To depict the impact of the drought in RUK, results of the reference scenario (drought in RUK) are compared to the baseline (normal weather conditions), whereas the policy scenarios (temporary export restrictions in RUK) are compared to the benchmark scenario in order to show the additional market and price impacts of the policies implemented. The final projection year in the scenario simulations is 2021. However, here we present only the scenario results for the year 2015, i.e. the year of the modelled harvest shock and the implementation of temporary export restrictions in RUK. We concentrate on the year 2015 because the scenario results indicate that the short-term effects are the most critical ones in terms of global food security. In the short-term, farmers have only limited possibilities for adapting their production behaviour to the new market conditions (as most of the planting decisions have already been taken). The further scenario results show that in 2016 farmers reacted to changed (world) market conditions, and world grain markets started to regain their pre-shock baseline levels.
Simulation results of the benchmark scenario show that a reoccurrence of the 2010 RUK harvest situation in 2015 would cause a total decrease in production in RUK of 29 % for wheat and 34 % for coarse grains compared to the baseline (i.e. under normal weather conditions) (Table 3). For wheat, the production decrease in RUK implies a decline in world production of 4 %, which leads to a 23 % increase in world market prices. Due to the higher world prices, certain countries such as the USA and the EU increase their exports.Footnote 11 However, increases of exports in third countries are rather limited, because planting decisions of farmers have already been taken before the drought event in RUK. Therefore an export increase by third countries is only possible with a switch from domestic use to exports or with stock releases. A switch in domestic use can occur due to the substitution of wheat by other feedstock, but this is also rather limited as wheat demand for food consumption is quite inelastic, and scenario results indicate that substitution takes place mainly in the feed sector and only marginally in the biofuels sector. The higher world market prices for wheat are transmitted to consumers through higher consumer prices for bread and other foods containing wheat, which provokes a decrease in global wheat consumption of 2 %. With regard to the RUK domestic markets, aggregated consumption decreases by 7 % and exports by almost 70 % compared to the baseline. Lower supply leads to higher producer prices. However, in Ukraine and Kazakhstan, the price increase does not compensate for the loss in quantity produced, resulting in decreases in production valueFootnote 12 by 5 % and 20 %, respectively. By contrast, in Russia, where the highest producer price increases are projected, the production value increases by 10 %. Consumers are penalised by the increase in food prices in all three countries, being least affected in Russia and moderately affected in Ukraine and Kazakhstan.
For coarse grains the simulated drought in RUK has less effects on the world market than for wheat, which is attributable to the lower share (10 %) of RUK exports in the world market. However, even though world coarse grain production and consumption decrease each by only 1 % in comparison to the baseline, the effect on the world price is substantial, as it increases by 15 %. This price increase triggers an increase in coarse grain exports of third countries (especially USA, Brazil and EU) by almost 10 %.
Export restriction scenarios: Impact on world food prices
Not surprisingly, scenario results show that the world market prices for wheat and coarse grains would increase more with RUK export restrictions than if the market were free to adjust to the lower grain availability caused by the drought in RUK. However, the effect on world market prices varies significantly in the policy scenarios, depending on the level of restriction adopted (cf. Fig. 2).
In Scenario 1, when all three countries introduce export bans, world trade in wheat decreases by 6 % compared to the benchmark scenario. Due to RUK’s high share in world exports this provokes an increase in the world price of wheat of 11 %. In Scenario 2, where the RUK countries restrict their wheat exports to a total quota of 3.3 Mt, total exports decrease by 4 %. The impact on the world market price is lower than in Scenario 1, but it still increase by 7 %. Contrary to an export ban or tight export quotas, the introduction of a 9 % export tariff on wheat in Scenario 3 allows the RUK countries to continue exporting significant amounts, which results in exports of more than 9 Mt. Therefore total RUK exports decrease by only 1 % and the world price increase by 1 %.
For coarse grains, only the export restriction measures introduced in Ukraine are projected to have a noticeable impact compared to the benchmark scenario, as the other two countries are major producers but do not export such significant quantities. Moreover, the share of RUK in the world coarse grains market is lower than the total share of RUK in the wheat world market. Therefore the effects of the export measures on world market prices for coarse grains are similar to those for wheat but at a lower level. The increase in world coarse grains prices varies between 6 % in Scenario 1 and less than 1 % in Scenario 3. The increase in world prices induces major coarse grains producers, such as the USA and the EU, to further increase their exports (up to 3 % in Scenario 1) compared to the benchmark scenario. This export increase in third countries is possible because coarse grains can be substituted by other feedstock to feed animals or to produce biofuels.
Export restriction scenarios: Domestic impacts in RUK
In the benchmark scenario Russian wheat production was set at 43.5 Mt (as experienced in 2010), implying that the drought caused a 27 % decrease in Russian wheat production compared to the baseline (Table 3). With the introduction of the export ban in Scenario 1, Russian exports drop to 0, whereas the 1.39 Mt export quota restriction in Scenario 2 results in a 28 % decrease of exports in comparison to the benchmark scenario. The 9 % export tax in Scenario 3 is more restrictive than the quota and implies a 39 % decrease in Russian exports (Fig. 3). Russian producer prices are only slightly affected by the introduction of the different export restrictions. The drop in exports is already drastic in the benchmark scenario (almost −90 %), considering that the simulated decrease in production (−15.9 Mt) is relatively close to the quantity exported in the baseline scenario (13.7 Mt). Compared to the benchmark, the decrease in Russian producer prices for wheat varies between no change with an export quota to decreases of 6 % and 3 % with an export ban and export tax, respectively. Domestic consumption increases by 4 % with an export ban and by 2 % with the export tax, whereas consumption remains stable with the modelled export quota.
In Ukraine and Kazakhstan the situation is very different from the situation in Russia, as in the baseline, i.e. under normal weather conditions, the two countries are projected to export almost 50 % of their wheat production in 2015 (whereas Russia exports about 23 % of its production). With the drought in the benchmark scenario, wheat production decreases by 27 % in Ukraine and 41 % in Kazakhstan, resulting in production of 17 Mt, and 10 Mt respectively. Thus the simulated production loss is lower than the countries’ export levels in the baseline scenario (Table 3) and therefore Ukraine and Kazakhstan continue exporting significant quantities of wheat (6 Mt and 3 Mt respectively) in the benchmark scenario. Under these circumstances the introduction of an export ban or a very restrictive quota has considerable impacts on producer prices. As such policies imply that huge quantities of wheat would be released on the domestic market, they put downward pressure on domestic prices. Consequently, Ukrainian producer prices are projected to be 61 % (Scenario 1) and 55 % (Scenarios 2) below the prices in the benchmark scenario. This implies that in Ukraine the producer prices could be even below the baseline level, which would be remarkable because production declines due to drought would usually imply an increase in prices rather than a decrease. Introducing an export ban or a restrictive export quota would therefore also potentially result in lower consumer prices than in the situation without a drought, leading to consumption increases of 19 % and 17 %, respectively. By contrast, the introduction of a 9 % export tax on Ukrainian wheat in Scenario 3 is much less market disruptive. Compared to the benchmark, Ukrainian exports decrease by only 6 % and producer prices by 7 %, whereas domestic consumption remains stable. Nonetheless, Ukrainian wheat producers still loose 12 % of production value compared to the baseline, whereas without any export restrictions the loss would be 7 % due to the drought (Fig. 4).
In Kazakhstan the impact of the export restriction measures is similar to the impacts in Ukraine, but the magnitude is different because in Kazakhstan the level of quantity exported in the baseline is closer to the simulated production loss due to the drought. Consequently, when exports are banned, the additional quantity released on the domestic market put slightly less pressure on domestic market prices. Nevertheless, in Scenario 1, producer prices in Kazakhstan decrease by 32 % and consumer prices by 10 %, whereas consumption increases by 11 % compared to the benchmark scenario. With an export quota set at 0.9 Mt in Scenario 2, exports decrease by 66 %, producer and consumer prices decrease by 24 % and 7 % respectively, and consumption increases by 8 %. By contrast, the introduction of a 9 % export tax on wheat in Scenario 3 is not very restrictive, with exports decreasing by 10 %, producer prices by 6 %, consumer prices by 2 % and domestic consumption increasing by 2 %. Thus, the simulated policy objective of maintaining stability of domestic consumer prices in Kazakhstan is reached with both the export ban and the export quota. However, with the modelled export quota, Kazakh producers are better off than with the export ban, as it allows for a small price increase (+3 %) in comparison to the baseline, whereas with an export ban, producer prices are below the baseline level (−7 %). The tax level of 9 % used in Scenario 3 are not enough to keep consumer prices at the same level as in the baseline, as they increase by 7 %, which is 2 percentage points less than in the benchmark scenario.
The OECD-FAO (2012) agricultural outlook projects an increase in livestock production in Russia over the coming years and therefore the domestic consumption of coarse grains is expected to increase in order to feed the livestock. This development implies reduced levels of exports of Russian coarse grains in the simulated year 2015. In this context, the introduction of export restrictions on Russian coarse grains is less relevant because the quantitative restrictions are not binding and therefore do not further affect producer prices. Moreover, as a reaction to the drought and in order to be able to feed its livestock, Russian coarse grain imports in all policy scenarios are five times greater than in the baseline. Kazakhstan is not a major producer or consumer of coarse grains and therefore coarse grains scenario results are not further commented for this country. By contrast, Ukraine is a major player on the world market for coarse grains. As a consequence of the drought, a drop in coarse grains production of 4 Mt is simulated. Simulation results of Scenario 1 show that, with an export ban, almost 9 Mt of coarse grains are additionally kept on the domestic market. As a consequence, and despite the increase in world prices, Ukrainian producer prices would be 66 % and consumer prices 26 % below the prices in the benchmark scenario. With the implementation of a 5.2 Mt export quota in Scenario 2, the producer price decrease in Ukraine is less than with an export ban, but is still very significant (−47 %) as this export quota implies a reduction of 40 % of the exports in comparison to the benchmark scenario. Accordingly, Ukrainian consumer prices are 16 % lower than in the benchmark scenario and domestic consumption increases by 15 %. In Scenario 3 the export tax of 13 % implies a limited reduction of exports (−9 %) compared to the benchmark scenario and a slight increase (+3 %) in domestic consumption. Consumer price levels are maintained, i.e. they are lower than in the benchmark scenario and actually equal to the baseline level. Ukrainian coarse grain producers still benefit from a small price increase (+5 %), but with regard to farm income this price increase would not be enough to compensate for the production loss caused by the drought.
Impacts on a major grain exporting consortium: the EU
The EU is a major exporter of grains on the world market. Between 2008 and 2011 the EU exported a yearly average of 21 Mt of wheat and more than 8 Mt of coarse grains (two-thirds of it being barley and one-third maize). At the same time the EU also imported 6 Mt of wheat and 5.5 Mt of coarse grains (mainly maize) per year.
Benchmark scenario: impact of the RUK drought
The increase of the world price due to the lower grain harvest in RUK is partially transmitted to the EU market where producer prices increase by 21 % for wheat and 7 % for coarse grains. As in RUK, European farmers are not able to adapt their production in the short-term and supply remains stable. However, the significant increase in world wheat prices (+23 %) triggers more EU exports (+8 %) and causes a decrease in EU stocks (−5 %). At the same time imports are reduced by 7 % as they become too costly. The lower availability on the domestic market translates into a reduction of the use of wheat by 1 %, in particular for ethanol production (−5 %) and for food (−1 %), while EU consumer prices potentially increase by 8 %.Footnote 13 For coarse grains,Footnote 14 the picture is more complex as both exports and imports increase considerably by 22 % and 28 %, respectively, while total use only slightly increased (+0.4 %). The EU producer price of coarse grains increases less than the world market price, implying a gain in relative competition of the EU, which boosts EU exports. On the domestic market the price increase of barley (+8 %) is higher than for maize (+6 %). Therefore the domestic use of barley (mainly for feed) decreases and barley is substituted in animal diets by maize. This demand for feed drives the significant increase of maize imports (+30 %).
Export restriction scenarios
The introduction of export restriction measures in RUK amplifies the drought effects (Fig. 5). In the scenario with a full ban on RUK exports (Scenario 1) EU wheat producer prices increase by 10 % (reaching 307 USD/t) compared to the benchmark. In Scenario 2 the price increase is slightly lower at 7 %. The modelled export taxes (Scenario 3) have a minor impact and EU producer prices increase by only 1 %. Further effects in the policy scenarios are that EU exports of wheat are higher, domestic consumer prices increase more and the total consumption decrease further compared to the benchmark scenario. The effects for EU coarse grains are quite similar but at a lower magnitude, with the EU producer price increase varying between +5 % in the case of a full ban on RUK exports and 0 % with export taxes. In the case of an export ban, the high world price causes EU maize imports to diminish by 6 % compared to the benchmark, whereas the import decrease is less in the other scenarios. In general, results indicate that for a net exporting region such as the EU, except for producer prices, the effects of the simulated bans and/or export quotas in RUK are rather small and equivalent between the different policy measures. Moreover, the simulated temporary export taxes in RUK have almost no effect on EU markets.
Impacts on a major grain importing country: Egypt
Egypt is the largest wheat importer in the world, with yearly imports of around 10 Mt. This implies that Egypt is importing about half of its domestic wheat requirement, almost 90 % of which is used for human consumption. In addition, Egypt imports between 5 and 6 Mt of coarse grains per year (almost all maize, mostly used for animal feed). Given the dependency of the country on imports, the government aims to keep strategic wheat stocks of about five months of the countries’ consumption level. Wheat is considered as a major component in the Egyptian diet, with Egypt having one of the highest wheat per capita consumption levels in the world. For food security reasons, Egypt operates a food subsidy system, which comprises a specific bread subsidy programme available to every citizen (about 85 % of the bread produced in Egypt is either fully or semi-subsidized). To keep the price for the typical Egyptian ‘baladi’ bread at a low level, wheat is given to mills at a low price, with Egypt’s General Authority for Supply Commodities (GASC) covering the difference from the purchased wheat price. This policy of food subsidy has considerable impact on the public budget and becomes even more burdensome for the Egyptian government the higher the wheat prices are (World Bank 2010; Trego 2011; Abis 2012; USDA FAS 2012).
Benchmark scenario: impact of the RUK drought
The world wheat price increase of 23 %, due to the RUK drought, is almost entirely transmitted to the producer price in Egypt, which increases by 21 %. Imports become very expensive and decrease by 16 % (−1.8 Mt). As a consequence, huge quantities of stocks are released (1.3 Mt). The consumer price is projected to increase by 5 %. This increase may seem rather small, but this is because, for Egypt, the reference for wheat consumer prices in the model is bread, i.e. a product with a high degree of processing compared to the raw product. Moreover, it has to be kept in mind that the price increase is measured as a yearly average and hence does not reflect the intra-year price changes, which can be very important. For coarse grains, the world price increase leads to a 14 % rise in Egyptian producer prices, imports decrease by 8 %, whereas stock releases increase by 14 %.
Export restriction scenarios
The simulated introduction of export restrictions in RUK has a major impact on the Egyptian market, considerably amplifying the effects of the drought (Fig. 6). In Scenarios 1 and 2, Egypt’s wheat producer prices rise further compared to the benchmark scenario, by 10 % and 6 %, respectively. Due to the increased global prices, wheat imports further decrease by 9 % in Scenario 1 and 6 % in Scenario 2. In order to allow maintenance of the food use of wheat, additional stocks are released on the market (10 % in Scenario 1 and 7 % in Scenario 2). Nonetheless consumer prices for wheat (bread) rise further compared to the benchmark scenario (3 % in Scenario 1 and 2 % in Scenario 2). By contrast, the modelled level of export taxes in Scenario 3 has only marginal effects on the Egyptian wheat market. For coarse grains, scenario results indicate similar effects to those for wheat, however, at a lower magnitude. It has to be kept in mind that in Egypt most of the coarse grains are used to feed animals, therefore consumers may not be immediately affected by the price increases. However, livestock producers are badly hit by increased feed cost and thus consumers might be affected with a few months delay by a rise in meat prices.