how the war in Ukraine affects the rest of the world

The war in Ukraine, one of the world’s leading wheat-producing regions, has led to a massive spike in wheat prices, leaving Iraq facing a multi-billion dollar food import bill.

At a time when the Iraqi government is embroiled in a political stalemate, the added cost underscores the fragility of the country’s food system, with millions of its poorest residents dependent on government food handouts, including wheat for flour.

Experts warn that the whole system could soon collapse given Iraq’s uncertain oil markets and growing population.

Ukraine and Russia account for around 20% of global wheat production and the current situation has created fierce international competition to secure supplies for the Black Sea region.

For some countries, particularly in the Middle East, this could push millions of people into food poverty. In Iraq, which has one of the largest government-run food programs in the world, that could add up to $3 billion to its bill this year, underscoring the dangerous vulnerability of the country’s food supply.

“Food prices have started to rise again since May/June 2020. Some of it was boosted by drought or problems in China,” said Ahmed Tabaqchali, an Iraqi economist and nonresident senior fellow at the Council of Atlantic.

In January, Iraq bought 150,000 tonnes of Australian wheat for around $450 a tonne, a fraction of the 2 million tonnes it is likely to buy in 2022.

Australian wheat is in high demand. The country is a major exporter and its wheat prices have risen as importers anxiously watch Russia’s invasion of Ukraine.

Iraq often increases its imports when harvests are poor – the Norwegian Refugee Council said 37% of Iraqi wheat farmers experienced a poor harvest through 2021 as drought returned to the country after a bumper harvest in 2019-20.

This is a problem for Iraq, where the government buys wheat locally and on international markets to distribute to private millers, a system almost entirely run by the government.

The price Iraq has paid for Australian wheat is about $70 a tonne more than the government pays to local producers.

The cost will soon rise for a government that many say needs to spend more on schools, water, electricity and infrastructure.

“While in 2020-21, Iraq’s grain imports, including flour, were around $0.9 billion, imports for 2021-22 are expected to almost triple to $3 billion. given the barley crop failure, the reduced wheat crop and the increase in world grain prices by almost double,” said Hadi Fathallah, an analyst at consultancy Namea who worked with the World Bank on agricultural policy.

To understand the trade-off Iraq is making between its social safety net and other sectors, $3 billion is more than 22 times the proposed 2021 budget allocation the country will spend on schools and learning materials, says Utica Risk, a consulting firm specializing in Iraq. Political economics.

Corruption in the food market

The flour that the Iraqi government purchases from private millers is redistributed to the population through one of the largest government food programs in the world, the Public Distribution System, which provides cooking oil, sugar, lentils and flour.

The PDS follows a decades-old pattern where Iraq’s agricultural system is dominated by state-owned companies that buy agricultural products from Iraqi farmers, often at inflated cost, and also buy imports. They even provide cheap or free items, such as fertilizer.

The system is riddled with corruption. A report by the Food and Agriculture Organization of the United Nations indicates that when wheat prices are lower in neighboring countries than the price set by the government, traders smuggle wheat into Iraq to sell. at the higher official price.

Corruption allegations came to a head in 2009 when it was discovered that PDS imports had been rigged with false prices, allowing government kickbacks and leading to the arrest of the former Minister of Trade Abdul Falah Al Sudani.

Other allegations plagued the PDS system in 2020, with owners of government-run silos being accused of accepting bribes from farmers for favorable wheat purchase terms.

oil for food

The system is subject to shocks from global markets. If oil revenues plummet, as they did in 2014, from $100 (the equivalent price today) to $23, the state cannot buy the produce, often leaving farmers to sink street to protest, while poor Iraqis are exposed to food poverty.

When oil prices last crashed, Iraq was spending billions fighting ISIS and, according to the World Food Program, had to cut PDS to vulnerable families as the government “focused all available resources on the payment of public sector payroll.

It’s a scenario that could repeat itself as Iraq’s population is expected to grow from 41 million today to around 50 million in 2030, gradually eating into the government’s budget for salaries and services.

Reforming the Iraqi Food System

The PDS was created by the UN to ward off mass hunger during a period of harsh international sanctions against Saddam Hussein’s regime in the 1990s.

Critics say that because Iraq looks so radically different today, the system is no longer fit for purpose.

Basically, they say, it discourages free-market-oriented production, which could be more efficient and pose less risk of corruption and waste, which is often a feature of major Iraqi government programs.

“There’s no incentive for farmers to start producing commercially because they don’t respond to fixed-price markets, and if you don’t respond commercially, your farm isn’t sustainable without government subsidies,” he said. Mr Tabaqchali, highlighting fears that the whole system could break down.

The UN noted that, despite being targeted at the most vulnerable, much of the PDS’s assets go to families who can easily feed themselves, while its clumsy and inefficient management opens the door to corruption.

Climate change risk

Iraq’s growing dilemma is that while imports become prohibitive, as the population grows and oil prices fall, government-run wheat distribution is also threatened by climate change and the use of oil. by neighboring countries where the construction of dams is underway, notably in Turkey and Iran. .

In 2018, Tigris levels fell sharply after a dam was built in Turkey and Iraq cut wheat production sharply, albeit temporarily.

“Given the failure of the wheat and barley crops in northern Iraq during the 2020-21 marketing year and the decline in rice productivity, and in view of the decrease in the water available for irrigation in the south in 2021, Iraq will need to import larger quantities of grain in 2022 to meet its needs, at a time when grain prices are at an all-time high,” Mr. Fathallah.

Critics of Iraq’s state-run food distribution system have repeatedly called for a complete overhaul of the PDS, even replacing it with a cash transfer system for poor families, which has been tested in Sadr City, Baghdad .

“The PDS is dysfunctional, mainly because of corruption. Little of the PDS itself accrues to the farmers. There is a separate program, the Wheat and Barley Purchase Program, which actually subsidizes both value chains through above-market government purchase prices. It is also stagnating,” Mr. Fathallah said, pointing to the complex web of state involvement in food in Iraq.

Still, Fathallah said a positive – at least in the short term – is that high oil prices can support Iraq’s inefficient food system.

“The government’s surplus of oil revenues in 2021 raised foreign exchange reserves to $55 billion from $48 billion in 2020, helping Iraq cover six months of agrifood imports on the basis of 2019 imports,” he said.

But Mr Fathallah said this situation cannot be sustained without major reform, a concept the Iraqi government struggles with, especially when it is mired in months of political stalemate following the October elections.

“Given the increase in global food prices in 2021, the costs of importing agri-food products into Iraq are expected to have increased by at least 28% in 2021, to around $12 billion, near their peak. of 2014,” he said.

“We need a policy where we go after the government subsidy program and take the hand off the government because it has been a failure,” said Tabaqchali, who insisted that Iraqi politicians had counted on heavy rainfall rather than reforms.

“We can protect farmers with charges and tariffs on imports, but our country has to be competitive for itself and it can never be competitive if the government controls input and output prices.”

Updated: February 25, 2022, 6:00 p.m.