The global drop in oil prices is by and large excellent news for the American economy, but nothing is ever quite so simple.
One bankshot consequence of cheaper oil is likely to be expensive wheat and other grain for the rest of the world. This likely means higher prices for bread, pasta, and beer and could have ripple effects throughout the world of food prices.
The reason is Russia. In addition to oil and gas, one of the big things that Russia exports is grain. And, as the ruble gets cheaper — thanks to falling oil prices — Russian grain looks more attractive to foreign buyers. That's good news for Russian farmers, but it means that the ruble-denominated price of bread in Russia is likely to rise sharply. And Vladimir Putin's administration doesn't want that to happen, so on Friday the Russian government announced that it would tax grain exports. That keeps the domestic price relatively restrained, but it's pushing up prices globally.
Russia is big in wheat, huge in barley
Two charts from Javier Blas, an Africa editor at the Financial Times who used to run commodities coverage, show why Russian farming matters to the global economy.
First, Russia is a really big exporter of wheat:
The #grain export restrictions announced by #Russia are a big deal - look at its importance in global #wheat exports pic.twitter.com/LkZiXYWOoD— Javier Blas (@JavierBlas2) December 22, 2014
Second, Russia is an absolutely gigantic exporter of barley:
And even a bigger impact in #barley - Russia is world's top-2 exporter. European barley prices up 25% in 3 months pic.twitter.com/QbZUOedTsb— Javier Blas (@JavierBlas2) December 22, 2014
Now unless you're a huge weirdo you probably don't eat much barley, so who cares? One answer is that barley is a key ingredient in the malt used to make beer and Scotch whisky. The other is that in colder areas where you can't grow corn, barley is a widely used animal feed. So expensive barley could raise the price of meat and alcoholic beverages, even as wheat impacts food consumption more directly.
Grain price dynamics are really complicated
Higher prices for wheat, barley, and products that take barley as an input are the likely consequence of Russia's efforts to curb exports. But it should be said that linkages between the prices of global agricultural products are extremely complicated due to partial substitutability of one grain for another. Most empirical research, for example, agrees with Harry de Gorter's conclusion that growing use of biofuels has contributed to higher rice prices even though rice itself is not used to manufacture biofuels.
The diversion of corn into the biofuels market and out of the animal feed market is enough to trigger a chain of events that leads to expensive rice. By the same token, the ultimate impact of reduced Russian barley exports could be felt quite remotely from the barley industry. Conversely, to the extent that cheaper oil leads to reduced biofuel use, grain prices could actually fall.
The Russian government's inclination to reduce grain exports does tell us something pretty clear about the Russian economy. The desire to shelter ordinary Russians from higher food prices is completely understandable. But a cheaper currency leading to more robust exports is one of the major channels through which a country is supposed to bounce back from an adverse shock in the global economy.
If the dollar value of Russian oil exports is going to fall, then Russia desperately needs exports of something else to come in and fill the gap. If that "something else" isn't going to be grain, then what's it going to be? The world is not exactly clamoring to get its hands on Russian manufactured goods or to sign up for VKontakte accounts. Curbing wheat exports is a fine idea if the oil price decline is just a passing storm that ends in the near future. But if oil goes into a multi-year period of relative abundance, these kind of measures will only make it harder for the Russian economy to adjust.