The Ukrainian war is on multiple fronts. As the fighting rages in the east of the battered country, on the economic front, Russia continues to maneuver to gain greater control over global food supply chains in order to later use it to its advantage. The world food market passes through a few private hands in key links in the chain and now, according to Bloomberg, two of these players, Cargill and Viterra, have announced that they will stop buying wheat in the country for later export. The US agency reports that other of these titans would also be studying making similar movements.
The departure of Cargill and Viterra means that Russia, the world’s biggest wheat exporter, will have more control over its food shipments and more income from them. Russia’s dominance in the global wheat market was evidenced by the war, with prices soaring over the past year amid disruptions in supply chains. “Archer-Daniels-Midland is also considering eliminating the bulk of its operations in Russia, according to sources close to the situation. Another company that is considering reducing its presence in the country is Louis Dreyfus, as reported by Kommersant”, they write from Bloomberg.
In 2021, the latest year for which export data broken down by country is available in the Observatory of Economic Complexity, Russia exported $8.92 billion worth of wheat. As a percentage of total world exports, the World Economic Forum estimates Russia’s weight at around 13.1% of all world wheat trade. On the opposite side of the scale, Egypt is the country most dependent on imports to feed its population. The corporate offensive leaves several questions in the air. Next, the key points of the situation.
Why are companies like Cargill or Viterra leaving Russia?
Cargill and Viterra have been under pressure to divest their assets in Russia since at least December, when a number of prominent Russian industry figures inside the country, including governors of major producing regions, called on the Kremlin to limit “influence Foreign” in the Russian food market.
Middlemen financed by Putin’s government have been grabbing more and more market share as the Russian president focused on promoting food sovereignty and wheat exports became another tool of geopolitical power. While facilitating the operations of Russian firms with one hand, with the other, Moscow has increasingly impeded multinationals in the sector in the form of bureaucracy, according to people familiar with the situation.
Andrey Sizov, general director of the analysis firm SovEcon, points out that it is likely that multinationals have been pressured to make the decision to leave before the new wheat export season, which will arrive in May.
What does it mean for the global supply chain?
The exit of the multinationals would leave the majority of the market in the hands of Russian companies financed by the government, giving access to more income for the public coffers at a time when Russia needs the money to finance its war machine.
On the other hand, Russia will have an easier time using wheat as another weapon. “We take it for granted that it is much easier to control export flows using local companies if the authorities want it,” says Sizov. Among Russia’s main buyers are countries in the Middle East and Africa, nations that have avoided outright criticism of the invasion of Ukraine.
“If the Russian government takes over, this poses more risk to the market. Until Russia shows that it is reliable in this regard, it is a supplier under suspicion, even if everything continues as it has been until now,” Matt Ammermann, a risk manager in the trading of raw materials at StoneX, told the US agency.
What does this mean for prices and trade flows?
Russian agriculture minister Dmitry Patrushev has said these changes will have no impact on the country’s export levels, but global wheat traders are watching for signs of attempts to influence prices or trading conditions. More bilateral agreements between governments are expected.
OZK, a Kremlin-backed company, has already signed several contracts with Turkish partners and pledged last year to “completely eliminate the role of international intermediaries and work directly with importing countries.”
All in all, Viterra and Cargill, the only two firms that for now have announced their cessation of operations, handled around 14% of Russia’s wheat exports, with which a majority will continue for the moment as it has been up to now.
Who are the main losers?
In its article, the US agency Bloomberg identifies Russian farmers as the main losers as they lose potential buyers and competition for their wheat. However, although Bloomberg does not mention it, these titans of world trade are also hurt by losing market access to the world’s largest wheat exporter.
In the case of Cargill, what the company calls “2022 results” makes no mention of the group’s income, profits or exposure to the conflict, but instead focuses on highlighting the firm’s sustainability. This is not the case in the case of Viterra, which does give more details about its business. In note 30 of its annual results, Viterra extensively analyzes the impact of the conflict on its company.
“On February 24, 2022, Russia invaded Ukraine, starting a conflict that continues to this day. Viterra has business operations and assets in both countries. Management is closely monitoring the situation on an ongoing basis. Viterra has implemented a comprehensive risk management plan, which prioritizes the safety of its employees in Ukraine,” the company begins by explaining.
During the 12 months ended December 31, 2022, Viterra’s operations in Ukraine were adversely affected. This resulted in a reduction of Viterra’s net income of $39 million. Last year, this giant had a global revenue of 52,000 million dollars and obtained a net result of 1,043 million dollars. “The continuation of the conflict may have additional adverse effects. As of December 31, 2022, Viterra had total assets in Ukraine valued at USD 275 million (approximately 1% of the Group’s global assets) and total liabilities of USD 44 million (less than 1% of the Group’s total liabilities). Cluster)”.
As for Russia, as of December 31, 2022, Viterra had total assets there of $495 million, including $54 million of cash and cash equivalents (approximately 2% of the Group’s total assets) and liabilities totals of US$495 million (approximately 2% of the Group’s total liabilities).
“Given the foregoing, management does not believe that the uncertainty arising from the conflict affects the Company’s ability to continue as a going concern,” Viterra concluded in its annual report.
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