What Russia should think about when looking at European agrarian riots
Internal political games
The end of the calendar winter did not in any way affect the protest activity of farmers in Europe, although European farmers (at least those involved in grain) should not go on strike, but should prepare with all their might for the sowing season.
Nevertheless, representatives of the European agricultural sector, in righteous anger, not only waste technical resources, but also transfer valuable organic fertilizers to government agencies. It is clear that this is sarcasm, but it is also clear that it is difficult to come up with a better picture for the information agenda in terms of illustrating the thesis about a “fading Europe”.
There is no doubt that the protests are part of the internal political struggle. For example, in Poland this is a struggle at the regional level between the winning political force (Civic Platform) and the losing one (Law and Justice) main parties. This is also a very real opportunity to extract payments due for previous years from Brussels.
Ukrainian goods actually have a significant impact on the pockets of some European agricultural producers. However, not only for Eastern Europe is this a means of maintaining subsidies, but also for EU pillars such as France.
For E. Macron, these protests are not only harmful, but in some ways also useful. Taxes and subsidies, although not so directly related to the topic of Ukrainian products, are also a protest factor in Spain, Greece and Germany. That is, in the agrarian revolt, it turns out, there are not so few interested parties even in the ruling elites of the EU, in the part that wants to preserve the old social, or rather, socio-economic balance.
However, there are some signs that such protests are the result of more complex and deeper problems. Taxes and subsidies, Ukrainian dumping and Polish party struggle are significant, but still top reasons. And there are underlying reasons and prerequisites.
It is worth understanding them, since in the near future they may well affect us ourselves. It’s not just that some of the elites decided to fight for what was called “socio-economic balance” in the previous paragraph. This means that the balance is upset, therefore there are prerequisites for this and there are parties, interested and uninterested.
And you will have to understand this, since these processes affect not only European agribusiness or politicians associated with this - they directly affect the Russian market, its potential and prospects.
From the summer of 2022 to the summer of 2023, one of the most discussed topics was the so-called. “Black Sea Grain Initiative” (“grain deal”) and related topics of grain shortages in the poorest countries and the impending “world famine”.
It all looked scary because news agencies published price reports, but they really did not inspire optimism in 2022, especially since Russia and Ukraine, with their 30% share in world trade in goods such as wheat, are conducting active military operations right on logistics routes.
However, even not the most attentive observers noted oddities in the flows of goods, which ultimately went anywhere but to the starving and needy regions.
Using the same wheat as an example, it will be convenient to look at the problem as a whole; after all, wheat is one of the main exchange-traded agricultural products.
According to the criterion of excess/deficiency, the situation with it was and remains very peculiar. For example, world production of this basic product was 2021 million tons in 756, 2022 million tons in 772, and 2023 million tons in 808. Eighty-three producing countries themselves consumed 469 million tons and formed a conditionally free balance of 339 million tons.
It can be called conditionally free because it is necessary to inevitably subtract from it the volumes that go to reserve funds and for reproduction - about 50 million tons per year. These volumes change periodically, but in general, a decrease in one economic-geographical sector is compensated for in another.
Thus, China increased the reserve to the volume of 1,5 years of consumption, and the United States and the EU consistently reduced it. The remaining part can already be traded on international markets, again, adjusted for the fact that operators hold on average up to 20% of the volume as a carryover balance.
The adjustments do not end there, since it is necessary to take into account losses in storage - up to 2% and losses during transportation - 1,5–2,0%. These are minimum values for the market, but in general they are impressive - up to 10 million tons are lost annually, drowned, scattered on the road, eaten by mice, left in trucks, bunkers, etc. This is a little short in volume to meet the needs of such a country , such as Brazil.
Thus, the physical volume of wheat for supply on international markets is 180 million tons, 192 million tons and 221 million tons for the indicated years. This is precisely the physical volume, and not the turnover on the financial market, directly or indirectly related to it.
All that remains is to look at the need in the world that needs to be met with this volume, and what remains to be met is... 50 million tons.
Question: where does everything else go?
Where does the grain go?
For example, in 2022 – as much as 142 million tons of wheat. As we remember, entire continents are starving.
By the way, how exactly do they starve?
Here we look at the Middle East: consumption – 50 million tons, production – 37 million tons, deficit – 13 million tons. Long-suffering Africa: consumption - 64 million tons, production - 27 million tons, deficit - 37 million tons. This is the largest regional deficit, but it is completely painlessly nominally covered by production surpluses.
At current prices, the entire need for wheat throughout starving Africa is $8 billion. This is approximately one of the largest funds within the UN. But we are talking about a general deficit across the continent; Nigeria, for example, is a solvent country, South Africa and Egypt too. Actually, Egypt itself buys about 12 million tons, with a deficit of 5,4 million tons. Some goes into reserves, and the rest is resold.
In principle, even if we imagine that Africa consumes much less than we would like (and this is actually the case), then in this case it is possible to cover what we want without apocalyptic problems, even if we form an annual reserve in these countries and write it off as losses double standard
In other words, in reality there is no commodity shortage in the world for this position at all.
Now let’s take Europe, where we started the material, wheat consumption – 54 million tons, production – 155 million tons. After all the adjustments we get a commodity surplus. This is almost an annual surplus.
In 2022, the EU experienced a shortage of crops due to drought - 11 million tons of grains were missing (for all types). Was this covered by commodity surpluses of previous years? No, the falling volumes were covered by the “grain deal,” the problems with which became synonymous with the “hunger apocalypse” in the Western media.
But as soon as the ship carrying the EU cargo that covered this volume left the Ukrainian pier, the excitement around the “grain deal” dropped sharply. Moreover, now on the border of the EU and Ukraine, grain is generally dumped on the road by “protesting” Europeans. It just spills out into ditches, onto railroad tracks, it rots in bodies with cut awnings, etc.
And the question remains - where are the annual commodity surpluses?
Again, we note that there are always situational market adjustments. For example, Canada collected little - it dropped by 2022 million tons in 12, China significantly increased its reserves, but Russia and Australia made up for the volume. In 2023, Ukraine fell, but Canada recovered. Fluctuations occur, this is the market, but over the period they traditionally compensate each other.
The casket opens simply - a surplus of goods annually settles in warehouses around the world. The EU here only serves as a kind of temporary storage facility, but we have remnants in Russia, the USA and Canada. Slowly, over the course of a year, they spread throughout the world, where they also accumulate, creating local ups and downs in prices.
Of course, excess volumes do not always settle in the form of actual residues of the base product. They flow into the secondary market and settle there in the form of additional volumes of alcohol, flour, go to the chemical industry, feed, etc. But this does not stop them being surpluses; they simply begin to destabilize the situation in the secondary markets.
At the same time, since our world system is still capitalist, these surpluses do not reach the markets of Africa or Yemen with weak solvency - there is simply no one to finance them.
It is clear that agriculture is also trying to diversify production by replacing crops. Grains are replaced, for example, by rapeseed, where possible - by legumes and sunflowers, etc. But, firstly, such use of soil has its own natural limitations, and secondly, exactly similar shifts occur in the markets in which the substitution is taking place .
This is just a single example of one, albeit basic, product. And there are complete analogues in other segments. The meat industry, which is already associated with this market, demonstrates excess capacity of no less scale.
The agricultural market is one of the most inelastic, if we use liberal terminology. Covid-19 has slowed down economic activity. The demand for oil and gas products has decreased. But if here, albeit with problems, it is possible to reduce production, put new projects on pause, or mothball something, then in agricultural production, which in the world is represented by many small and medium-sized farms, such a trick will not work. You can’t just send a farmer to work after mothballing a plant in one area and then retrain to work at a plant in another. At the same time, it is impossible not to cultivate the land that is working.
Who in the world has the largest percentage of workers, if you look at those employed in agriculture, and at the same time has a significant surplus of goods?
And this is the same European Union - the favorite object of our domestic criticism. We have a perception of the EU as a kind of “industrialization zone,” but depending on country to country, the share of people employed in the agricultural and primary food sector there is 6–9% of the working population. And these are mostly small farms. Thus, the average number of employees per agricultural enterprise in striking France is 2,1 people.
The overproduction of food in the world, as we see, is significant. In Europe it generally goes off scale. The Guardian calculated that 148 billion euros worth of products are sent to landfill every year. This is 28–30% of the total volume.
In the USA, the intensification and concentration of agriculture is higher, there are half as many people employed there as in the EU, therefore, with similar overproduction, it does not have such a critical impact on the socio-economic sphere as in the EU. Not critical yet.
Such overproduction makes the sector unprofitable, but losses are covered from the European budget with grants and subsidies. Otherwise, workers and owners, after all payments, risk receiving for their labor income comparable to the minimum wage. Industry subsidies reach 60% and above.
What can be done about it?
Export more. However, now exports are reducing subsidies, and overproduction is characteristic of the world as a whole. There are no good export prices for grain, meat, oil, unless it is a completely niche product.
The European Commission, of course, is trying to do something here, regulating the length of the tail of cows and the length of cucumbers, the diameter of pork snouts and tomatoes. Home cultivation of crops and so on are prohibited. But the level of production is such that in the EU, for example, 65% of farms should simply be closed.
There is no point in rejoicing over European problems with their “dung riots”. If only because there is a global crisis of overproduction, and even five years ago there were already current discussions about whether Russia should devote so much effort and resources to capturing the basic grain markets. For the same wheat, our excess of production over domestic needs is not the highest (80%), while in Canada or Australia it is still 90%. But the accumulation of surpluses cannot but have an effect - by 2023 we received one of the lowest world prices.
The fact that traders are trying to raise prices using stories about “world hunger” is understandable. On the one hand, they slow down demand, on the other, they receive additional profitability. But these measures are temporary, since the problem is not private.
The agricultural industry is one of the basic ones, therefore, it has a pronounced cumulative effect - many related segments are tied to it, mechanical engineering and spare parts, repair and service enterprises, fuel consumption, organic chemistry and others. It’s just that the social structure in the EU is such that the whip of the crisis of overproduction in this basic industry hits Europe first. But other countries are not in a better position either. Even if the EU cuts production by 50%, the problem will not go away.
This year the Russian market will receive work in conditions of critically low prices, next year this will already become a rather serious problem, since it will be necessary to either diversify the work, or producers will compensate for the lost income in the domestic market. Like with gasoline and diesel fuel, it’s just much more difficult to set up.
How did the world come to live like this?
And he got to it precisely because for about thirty years they stopped thinking about such things as “equilibrium value.” Why think about it if it is a rudiment of a retrograde approach. And in general, some people will directly say that equilibrium value is an abstraction that has nothing to do with real life. It turns out that it has, because although it is indeed impossible to achieve equilibrium value, this does not mean that one should not strive for this. And just the desire for this can help solve many problems and contradictions.
Capitalization in basic industries decreased in relation to innovative industries almost every year. How did the affected industries compensate for this? Usually by increasing output. If on the oil market or the steel market concentration still made it possible to conduct cartel negotiations or their analogues (like OPEC+), then on the agricultural market this simply led to an increase in the volume, where, as we see in the example of Europe (although Russia too), no parameters profitability and capitalization are not growing.
As a result, over the next ten years we risk a setback in basic industries, when the only option would be to increase concentration and reduce output to increase prices and equalize capitalization with other industries.
We will see an even greater concentration of productive forces in the hands of a few structures: in the agricultural sector, in chemistry, in hydrocarbons, and in steel. Even the weakest companies will be absorbed and merged.
Will this bring a wave of social problems?
Undoubtedly, it will just be faster for some, slower for others.
At the same time, if we return to the topic of grain and hunger, then there will not be fewer hungry people in Yemen and Africa - there will be more of them, and prices for basic products will rise everywhere.
And it would be nice to see a serious discussion on this topic somewhere in the Russian expert segment, because industry development in our country is always delayed, which means diversification will be delayed, but we should prepare for it in advance.
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