Agflation?

Russia has banned grain exports due to drought conditions, causing grain markets to sharply rally and sending nervous waves through many sectors of an already fragile world economy. Putin may find this a tough row to hoe…literally

Commodity spikes can be inflationary but also deflationary, depending on context. Central banks in Europe and the US misjudged events two years ago, mistaking oil and food rises for the start of a 1970s price spiral. In fact, it drained demand from economies already tipping into recession.

“This is more deflationary than it looks,” said Albert Edwards from Societe Generale. “The risk is that central banks will hold off from further easing that I think is needed, increasing the risk of a hard-landing.”

Mr Putin acted after meteorological experts issued further drought warnings, raising fears that the ground would be too hard to seed the winter crop next month. The loss of both crops would force Russia to withdraw from export markets for two years.

This could ripple into a lot of markets, as these defaults will affect not only Russia’s customers but shipping lines as well.

Kirill Podolsky, head of Russia’s grain group Valars, told Bloomberg that the ban had created havoc. “We have ships lined up for grain and no idea what to do. This will be a catastrophe for farmers and exporters alike,” he said.

The move will be welcomed by grain firms that fixed supply contracts in advance, and are now caught short. Some may declare “force majeure”, suspending contracts for reasons beyond their control.

We’ll see how this develops. I seem to recall a similar “rice panic” a few years ago that turned out to be…not much (but admittedly the world economy believed in itself back then).

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