Blog Post

Price Insulation And Global Wheat Markets

The real global price of food surged in 2022, reaching well above the previous peak seen in the 2011 food price crisis. While prices declined somewhat in July 2022, they remain alarmingly high, and some countries have enacted policies, such as export bans, to try to rein in prices on their domestic markets. A new IFPRI discussion paper examines the extent to which the high global wheat prices seen during the COVID-19 pandemic and the Ukraine conflict have been passed to domestic markets, as well as the impacts that policies meant to insulate those domestic markets from rising prices have had regionally and globally.  

The study finds that global wheat prices rose only slightly between 2020 and the second half of 2021. At that point, however, they saw a sharp increase and continued to rise until they peaked in May 2022 at well over twice their 2020 opening level.

The authors determine that there is generally a strong, stable relationship between domestic prices and global prices; however, how quickly and to what extent domestic prices adjust to changes in global prices varies among countries. In the United States and the European Union, domestic wheat prices follow global price changes closely. In China, India, and Pakistan, domestic prices have experienced much less volatility and have not risen to nearly the levels of global prices. Russia also experienced stable and relatively low domestic wheat prices until February 2022; Russian wheat prices declined in March 2022 before returning to their original relationship with global prices.

While the 2022 surge in global wheat prices can be partially explained by reductions in supply from Ukraine due to the ongoing conflict, the paper’s authors suggest that extensive price insulation policies, such as export bans and variable levies, may have played a role as well. Such policies also likely played an important role in the foregoing results, with some countries experiencing less dramatic domestic price increases than others. For example, domestic wheat prices in India actually trended downward while global prices were surging, suggesting strong insulation policies. These policies, while intended to protect domestic consumers, can lead to increased volatility globally because the adjustments needed to stabilize global supply and demand after a shock (like the COVID-19 pandemic or the Ukraine conflict) cannot be spread across a wide range of markets.

During the COVID-19 pandemic, global wheat prices rose by 40.8 percent, while average domestic wheat prices rose by only 22.4 percent. Similarly, following the start of the Ukraine conflict, global wheat prices rose by 26.5 percent, while average domestic prices rose by only around 11 percent. The authors suggest that some of this difference is likely due to policies aimed at protecting domestic prices through adjustments to export tax policy. These policies significantly increased the shock to global markets by more than double.

India’s domestic policies appear to have had the largest impact on global wheat prices in both the COVID-19 period and the period following the start of the Ukraine conflict, followed by China. Russia had the third largest impact during the pandemic, while Pakistan had the third largest impact during the Ukraine conflict.

The authors conclude by emphasizing the harmful impacts that insulationist policies, like export bans, can have on poor populations. Global price volatility, combined with the strong relationship between global and domestic prices in the absence of such policies, can wreak havoc on the ability of consumers in low-income countries to afford food. One potential solution to help countries protect their domestic markets from high prices without increasing price volatility on the global stage would be through redesigning domestic trade and storage policies. Additionally, international agreements should focus on limiting export bans and variable import levies, both of which are particularly harmful to global market stability.