Trade, Corn and Oil - Alpcan Efe Gencer

The globalized international trade flows that ranged from essential commodities such as wheat and grains over to highly complex petroleum products has had its fair share of hurt from the COVID-19 crisis. The abrupt slowdown in the economy combined with quarantine measures at the customs has created a backlog in the trade flows. Besides, the panic among the citizens concerning food shortages in the initial days had no backing. Still, the prolonged nature of the pandemic has forced extensive shutdowns globally, and it is potentially leading to interruptions in the supply chains. Based on that, some of the largest agricultural exporters in the world have been announcing domestic preventative measures for ensuring their food security by applying export quotas or, in some extreme cases, bans on exports of key agricultural commodities. So, who has so far announced the restrictive measures?

While the list is non-exhaustive, it shows the direction of the current picture from a general perspective and highlights a new reality for post-pandemic times. Food security. Having uninterrupted, reliable, and affordable access to staple food is equally, if not more, important than having energy security. While no real challenges have so far been announced globally in these terms, the possibility of it has risen, and certain measures will likely be taken in the future. The United States’ response to the colonial government’s threats concerning reliable food supplies in the mid-to-late 1700s can be investigated as a starting point. Benjamin Franklin’s, one of the founding fathers, a famous letter titled “Homespun”: Second Reply to “Vindex Patriae” that roughly outlined the future agricultural policy of the U.S. in the face of colonial food restrictions showed just how domestic policy might be implemented during times of social distress. While the culinary customs from the European society at the time looked down on the corn, it was widely available in the U.S.. Despite the social perception of it, policymakers implemented a nation-wide strategy of planting the widely available commodity. Numerous other staples were also mentioned throughout the letter such as the use of lamb, which was dropped in the U.S. from the regular diets of the citizens. Still, the main point of the letter was that when confronted with such matters, policymaking will make use of what domestic resources are available to come up with preventative measures even if it means changing the status quo in social and economic terms.

How does this reflect on our current day crisis? Perhaps, one of the few good areas the oil price crisis will positively impact will be the domain of agriculture. With the WTO already lined up for troublesome times in the post-pandemic world, the incentives that can be provided by the governments through wide import restrictions and subsidization programs will likely flourish, defying the concept of free international trade. The correlation between crude oil and agricultural production has been a long-studied concept. With the industrialized agricultural production growing at exponential rates to feed the world’s growing population, farmers have started using more and more complex and capable machinery that require substantial amounts of energy inputs, namely diesel and/or gasoline. Adding to these direct costs, the existence of indirect costs, such as pesticides and fertilizers that are manufactured through using petroleum products, present another attributing factor linking oil prices to that of agricultural production. In the U.S., nearly 10% of staple food commodity production costs were associated with energy inputs. As the price of crude oil increases, so does the production cost of food commodities. In the current low-price environment, the countries that were previously in uncompetitive spots and overwhelmed by cheap imports could follow new policies of extending their domestic production. Following the terms of the international trade theory, however, all of this would have to start under the trade protection of domestic governments through import restrictions as infant industries are relatively disadvantaged when it comes to competing with the global giants of the industry.

To start-up the global economy in the post-pandemic world developed and developing nations could follow four scenarios, with each having two pathways respectively regarding domestic agricultural production. Developed nations could encourage conventional farming and soilless farming. The conventional method would imply increased employment opportunities in rural regions at relatively lower CapEx costs. Still, it would not adhere to the sustainability principles the world wants to achieve in the next decades due to pesticide pollution, diminishing productivity of the soil, and the deforestation effects of large-scale industrialized farming. Another option would be to encourage and possibly incentivize soilless farming. An endeavor that is usually quite costly, but with the implied productivity returns and the technological advancement opportunities it brings in the domain of agriculture, with adequate funding, it might be a more viable choice in the long run. The developing nations face a different reality in this scenario. The costly nature of the soilless farming would be hard to implement in these nations due to credit constraints, and from the viewpoint of closing the poverty gap through employment opportunities for all, conventional farming, in the short-run, will be constitute a more rational path of action.

On the other hand, the countries that do not have arable land but have the funding resources will have the sole option of pursuing soilless farming if achieving food security is their purpose. However, for countries in such regions with limited access to funding, the question remains for as to how it can be achieved, and the answer will probably be coming from the International Development Agencies and Institutions.

The Gulf nations at this point are in a quite advantaged position. While using their petroleum products for providing a steady stream of resources for usage as inputs in the conventional farming commodities, they can invest some of the proceeds of their oil and oil product sales into the agricultural sector to benefit from increased profit returns of food commodities during times of a downturn in the oil prices. They would also be widely diversifying their economic structures away from oil & gas, all the while increasing their presence in the financial commodity markets.

How the future might play out will be a question of time and measure the strength of international organizations/institutions. But based on what has been developing, it can easily be inferred that structural changes will forego no sector and leveraging these times of changes in parallels with two different.

Still, essential industries might be a solid play for most of the nations.

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