhowmick

Soumya Bhowmick is an Associate Fellow at the Centre for New Economic Diplomacy at the Observer Research Foundation. His research focuses on sustainable development and ...

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