Emilia-Romagna Floods: Impact on Local Agribusiness
Since the start of May, the Northern Italian region of Emilia-Romagna has endured heavy rainfall culminating in flash flooding across the region. At time of writing, the region’s weather alert agency classified the provinces of Modena and Bologna at a moderate risk of flooding and gave high-risk flood warnings to the provinces of Ferrara, Ravenna, Forlì-Cesena, and Rimini. Bologna remains at high risk of landslides, although in neighbouring provinces there is only a moderate risk. Satellite imagery published by NASA’s Earth Observatory illustrates the severity of the flooding in farmland near the town of Lugo, in the Province of Ravenna.
Map 1 - Emilia-Romagna Provincial Map. Available here.
Emilia-Romagna is Italy’s fourth region in terms of GDP output behind Lombardy, Latium, and Veneto. The region’s diverse economy is made up of agriculture, manufacturing, and textiles sectors. In the first half of 2022, agricultural output was valued at €575 million ($621 million), just under two per-cent of all regional output. Although agricultural output in the primary sector does not amount to much of the region’s economic output, the processing of agricultural products in the secondary sector represents almost a fifth of Italy’s total agricultural value chain and agri-food exports represent over ten per-cent of the region’s exports, according to information published by the regional government of Emilia-Romagna.
The collateral damage faced by Emilian farmers is not just economic. The region’s farmers produce 44 geographically-protected agricultural products such as Parmigiano Reggiano, Parma ham, balsamic vinegar, and Lambrusco wine. In addition to this, the region’s farmers and their respective research partners are field-leading innovators of food safety farming practices. This has led Confagricoltura – an Italian farming association – to describe the situation as having the potential to trigger a significant socio-economic gulf within the region, due to the costs of rebuilding. Currently, Confagicoltura estimates a cost of approximately €40,000-50,000/hectare for fruit farmland ($43,250-$54,060/hectare) and €6,000/hectare for grain and cereal farmers ($6,490/hectare), not to mention the years it will take for affected farms to return to capacity-level production. Notwithstanding, the large part of the region’s spring harvests are pretty much written off as fruit trees suffer from root rot and 400,000 tonnes of wheat have been lost.
The figures reported above only represent the immediate cost for the 5,000 farms impacted by the floods, and do not consider the longer-term social and economic costs associated with the loss of assets and labour of Emilian farmers – not to mention the increase in costs of secondary food products which are the heart of gastrotourism in the region. For the Italian government, there is the question of financing reparations and rebuilding. At the moment, some €100 million ($108 million) have been approved by the central government for relief spending in Emilia-Romagna, as head of government Giorgia Meloni explores the use of the European Union’s Solidarity Fund.
Cover Image Credits: International News - The Chronicles of Life. Available here.
Commodities in the First Quarter: Inflation, War, and Geopolitics
Goldman Sachs’ 2023 commodity markets outlook had anticipated a substantial return of over 40 per-cent by the end of 2023 for commodities (S&P GSCI TR Index). As the first quarter of 2023 draws to a close, S&P GCSI spot prices closed the quarter at a -2.81 per-cent loss. As was the case in many financial markets, the S&P GCSI saw its biggest decline in the first quarter in the week of Silicon Valley Bank’s collapse – gold being the glaring exception. Of course, this is by no means indicative of how commodity markets will perform for the remainder of the year. Nevertheless, the impact of the ongoing banking on the inflation-duration investment cycle (elaborated below in Figure 1) for commodities remains to be assessed. This spotlight aims to do precisely that, considering some of the macroeconomic assumptions and models proposed in Goldman Sachs’ 2023 commodity outlook.
Understanding the Inflation-Duration Investment Cycle
The inflation-duration investment cycle is a tool useful for understanding investment in commodities and commodity market behaviour, relative to inflation and interest rates. It loosely correlates with the Merril Lynch Investment Clock – although it is a bit more specific to commodity markets.
Figure 1 - The Inflation-Duration Investment Cycle. Adapted from Goldman Sachs Commodity Outlook.
When Goldman Sachs published their 2023 Commodity Outlook, they affirmed that at present, the commodity market was still in the first stage of the inflation-duration investment cycle. Crucially, the 2023 Commodity Outlook explains that in addition to the current high-inflation, high-interest rate macroeconomic environment, commodity markets are confined in an underinvestment super cycle such that unless there is a sustained increase in capital expenditure (capex), increasing demand cannot trigger a supply-side response hence creating inflationary pressures in the short-term. The remainder of this spotlight will sum up the overarching macro-level geopolitical supply-side risks impacting three core sectors of the commodities market: agriculture, rare earth minerals, and energy markets.
Agriculture in Q12023
S&P agriculture indices (GSCI Agriculture, GSCI Livestock, and GSCI Grains) outperformed the S&P GSCI with GSCI Livestock being the best performing index considered in this spotlight, gaining 5.94 per-cent this quarter. Agriculture and Grains lost 0.61 per-cent and 2.57 per-cent, respectively.
At the macro-level there are two factors that will keep grain prices high, despite losses in value in the first quarter of 2023. These factors are the supply-side issues resulting from the Russo-Ukrainian War, despite the recent extension of the Black Sea Grain Initiative, and climate change – which is already having some impact on grain yields. As hypothesised at the start of the Russo-Ukrainian war, grain prices skyrocketed as the two countries contribute to about half of the world’s grain supplies. The wide use of grain in human and animal diet means that the precarity of grain supply will likely underpin most food-related price rises and contribute significantly to the cost of living crisis, globally. For that reason, the extension of the Black Sea Grain Deal on March 18 was of great relief for the global food supply chain. However, despite the extension there are two items still on the snag list: (i) a disagreement between Moscow and Kyiv over how much longer the Grain Deal will run for, and (ii) Russia banning major grain exporter – Cargill – from exporting Russian grain, which has already impacted futures’ prices.
Short-term risks impacting the supply of agricultural commodities also consist of grain supply, as they are crucial for animal feed. In addition to this, avian influenza outbreak in poultry supplies, which are not limited to just the United Kingdom, are having impact on related goods. Avian influenza outbreaks have been reported in the United Kingdom, United States, the rest of Europe, and there are fears that avian influenza and eventual egg shortages are also felt in South America. Long-term impacts of zoonotic diseases like avian influenza are difficult to quantify. Notwithstanding, after the outbreak of COVID-19 and the ensuing pandemic, there has been formal research dedicated to the matter which would suggest that countries with highly-industrialized, high-density agricultural industries run a higher risk of having disease outbreaks harm crop and livestock supplies. Thus, balancing land use and industrial density with growing populations’ driving up demand will be of importance if governments want to avoid severe shortages of crucial food items.
Energy Markets in 2023Q1
The three S&P energy indices considered in this spotlight – GCSI Natural Gas, Global Oil, and Global Clean Energy – all lost value quarter in 2023. Natural gas especially took a substantial hit, losing 44.43 per-cent of its value at the end of trading on March 31. Oil lost a little over five per-cent throughout the opening quarter whereas Global Clean Energy’s losses were below the one per-cent mark.
The stand out commodity here is natural gas (including LNG) and this is in large part because of the “geopolitical struggle between Europe and Russia” which will play a crucial role in dictating natural gas markets for the foreseeable future. As severe sanctions on Russian oil and gas were confirmed by the European Union throughout 2022, the bloc has not yet dealt with the fact that there is still strong demand and necessity for those commodities. Although some effort by means of REPowerEU have laid the groundwork for a shirt to alternative energy supplies, European countries have begun to look elsewhere for natural gas supplies. One such effort has been made by Italy who has looked to further increase imports of Algerian natural gas.
Another recent trend has been importing Indian-refined petroleum products derived from Russian oil, despite embargoes. This shows that short-term procurement of oil and gas into Europe could well become economically and politically costly until alternative energy supplies are not secured. As the necessity for reliable energy supplies begin to outweigh the political value of sanctions on Russia, European countries may well find themselves having to prioritise one over the other. A pessimistic outlook that may be, but it is already materialising; as France settled its first LNG deal in Yuan with China. As the BRICS countries begin to trade in their own currencies the return of a multi-polar energy market might lead to less market predictability and prolonged period of macro-scarcity.
On the other hand, the political and economic urgency to expedite the green energy transition is indicative of a positive outlook for renewables markets according to the International Energy Agency’s latest industry overview. Indeed, analysis and forecasts from McKinsey share this sentiment as they expect substantial growth in solar and wind energy. Bloomberg shares this sentiment in the hydrogen sector, too. As legislation and regulation gears itself towards carbon-neutrality in the world’s three largest economies – the United States, China, and the EU – there is a genuine legal basis for optimism in renewables markets. A medium to long-term risk to watch out for, however, would be the political and economic competition over the necessary resources – such as copper – for a green transition.
Rare Earth Metals in 2023Q1
In the opening quarter of the year, the S&P GCSI Core Battery Metals Index – which tracks stocks of rare earth metals (REM) pertinent to battery production – stagnated around the -0.34 per-cent mark. On the other hand the S&P GCSI Precious Metals Index soared 9.14 per-cent, though this was in large part due to investors backing gold and silver as the United States’ regional banking crisis erupted.
Although the relationship between geopolitical tensions and short-term supply risks of REMs is not yet at the scale of the relationship between geopolitical tensions and the supply of agricultural and energy commodities, there is reason to believe that this will not last very long. Essentially, this is because REMs and precious metals are crucial to the green energy transition and the production of key electronics’ components like semiconductors. REMs are also becoming ever-more important for the production and maintenance of modern-day defence systems. Thus, securing REM supply chains and secondary materials is a paramount task for states and businesses looking to establish a dominant presence at the international level. As of 2020 REM exports originated overwhelmingly from Asia with Myanmar, China, and Japan accounting for over half of all exports. The United States and its European allies, on the other hand, exported just over 10 per-cent of global REM exports. Furthermore, sanctions against Russia and Myanmar have further complicated access to REM imports for Western business and countries. This is exacerbated further by Beijing’s recent efforts to improve relations with Moscow and Naypyidaw – with the latter being crucial for China’s efforts to overcome the ‘Malacca Dilemma’.
In recognising this weak spot, both the Biden and Trump administrations took swift action to incentivise the reshoring production of crucial electronics, starting with the National Strategy for Critical and Emerging Technologies as a direct countermeasure to China’s efforts to increase its own electronics production. This was followed up with the CHIPS and Science Act and formal export controls, limiting semiconductors produced with American technology and inputs to China. In the meantime, the United States has sought to diversify its REM supplies from Africa, where China has a considerable geopolitical presence. What the impact the ongoing China-United States rivalry over REM supplies and semiconductor development will have on prices in the short-term remains to be seen, but the medium-to-long-term protectionism and antagonism between Beijing and Washington will likely lead to REMs enjoying substantial price increases considering their growing demand.
Summary: Outlook for 2023 and Beyond
The first quarter of 2023 carried forward many of 2022’s geopolitical dynamics and risks into global commodity markets. There have also been supply shocks, like avian influenza outbreaks and severe climate events, which have harmed the supply of crucial commodities that have further exacerbated the impacts of geopolitics on market activity.
This is particularly visible in agriculture markets where the uncertainty on how long the Black Sea Grain Initiative extension will last is a key risk to secure grain supplies globally. If Russia’s demands for a reduction of sanctions can be made credible by its recent rapprochement with China, then an extension of the Black Sea Grain Initiative beyond the current deadline will likely result from a reduction in Western sanctions. Conversely, if the West can find ways to cope with inflation and diversifying energy supplies, then Moscow might be forced to formally accept a longer extension. The outlook on the matter remains speculative, but the consequences of a no-extension scenario could spell disaster for global food supplies within the next quarter.
Although energy and REM markets are also mired by geopolitical power struggles and risks, the potential for a drastic spillover into commodity markets and the wider economy in the short-term is, at this stage, quite limited. Although, as REMs become more intertwined and necessary for future energy markets this outlook will likely change post-2023. This is because in the absence of short-term flashpoints, the increasing pursuance of protectionist and antagonising trade policies between Beijing and Washington will very likely undo much of the economic globalisation that occurred pre-COVID.
Hence, it is not likely that global commodity markets will break the macro-scarcity phase of the Inflation-Duration Investment Cycle in 2023 – and potentially prolong the under investment in commodities into 2024 and beyond. However, there is still a lot of 2023 to go and there is a lot of time for pressing issues to unfold and provide a clearer picture for commodity markets. Although, the current direction of the international regulatory and political environment does not offer much optimism for the long-term, with regards to increasing capex or securing crucial supply chains.
Cover photo credits to: Black Sea Grain Initiative FAQ | United Nations in Namibia
REPowerEU, Piano Mattei, and the Political Economy of the Mediterranean
From the Phoenicians to the First French Republic, two shores of the Mediterranean have been the cradle for many important ancient civilizations, including the Carthaginians and Ancient Egyptians. Although in modern times the post-war political alignments and government institutions look very different, the evidence of a rich common history can be seen all over Southern Europe and North Africa in the forms of enclaves, architecture, and shared cultural and linguistic norms. Following Giorgia Meloni’s state visits to Algeria and Libya, this spotlight considers how Italy’s Piano Mattei (Mattei plan) can be an opportunity for the rest of the European Union (EU) to successfully implement the REPowerEU energy plan and potentially rekindle trans-Mediterranean trade and cooperation, beyond natural gas and energy markets.
Immigration, Energy Markets, and Fratelli d’Italia: What is Piano Mattei?
In simple terms, Piano Mattei represents Italy’s de facto foreign policy in the Mediterranean under Giorgia Meloni’s tenure as President of the Chamber of Deputies (the official title of the head of the Italian government). The origins of Mattei can be found in Fratelli d’Italia’s (FdI) manifesto for the 2022 Italian general election, which stresses FdI’s belief that Italy must once again become a leader in energy markets. Piano Mattei takes its name from Enrico Mattei – founder of Italy’s state-owned hydrocarbons agency: Ente nazionale idrocarburi (Eni). During his time in the Chamber of Deputies, and later as Chairman of Eni, Mattei realised that if Italy wanted to include natural gas in its energy mix then Italy needed to cooperate with key exporters. Indeed, Mattei oversaw the signing of various bilateral agreements with many newly-independent states in the MENA region to import natural gas to Italy. Mattei’s work with Eni was also crucial to the construction of the Transmed pipeline, which channels Algerian natural gas to Sicily via Tunisia. The plans for the Transmed pipeline also included the Maghreb-Europe pipeline, which exported Algerian gas to the Iberian Peninsula until last October, when Algiers elected to not renew its export contracts with Morocco over increasing tensions over the Western Sahara conflict. This effectively ceased the flow of natural gas from Algeria to Iberia.
Giorgia Meloni formally introduced Piano Mattei last December, during the eighth iteration of the Dialoghi Mediterranei di Roma – a forum on Mediterranean politics hosted by Italy’s Ministry of Foreign Affairs and International Cooperation alongside the Instituto per gli studi di politica internazionale (ISPI), a prominent Italian thinktank. In Meloni’s own words, Piano Mattei is a “virtuous collaboration leading to the growth of the European Union and African nations” guided by the principles of “interdependence, resilience, and cooperation”. Naturally, the namesake “Mattei” suggests that Meloni’s stance is primarily to secure energy supplies for Italy and totally eliminate the dependence on Russian natural gas. On the one hand, however, Meloni’s foreign policy in the Mediterranean also aims to build upon the European Commission’s trade ambitions with the ‘Southern Neighbourhood’: “The long-term objective of the trade partnership between the EU and its Southern Neighbourhood is to promote economic integration in the Euro-Mediterranean area, removing barriers to trade and investment” and the EU’s wider energy policy goals. On the other hand, Associazione Amici dei Bambini – an Italian children’s rights NGO – raises the concern that Meloni’s ambiguous and rhetorical references to immigration in her keynote speech at the Dialoghi Mediterranei di Roma, suggest that perhaps Meloni’s ambitions are centred on delivering campaign promises regarding trans-Mediterranean migration flows. Indeed, Meloni’s lexical and rhetorical ambiguity is often the cause for concern for some analysts (including the author of this spotlight). Whether Meloni intends to use Mattei to further her immigration policies is difficult to ascertain at this stage, and is beyond the scope of this spotlight.
Regardless of how one may interpret the scope or intentions of Mattei, one thing is certain – it can be an opportunity for all of the Mediterranean countries. For Italy (and to a large extent, Meloni) it would be a first step in re-establishing itself as a regional economic powerhouse and help move away from decades’ long economic stagnation. For Algeria and other North African countries, the prospect of increased cooperation and interdependence with the EU is an incentive for investment, potentially beyond natural gas and energy markets. In the two weeks after Meloni’s visit to Algiers on January 24 2023, Eni’s (Euronext Milan) share price increased 4.58 per-cent from €14.18 to €14.83. Year-to-date growth is around the 8 per-cent mark, at time of writing.
Limits for the European Commission and Meloni’s Government
Although a more collaborative and economically interdependent Mediterranean could have the potential to benefit states on either side, Giorgia Meloni and the European Commission need to learn from the past if they are to derive short-term economic benefit as well as long-term regional cohesion. What is meant here by “learning from the past” is that ‘switching’ who is supplying the EU with gas from Russia to Algeria, for example, does not account for the weakness in Europe’s energy strategy before the Russo-Ukrainian War. That is, relying on a weakly-integrated trade partner for a crucial commodity.
The REPowerEU plan outlines the EU’s energy policy following the Russian invasion of Ukraine. Although the medium to long-term impetus is to increase the role of renewables within the bloc’s energy mix, the short-term imperative includes securing hydrocarbons from non-Russian suppliers. These two foreign policy goals are not necessarily ad diem, and in the context of the Mediterranean, actually involve compromising successful economic interdependence between the EU and its ‘Southern Neighbourhood’.
To contextualise; on January 19 2023 Resolution 2023/2506 was adopted by the European Parliament, calling upon the Kingdom of Morocco to “release all political prisoners'', including the release of Nasser Zefzafi, and to “end of the surveillance of journalists, including via NSO’s Pegasus spyware, and to implement legislation” which protects journalists. Further, increasing collaboration with Algeria (who, as above mentioned, is having its own political standoff with Morocco over Western Sahara) suggests that the short and medium-term ambitions of REPowerEU and Piano Mattei are at odds with the European Parliament’s adoption of Resolution 2023/2506. This is problematic for securing natural gas supplies to Iberia and the westernmost corners of the bloc, but potentially for regional stability in general. If the EU cannot strike the right balance between appeasing Algerian requests and reprimanding Morocco for its treatment of journalists, the prospect of tensions between the two North African states cooling off is not particularly positive. This indirectly impacts the operations of the Maghreb-Europe pipeline, and so on. Indeed, on January 23 2023 the Moroccan parliament “voted unanimously” to reconsider its ties with the European Parliament.
That said, Morocco-European relations are not exactly at an all time low – in terms of trade and commerce, at least. Trade between the EU and Morocco has increased significantly in the period between 2011 and 2021, and the North African state is the bloc’s 19th largest trading partner. Morocco is also among the top African trading partners for Greece, Italy, Portugal, and Spain. Therefore, there is still space for Morocco-Europe relations to improve within the broader scope of REPowerEU, the European Commission’s ‘Southern Neighbourhood’, and of course, Giorgia Meloni’s Piano Mattei.
Summary: Implications for the Political Economy of the Mediterranean
As the EU gravitates towards North Africa to ‘de-Russify’ its natural gas imports what diplomats and politicians should keep in mind two things: (i) the current tension between Algeria and Morocco, and (ii) diversifying gas imports is not (in the short-term) compatible with holding Morocco politically accountable for its mistreatment of journalists. It is an unlaudable conclusion, of course. But certain international relations theory – namely liberal institutionalism – would defend this claim as the theory emphasises understanding “the role that common goals play in the international system and the ability of international organisations to get states to cooperate,” as opposed to focussing strictly on power relations between states.
In the case of Mattei as a part of the EU’s ‘Southern Neighbourhood’ strategy, turning to the Mediterranean region means understanding the political tensions of North Africa in order to ensure the best outcomes for REPowerEU and Mattei, as well as avoiding antagonising the Kingdom of Morocco – even if the normative reasons for doing so are justified. Within the EU, the success of Piano Mattei in increasing Algerian gas supplies to Italy and the rest of the Transmed pipeline (which terminates in Slovenia) is intricately linked with REPowerEU’s short-term goals. Thus, as Arturo Varvelli elaborates in his commentary on the issue, Brussels and Rome ought to conduct themselves in a cooperative manner to ensure the success of Mattei and REPowerEU alike. If not, Meloni’s well-documented Euroscepticism could well be weaponised and used against Brussels, which would be a counterproductive outcome for Italy and the EU’s political legitimacy.
On these premises, then, the EU’s ‘Southern Neighbourhood’ strategy should also encompass the goals of REPowerEU to, first of all, secure alternative gas supplies, but also to cosy up to Rome and using the increased demand for non-Russian natural gas to quell Algiers-Rabat tensions. Equally, in pursuing the energy goals of Piano Mattei Giorgia Meloni should also consider using Italy’s diplomatic power to help find a solution that might reopen the Maghreb-Europe pipeline if she desires to obtain a reputation for closing deals and power brokering at the European level.
Outlook
Italian-North African gas exploration and trade deals may face significant challenges in the shape of Europe’s green energy transition.
Meloni will most likely be able to secure the ‘de-Russification’ of Italy’s natural gas supply, but whether this will hamper Rome’s green energy transition remains to be seen.
Forecasts would suggest that LNG futures prices will not fluctuate sufficiently to dampen the value of natural gas trade between Italy and its partners, Algeria and Libya, in North Africa.
Whether Meloni aims to cooperate with, or conspire against, the EU’s short and long-term energy policies remains to be seen.
At the present moment it is very unlikely that Algeria-Morocco relations will improve to the point of reopening gas flows to Iberia via the Maghreb-Europe pipeline. How the situation between both states remains a critical point for the energy policies of Italy and the EU at large.
Image Credits: ROSI Office Systems Inc.
Providing for the Peninsula
This collaborative research paper by London Politica’s Global Commodities Watch and Ukraine Watch sheds light on the critical infrastructure for the supply of Russian water, fuel and military equipment through and for Crimea and investigates how these may be affected by pressure from Ukrainian forces in the months to come.
Potash supply in a de-globalising world
International sanction regimes are disrupting supply chains across the world. In this research paper, analysts from London Politica’s Global Commodities Watch (GCW) provide an overview of the major stakeholders, critical infrastructure, trade routes, supply and demand side risks, and forecasted trends for potash.
Potash is a fertiliser, essential for increasing agricultural yields and feeding the growing population of the world.