THE BIG READ: TMO firesale a reminder of weather's impact on security

9 Aug 2018 | Tom Houghton

Turkey’s decision on Wednesday to dump more than half of its strategic wheat reserves is an attempt to stabilise food prices at a time when global supply is retreating and its domestic currency slumping – it has learned a lesson from history.

Unleashing 2 million mt of supply into a market that only consumes around 20 million mt a year is a sign of urgency, if not one of panic.

It’s a reminder of how weather, or climate, can have a big impact on security.

So far this year, unusually hot and dry weather has pushed global wheat prices up 15% in just a month, as supply in Russia, Europe and Australia has fallen.

Coupled with a stronger dollar, that can put pressure on countries whose populations spend a large proportion of their disposable income on food to take action to minimise food inflation.

With the lira in freefall as Ankara faces overwhelming political, monetary and financial crises, TMO – the state grain board – has taken such action.

Let them eat bread

Governments have known for some time that if you want to stay in the business of being in power, keeping your population well fed is as good a starting point as any.

Bread and circuses were the gifts Roman emperors feted upon their population to appease unrest, while “let them eat cake” were the out-of-touch words mis-attributed to Marie Antoinette in 1789.

The second president of Egypt, Gamal Abdel Nasser, launched the baladi bread programme in the 1960s to avoid social unrest and it still runs today in the form of GASC's regular tenders to buy grains.

Indeed, the state usually plays a big role in markets with state-sponsored tendering accounted for around 15% of the global wheat trade last year, according to Agricensus data.

The volumes – almost 25 million mt – are impressive, but ensuring food security comes at a cost.

A 2014 study by the UN’s Food Agriculture Organization put the cost of running the Egyptian bread subsidy at almost 1% of GDP – a staggering amount bearing in mind that that is what many western governments spend on ships, planes, tanks and troops.

Bread helmet

Maybe it is a form of defence.

You don’t have to look hard to see what happens when state-run policies to feed populations don’t work.

Attempts to wind back the baladi policy in Egypt have been met with limited success, as Anwar Sadat found in 1977, and Hosni Mubarak in 2008.

More recently, the Arab Spring that led to the Syrian civil war has been theorised as a direct function of government inaction amid rising wheat prices in the aftermath of a collapse in the Russian and Australian crops due to drought and floods, respectively.

Who would have thought forest fires, droughts and flooding on opposites sides of the world would be a trigger point for mass regime collapse?

Indeed, in Tahrir Square in Cairo in the early days of unrest, people were photographed wearing “bread helmets” to highlight the rising price of wheat.

Supply side economics

Back to the now, big state buyers will hope supplies don't tighten further.

Current forecasts by the International Grain Council for next year’s wheat crop is for a 5% reduction year on year, led by lower EU and Russia harvests.

And the USDA will on Friday release its latest global supply estimate – which is widely expected to reflect a similar cut.

Anything larger and wheat futures could spike.

But production is one thing, securing that supply is another.

Russia, a huge supplier to Turkey due to its geographic position, has seen its currency tank also.

And while normally that would lead to higher exports and lower prices, twice already this year, that has proven not to be the case as farmers and cooperatives have held onto supply amid a weaker ruble, keeping both inland and export prices high.

Separately, and perhaps more worryingly, there are also rumours among the trade that Russia and Ukraine’s governments could act to limit wheat exports.

Fearing higher prices would tempt farmers to sell a huge proportion of their crop to exporters in return for valuable dollars, there are fears that keeping domestic food inflation low is more of a priority for those states.

Such a policy would cause a huge headache for buyers across the Middle East, as it would sharply push up prices – as evidenced last week when misinterpreted comments from a Ukrainian agriculture minister about a potential curb in exports sent prices soaring 5% in just minutes.

Buy buy buy

Turkey isn’t the only country in the region to take action against the threat of potentially higher prices.

Jordan’s state buyer of grain, which has failed to buy wheat in eight consecutive tenders until August, has now bought wheat twice in a week – paying higher prices each time.

Yet talk of supply side cuts are only rumours and based on speculation that Russia may want to keep food price inflation low.

After all, Russia has promoted itself as a reliable trading partner on the international wheat market for several years after banning exports back in 2010 when fires ripped through its agricultural heartland, incinerating crops.

And in any case, supply remains high for now – as chunky global carryovers from last year provide some cushion, while the US has a stocks-to-use ratio far off historic lows.

The USDA will release its forecast for global wheat supply on Friday at 1200 Eastern Time.