The government of Russia took a measure of banning the export of wheat and other related foodstuffs in early August the year 2010. This was due to many reasons that were facing the country. Among the most direct reasons include extended drought period, wild fires and recorded high temperatures that affected the crop. The prime minister ordered this to take effect from the middle of the month to the end of the year (VOANews.com, 2010).
Bhatia (2010) asserts that the plan was a measure to curb the prices of wheat domestically as well as avoid supply problems at home for the local consumer. According to media reports, Russia slashed 20 percent of its forecast on wheat harvest at the end of the season due to the continuity of the problem.
Russia being a leading exporter of wheat in the world is at crossroads to balance the fact that local consumption of the crop is basic as well as the international market's high demand. The governments then decided that the local demand be taken care of first then the international demand later. However, this action has consequences both locally and abroad through the prices and the quantity delivered. This is in the short and long term duration thereafter (Hernandez, Robles & Torero, 2010).
We are going to see in this paper the impact of the decision in Russia now and in the next few years as well as the other markets. We are specifically going to discuss the reactions by the local people and their expectations thereafter. We are also broadly going to see the greater impact on the international prices and demand. The reaction of the markets abroad will be how to curb the expected shortage of the crop in the last quarter of the year on their markets.
The paper will be based on the issue of economic efficiency of the strategy as well as the viability of the step that was taken of export ban. Further, the economic equity of the action will be addressed as well as the general impact on the environment.
This being a natural resource, wheat as a crop poses a big challenge to both the farmers and the government to preserve and continue reaping from it without affecting its well being. We are thus going to discuss the uncertainty of its tenure as well as the impact of the negative externalities.
After the discussions stated above, it will be appropriate to predict the impact on the future of Russia market as well as the international platform
1. What were the reasons which led to the ban on the export of wheat?
2. What is the immediate impact of the Russian ban on wheat domestically?
3. What is the reaction of the international market initially?
4. How is the local and the international market likely to approach the expected shortage?
5. What is the economic efficiency of the steps taken?
6. How has the environment been affected and what has it affected the situation?
7. Wheat being a natural resource how is the problem of uncertainty of tenure, unregulated externalities as well as the undervaluation of the resource being tackled?
1. To analyze the root causes of the problem
2. To address the immediate reaction and the impact of the ban on the local Russian market.
3. To measure the reaction of the international market in terms of the economic variables such as prices, quantity of supply etc.
4. To predict the most appropriate actions that the international markets are taking to address the expected shortage.
5. To determine the efficiency of the action of banning of the export and how it will affect the economy in itself both locally and internationally.
6. To examine the environmental reasons leading to the actions.
7. To highlight the problems of the three U's namely uncertainty of tenure, undervaluation of the resources as well as unregulated negative externalities.
8. To understand the effect in the future for Russian wheat
These are the methods, techniques and procedures used to collect the information. In this case, the data used for analyzing the impact of Russia's export ban on wheat was mainly obtained through data mining. The internet was a key source of information together with text books obtained from the library. Relevant data was collected from various websites and textbooks.
Hernandez, Robles & Torero (2010) point out that Russia produces about 8 to 10 percentage of the world's total wheat crop. According to statistics the recent catastrophes which are due to the increased heat and temperatures have led to increased wildfires and a further reduction in total annual wheat production. Specifically it's estimated that there is a 10 percent reduction in the total output in the late quarter of 2010. Russia exported about 21 million metric tons of wheat translating to about 6 to eight million metric tons in reduction.
The root cause of the ban is analyzed from the fact that the business people who are the farmers, dealers and even the government realized the fact that the local market is going to experience a d3eficit in supply and demand which increase of price would be inevitable. However the reason for the ban was due to the unprecedented climatic condition that the country is facing now (BBC News, 2010).
The impact on the domestic market was expected to be immediate. All the stake holders in the wheat industry felt the pinch. The action being on national level was all inclusive to all the farmers regardless of whether they had good or bad harvests. For instance some parts of Russia dint experience the large heat wave and many farmers are expecting a bumper harvest. Many farmers target both the subsistence and commercial aspects (Agrawal, 2010). The local traders are likely to be impacted by the ban financially. The profits are also likely to go down because even if the government attempts to buy from the farmer the price will likely be a bit lower than the international price.
The local consumers will be affected in a positive way though in a temporary way. This is because the food security is guaranteed for now. The prices also will be stable because the supply of the wheat is likely to be in tandem with the demand. However this may be short lived because it's uncertain how the future of the climatic conditions is likely to be. This means the government must come up with measures to address the pending issues (Hernandez, Robles & Torero, 2010).
The reaction of the international market
Taking a case study of Egypt Philippines and Saudi Arabia the biggest importers of Russian wheat the impact was big as expected. The Northern Africa state has however reported that the country has enough reserves for the crop. Through its minister of agriculture it made it clear that the food supply for the crop is enough to last for close to a year. This is by the fact the country subsides wheat ant its products in a certain proportion. This will be in effect to stabilize its prices. However one challenge that the country will be facing now is that the security is only temporary. The demand for the wheat products is greater in Egypt than any country since it's the most populous country in the Arab world (Al Arabiya News Chanel, 2010).
Saudi Arabia also is on of the highest importer of wheat world wide. Most of its population takes wheat as the staple food. It was on e country that had a more prepared approach to the issue than its counterpart Egypt. There was a prior arrangement by the Saudi government to import soft wheat from the west. The country was experiencing decline in prices of the wheat from the previous year but this may not be the case in the late 2010 (Al Arabiya News Chanel, 2010, 2010).
Philippines is one of the poorest nations in the Asian countries. The consumption of what in that country is almost to the dot. The ban on the commodity is likely to pose a big challenge especially to the poor people in the country which depends on the product. This will be a greater social misfortune than the economic impact.
BBC News (2010) explains that the reaction of the two wealthier countries reflects two scenarios of two countries one with a grater dependency on the wheat supply on Russia and another with a lesser dependence. This means that even on the global front, prices are likely to increase for all the related commodities where the demand is to likely to surpass the supply. However according to 'Green World Investor 'the third country (Philippines) will not only experience a huge economic impact through destabilization of price and food insecurity but also the increased poverty levels. Then this leads us to the questions on what are the governments' steps to curb these challenges of wheat shortage.
The expected approach by these governments to this issue
Egypt gave out a broad formula on how to deal with the problem in both short and long term aspect. In the short term the country will decide to import lesser quality wheat from Kazakhstan and Iran for a shorter time as they decide on how to fill the balance. In the long term the country has installed the diversification policy whereby the food supply is not only guaranteed but maintained. It has resolved to plant more of the crop for subsistence through its irrigation systems. It has also imported about 240000 metric tons of wheat from France (Smith, 2010).
Al Arabiya News Chanel (2010) adds that Saudi Arabia has imported little wheat from 2008 and was expected to import an increased amount from Russia at the last quarter before the prior knowledge of the ban. However, this ban has made the Saudi government resolve to import several metric tones of wheat. In the long term the irrigation system in the country will be the likely to be the focus of the country for the next years to stabilize the food security.
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The efficiency of the action of banning the export
It's absolutely necessary to not only check the impact of the action of banning the export domestically and internationally but also the efficiency of that action. The initial intention of the ban was to increase the food security and the price stability. But the question arises is it efficient in both the markets? (Agrawal, 2010)
These questions should be analyzed through the perspective of the Russian farmers, the government and the international commercial market. The huge farm owners of the Russian wheat business naturally must have expected the international prices to be high at the end of the year during the festive season; however the government took the action to ban the exports all inclusively to protect its national food security (Smith, 2010). This must affect them because the governments usually subsidize the farmers minimally and set price that are standard when such actions are taken. This means the farmers will not depend on the forces of market to determine the prices but by the governments. If the governments further directs that all the farmers to comply with rules it may lead to local oversupply of the product making it inefficient to produce the crop.
The only party that will find the action be efficient is the government not only in the economic perspective but the political aspect as well. But this will only be achieved in the short term. It's likely that the domestic market will be enjoying the relative food supply and price stability and the political temperature e also very sustaining (Al Arabiya News Chanel, 2010).
According to Al Arabiya News Chanel (2010), in the long term however, there will be a shift of market by the initial big importers of the Russian wheat to more reliable sources like the European markets. This is through the fact that the countries need a reliable source of its wheat supply from a consistent source. We can say that the efficiency in the long term can be uncertain as it may be bleak.
This lack of faith will make the Russian government lose the market share and reliability hence future markets will be not in favor of the produce.
In the international market, the efficiency of banning of the export is negative. The supply of wheat a basic food in most countries especially the Sothern Sahara and the lower side of the Asian countries will be lesser than the demand. For instance, in Maputo, Zimbabwe the demand for the wheat is triple the available supply. According to sources there have been reported incidences of social unrest in the capital. This deficit means that the affected countries will spend more on buying the products or subsidizing the wheat in order to cover for the deficit. This reflects to amore stagnant global economy (BBC News, 2010).
The ban will not only be economically inefficient but also socially. For instance, some countries which have projects of charities and in developing nations are affected by the wheat supply deficiency. This will mean that the food security, if blocked will result to a cut in those projects making it harder to deliver the aids to the needy people. Although Russia claims that the ban is only temporary it may have severe impact in future (Nickel, 2010).
The environmental impact
The government of Russia has been a victim of natural catastrophes such as heat wave and 2wild fires. All these can be attributed to the actions that the country takes in the environmental management. The huge industries that the country boasts of have been a major contributor to the environmental degradation in the country (Smith, 2010).
The practices of farming too have been a contributing factor in the environment degradation. The use of insecticides and other chemicals that affect the soils and water but increase the productivity have contributed greatly. These are the policies that the government ought to address to have a long term solution.
Smith (2010) explains that it has been discovered that Russia has the climatic conditions diverted the heat waves to Pakistan leading to the unprecedented heat flooding in the country. The impact of such happenings has greatly decreased the wheat quantity in Russia. The environmental mismanagement has led to a collective responsibility of many dependent nations of bearing the brunt of the economical and social instability. Domestically this translates to hiking of both the social and marginal costs of the grain as a commercial commodity.
The three U's of the natural resources
To show how these factors each affect the whole scenario of the economy through the ban, we have to tack each at a go. The first one is;
These are third party effects that exist in production or consumption of a particular product which is not necessary to be compensated. They have a danger I that they can cause market failure if the social benefits and costs are not taken into considerations. An example that is president in the issue of Russian scenario is the issue of pollution (Tutor2u, 2010).
Pollution is an externality that is not regulated in Russia; the government has initially been disputing the existence of climatic changes (Smith, 2010). But since the effect is normally a big problem the policy change is now almost inevitable in the country. There are other externality like labour force go slows and traffic jams in many parts but pollution is the most direct effect on the economy
This is a problem where wheat is overly undervalued through the underlined indirect costs that result from the the above externality. This means the general economy has the general risk of losing in the income that is supposed to realize (Tutor2u, 2010).
This is also a problem that is prevalent on all natural resources where it is not with perfect certainty that the resource has the longevity that it is supposed to benefit the people.
The implications of the findings in the study and Recommendations
Through out this study we have seen the action of the Russian government and the effects that have been realized thereafter. It is also important to come up with the suggestions that might likely be the remedy to all the problems. These are mere observations that are challengeable but also have a bigger impact to alter the situation (Nickel, 2010).
The Russian government should lift the ban in part to allow for foreign trade. This means the local traders will be able to participate in the international trade. The move will also help Russia to maintain the market share and reputation in future. The ban should be in place for a shorter time period to help shorten the effect of the long term (Pearse, 2010).
To help curb the international pressure especially on the countries with the most need, Russia should consider continuing o supply those countries with the necessary food stuffs.
Lastly the country should be in a frontline to set policies that are in tandem with curbing the climatic change that will in effect help curb the issue of climate change. This is through correct disposure of waste and smoke as well as controlling the use of chemicals that will eventually cause the climatic change (Hernandez, Robles &Torero, 2010).
These observations are as a result of the specific examination of the global economy as it is right now and the way forward of the actions. Finally we are to analyze the effect of the Russian wheat industry in future from the economist point of view (Hernandez, Robles &Torero, 2010). The effect of the economy in the Russian wheat is uncertain now because of not only the changing economic dynamics in the world but also the issue of market share and the command it is likely to take in future.
First the reputation of Russia as a reliable source of wheat is at stake. The issue of terming the ban as a short term measure may have even larger long term impact. Countries such as Egypt and Saudi Arabia are turning to western countries for the supply of the same product this will reduce Russian market for the domestic good (Pearse, 2010).
The government must also address the underlying issue of climatic change and the long-term solution to cover up for the long term effect of this scenario. Much as its temporary its not guaranteed that no future wild fires are never to happen
In conclusion the Russian wheat ban has been the highlight of the world food security due to the overall impact on the globe. Also the issue is important in the global food prices and stability. It is important that world food producers should consider policy of such important commodities to prevent greater negative impact.
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