On the 24th of February 2022, Russian President Vladimir Putin shocked the world when he had announced the decision to launch a “special military invasion” in the eastern parts of neighbouring Ukraine in order to “protect the Russian-speaking people” there.
While there are various reasons speculated for the war, such as Ukraine wanting to join the North Atlantic Treaty Organization (NATO) or Putin’s vision of bringing back the old erstwhile Soviet Union, the economic effects of the war have been brutal for the world.
While the catastrophic effects of the invasion on the energy sector have been well-documented, given that Russia is one of the largest exporters of petroleum and natural gas and the subsequent oil embargo it has faced at the hand of the United States, this war also has effects on other sectors of the economy. One such sector is the agricultural sector, especially wheat production.
Russia is the largest exporter of wheat in the world, and Ukraine is the fourth largest exporter of the same commodity. Together they combine for a whopping 30% of the worldwide wheat production. But now, due to the various instability issues in the supply chain, there is a need for other countries to fill the void. India can be one of those countries.
And in India, one of the largest wheat exporters is the agribusiness section of ITC Ltd (formerly known as the Indian Tobacco Company). The agribusiness section of ITC accounts for about 21.88% of their revenue as per FY21 (Fiscal Year ranging from 1 April 2020 to 31 March 2021).
With ITC’s agribusiness section being one of the major contributors to India’s wheat exports, this article would discuss how they can benefit from this war, like, for example, the geographical conditions which help India’s aims, unlike exporters. We would also briefly discuss how ITC procures wheat from its farmers.
Procurement of Wheat by ITC
ITC procures wheat through their e-Choupal initiative. Launched in June 2000, it has provided computer and Internet by e-Choupal kiosks access to the rural regions across multiple agricultural regions in the country.
Through e-Choupals, farmers can negotiate with the representatives of ITC, eliminating the need for a third party. They also help farmers place orders for basic agricultural needs like seeds and fertilizers, which enhances their productivity.
In 2020, ITC launched e-Choupal 4.0 which gives farmers information on weather and markets on a real-time basis. Today, around 4 million farmers growing a wide variety of crops like soybean, coffee, wheat, rice, pulses, and shrimp in over 35000 villages, are connected with ITC through 6100 e-kiosks. These farmers are spread across 10 states (Madhya Pradesh, Haryana, Uttarakhand, Uttar Pradesh, Rajasthan, Karnataka, Kerala, Maharashtra, Andhra Pradesh, and Tamil Nadu).
How Much Wheat Does ITC Export?
As per a March 2022 Business Standard report, out of the nearly 7.25 million tonnes of wheat exported in FY 2022, ITC is responsible for about a whopping 50% of it. With the Indian government targeting a record 10 million tonnes of wheat export for FY 2023, it is reasonable to expect that ITC would be a major contributor to it.
According to domestic brokerage firm Edelweiss, the poor production of wheat in Russia and Ukraine in the third quarter of FY 2022 (July 2021- September 2021), was a major reason for a 100% YoY (year-on-year) increase in ITC’s agribusiness division revenue as they slowly started to fill the void. They were also aided by other factors, such as a growth in demand for spices and leaf tobacco.
The Opportunity That Beckons
The invasion of Russia on Ukraine has further exacerbated the issue regarding the poor yield of wheat exports.
In the case of Russia, it is because of the various sanctions the Western World has imposed on them due to the invasion. These sanctions also affect other Russian exports like petroleum and potash. In fact, Russia has even temporarily stopped exports to ex-Soviet countries in Belarus and Kazakhstan for the time being.
In the case of Ukraine, it is mainly due to the Russian airstrikes on all their major port cities on the Black sea like Odessa and Chornomorsk. This has led to supply chain disruptions worldwide.
So if we consider these two factors, then it should be no surprise that wheat prices have touched a record high of around $13.50 per bushel (roughly around $500 per tonne). This had led to a huge void in the market, especially with countries dependent on wheat imports like Egypt struggling right now, given its ever-increasing population at a rate of 1.9% per year.
How Can ITC Exploit This Opportunity?
Given that wheat is a crop that is mainly harvested in the months of April and May, it looks like India is at the right time to help the world overcome the consequences of the Russian invasion of Ukraine as there has never been a demand for wheat higher than what it stands right now.
Another thing that needs to be considered as per the Edelweiss report mentioned before, the wheat produced in India is comparable in all parameters to Russian Red Sea Wheat, be it in quality, taste, or texture. Thus, all these factors help us conclude that the wheat produced in India is primed to fill in this huge void of wheat exported by Russia and Ukraine.
And who else is better positioned than ITC here? ITC already has a strong market in Bangladesh, the Middle East, and countries based in southeast Asia like South Korea and the Philippines.
No wonder it has started taking steps to exploit this advantage, such as scaling up its wheat development program and introducing location-specific superior seed varieties. It has also started exporting its wheat to countries like Lebanon as well.
Role of the Government (Central and State)
Even the current Prime Minister of India, Narendra Modi, has acknowledged this need to fill this void and recently said that India should seize this opportunity of exporting the best quality of wheat the exporters can.
The government has also decided to aid these companies so that India's exports can be further boosted as per the directive of our Prime Minister. They have started establishing laboratories at a faster rate for quicker testing. They have also told port authorities to give priority to wheat exports.
Admittedly, a major issue that still persists that the exporters continue to raise is state-specific taxes. For example, in Punjab, they have to pay 3% taxes as per the fee they have paid to the market and 1% service charges. Exporters have appealed to the respective state governments to give tax relief, which would ease their business a lot.
Thus, in this article, we have talked about why there is a huge gap in the wheat exports market due to the Russian invasion of Ukraine and how ITC can exploit this gap. This gap is something that not only ITC but other exporters like Cargill or Olam Agro can take advantage of. And thankfully, it seems all of them are.
As per various reports, India could potentially export 4 million tonnes of wheat (around 55% of what it used to export annually) within the next two months, so it can be seen that Indian exporters are seizing this moment. This bodes well for the Indian economy and, thus, the country as a whole.
Was Russia a major exporter of grain?
Yes, Russia is one of the largest exporters of wheat in the world and accounts for 16.5% of wheat production in the world. The country exported 37 million tonnes of wheat in 2020.
Does Ukraine produce a lot of wheat?
Yes, Ukraine accounts for 11.5% of wheat production in the world. It exported 18 million tonnes of wheat in 2020.
Who does Ukraine export wheat to?
Egypt, Indonesia, Turkey, Pakistan, and Morocco are some of the top countries to which Ukraine exported wheat.
Who does Russia export wheat to?
Egypt, Turkey, Nigeria, Bangladesh, and Pakistan are some of the top countries to which Russia exported wheat.
How can ITC benefit from the Russia Ukraine crisis?
As the Russia Ukraine war has caused a huge shortage of wheat in the world, ITC can seize this opportunity by providing the wheat to the countries that Russia Ukraine exported to.