Global instability and volatile markets

HOW DOES POLITICAL INSTABILITY THROUGHOUT THE WORLD IMPACT FARM MARKETS AND ONTARIO FARMERS?

when it comes to politics in the world, all things are not equal. In Canada we have a certain set of political rules and traditions, which have led to a stable society. Surely this has been rocked in the past with the threat of Québec separatism but generally in Canada, our political and societal stability enhances our trade with other nations.

In other parts of the world, political instability can be a constant in society. For instance, in many developing nations the specter of democratic, stable and responsible governments is not on the radar screen.

FIGURE 1: VIEW OF TAHRIR SQUARE IN CAIRO, EGYPT DURING THE 18-DAY REVOLUTION THAT OVERTHREW PRESIDENT HOSNI MUBARAK IN FEBRUARY 2011.

Some major food producers in Asia and South America do not have the stable political institutions that we may take for granted in Canada. It is this political instability that sometimes adds much risk to our agricultural trade and our agricultural prices and understanding this dynamic is important to the bottom line of Ontario farmers.  

If you consider the political events of the last few months in Egypt, Libya, China, South America and the Middle East, there is a lot of political uncertainty affecting agricultural trade. With Ontario exporting $9.39 billion of agri-food products in 2010, the risk to a trade interruption is always a constant from some form of political instability around the globe.

argentina’s impact on soy markets
In some ways Ontario is insulated from this political instability because 80 percent of our agri-food trade goes into the US, which has a very stable political economy. However, there are always indirect effects on agricultural trade and markets through political instability in far-off lands. Argentina, the third-largest soybean producer in the world, is a good example.

Over a period of years, Argentina’s government has looked at their burgeoning agricultural industry as a way to raise government revenue. Recently the Argentinean government suspended Cargill, Archers Daniel Midland and Teopfer from the grain export registry. This arbitrary move caused large tax increases to these companies slowing export shipments and reducing client confidence in this large South American soybean exporter. According to Alastair Stewart, DTN’s South America’s correspondent, it is not the first time tax authorities have gone after grain exporters. In fact, the Argentinean soybean sector is often hit by strikes by producers sending soybean markets awry. When this type of political instability strikes in Argentina, the soybeans being traded have to be replaced, providing an opportunity for the US and Canada.

the unknown of china
Of course, the big gorilla in the room when it comes to agricultural trade imports is China. China’s insatiable appetite for the world’s soybeans has impacted soybean trade for several years. The potential for increased corn imports into China in 2011 hovers over the corn market like  forbidden fruit.  However, do we really know what’s going on in China?  Does political instability in the world’s most populous country send jitters through agricultural markets?

Dr. Karl Meilke, a professor specializing in trade and domestic policy at the University of Guelph, suggested that China is a lot better connected with the world economy than they were 20 years ago. He commented that it was in their best interest to keep a lid on political instability, as that would be bad for their economy. The political leadership certainly wants to control the population and keeping those trade flows going is one of the best ways to do that.

instability in the middle east
Meilke also commented on the recent political instability in the Middle East. He said it had an obvious effect in the oil markets, but whether more political stability through democracy would increase economic growth and investments in Middle Eastern countries in the next 20 years is unknown. Egypt is the world’s largest importer of wheat. Their recent political insurrection curtailed some trade flows and caused much nervousness in wheat markets.

Political instability in the Middle East always increases risk in world oil markets sending prices higher. An argument can be made that more instability means higher oil prices, higher ethanol margins and positives for Ontario corn producers. However, producers are also negatively impacted by high oil prices. Trade flows resulting from that will change, forcing end users to adjust along with producers.

another perspective
Dr. A.K.Enamul Haque, a professor at United International University in Dhaka, Bangladesh offered a somewhat different perspective. He discounted political instability impacting trade flows, but countered on what type of political instability that might be.

Clearly, civil wars like what’s currently going on in Libya changes trade flow. However, from a developing country perspective he said sometimes political decisions from food exporting nations can often impact prices in the  developing world. Sometimes when you are on the receiving end it’s looked at differently.

Of course when Ontario farmers harvest their crops, vague notions of political instability in far off lands don’t register as top drawer. However, unforeseen political events around the world can sometimes abruptly change markets and change agricultural trade flows. It might seem like a surprise at the time, but it’s really a constant. Political instability like we’ve seen in the Middle East over the last few months can change the game. The challenge for Ontario farmers is to recognize that. •

About the Author: Philip Shaw is a farmer and agricultural economist from Dresden.