Russia’s invasion of Ukraine has significantly increased the uncertainty of global agricultural supply and trade in the short to medium-term. The conflict is directly disrupting physical, logistical, and market dynamics in the Black Sea region — a key supplier of wheat, feed grains, and sunflower products to the world markets, particularly for the Middle East and North Africa (MENA) region. This comes on the back of severe droughts that severely compromised the expected US and Canadian spring wheat output, and record-breaking rains in China that have damaged and delayed planting on more than 18 million acres of land, about one-third of China’s total winter wheat acreage. Commodity markets have reacted strongly to this uncertainty, sending agriculture futures through the roof.
How significant an effect will these disruptions have on food security and food prices? We expect the curtailment of Ukrainian supply to drag well into next year, due to war-induced disruptions to the crop cycle. At the same time, Russia’s dominant role in the production of fertilizers and the shortage of grains used for feeding livestock will increase input costs for farmers even in areas that are not directly linked to Ukrainian grain exports. Food prices will therefore remain elevated for months to come, and the effect will be felt across the globe even in countries that do not rely heavily on Ukraine or Russia for grain imports. In the short term, the shock will hurt most strongly some of the poorest and politically more unstable areas of the world.
A Foregone Winter
Russia and Ukraine are major producers of agricultural commodities. Ukraine’s reputation as Europe’s “breadbasket” is long-lived: thanks to its exceptionally fertile soil, the country accounted for more than 25% of Soviet agricultural output, and today it exports 10% of the world’s wheat, 14% of corn, 17% of barley and 51% of the world’s sunflower seeds oil. Wheat and corn account altogether for 65% of Ukraine’s grain production. Ukraine’s wheat production mostly takes place in the Kharkiv, Dnipro, Zaporizhia and Odessa regions (east and south of the country), whereas corn production is concentrated in Poltava, Sumy, and Chernihiv regions (in the north-east). All these regions are currently a battleground, which raises concerns about the outlook for Ukraine’s grain production and export, both this year and potentially stretching into the next season.
In the immediate term, war-related logistical disruptions are especially relevant for corn exports. Ukraine was projected to export a total of 33.5 million tons of corn by the end of the 2021/22 crop year but USDA projections in early March suggest however that corn exports will drop by 18% due to the ongoing conflict. Some of the stored grain may be lost or damaged from the artillery shelling occurring in the areas where production is concentrated, and transportation of grains may be difficult due to military action broadly disrupting Ukrainian infrastructure. Most importantly, the Ukrainian ports on the Black Sea – which are vital for shipping of Ukrainian grain exports – have all been closed or are currently blockaded and bombarded by the Russian Navy. As a result, Ukraine has effectively suspended port operations for commercial activities since February 24th.
Corn and barley are also vastly used to feed livestock such as pigs, chickens, or turkeys. China and India source 84% and 70% respectively of their imported corn from Ukraine, and Ukrainian corn amounts to 50% or more of the total domestic corn supply for European countries such as Finland, Latvia, and the Netherlands. Corn is especially important as feed for chicken, and feed accounts for 55-65% of the chicken production cost – so prices for European chickens could raise significantly. Ukraine summer barley exports, on the other hand, are generally front-loaded after harvest and a majority of the most recent crop has already been shipped, so the effect of port closures on exports is expected to be less severe for barley than for corn. But further pressure on prices may come from China stockpiling feed for its pigs on the way out of a severe outbreak of African swine fever.
An Uncertain Spring
Looking into the next crop cycle (Figure 3), the war increases uncertainty as to the yield of winter barley and winter wheat – which have both been planted in fall 2021 and are due to be harvested in the summer. A significant part of the population in the regions where wheat and barley are grown has fled or taken up arms to fight the Russian invasion, and military action could jeopardize farmers’ tending to the crops. Farmers usually put fertilizer on the winter-planted crops during the spring, as they emerge from the ground – but war is disrupting this process. As 97% of all Ukrainian wheat is winter-planted wheat, disruption to the application of nutrients could result in an abnormally low yield for the 2022 summer harvest. For corn, soy, sunflower seeds and summer barley, the biggest risk is instead that the conflict drags on iand disrupts the new sowing window – typically between March and May. Analysts at Mintec suggest that due to the port blockages and limited overland transportation, many farmers might be simply unable to receive the seed to plant.
Altogether, these factors could inflict a severe blow to Ukraine’s grain production and export capacity this year and well into next year. A preliminary impact assessment from the Food and Agriculture Organization (FAO) suggests that between 20% and 30% of the areas under winter cereals, maize and sunflower seed in Ukraine will either not be planted or remain unharvested during the 2022/23 season due to the war, with the yields of these crops also likely to be adversely affected. For the medium term, risks to production could come from loss of usable agricultural land due to bombing and military action, or deterioration of the soil fertility due to prolonged disruptions in the regularity of the crop cycle. Moreover, if it were to gain control of all ports on the Black Sea, Russia could impede or curtail exports of Ukrainian grains to those countries that it has identified as being ‘hostile’, in retaliation for the sanctions imposed. While not being a direct disruption to production, this could nonetheless induce into shortages and very high prices for the countries affected.
Grains and Energy
Russia is the world’s largest exporter of fertilizers – a key input for agriculture globally. International benchmark prices of fertilizers have increased markedly throughout 2021, in many cases reaching all-time highs (Figure 4). This dynamic is closely linked to the high and volatile prices for natural gas – which plays a pivotal in the production of nitrogen fertilizers – as well as broader supply chain disruption and transportation costs from the pandemic. Following the invasion of Ukraine, the Russian Ministry of Industry and Trade has recommended temporarily suspending the export of fertilizers – which has pushed prices even higher.
Fertilizer imports appear to be relatively diversified. UN trade data in fact suggest that only 10 countries depend on Russia for more than a quarter of their imported fertilizers – although for some of them (Moldova, Finland, Azerbaijan, Serbia) the dependency rate is at or above 60%. This notwithstanding, with prices of fertilizers remaining at a historically high level due to the conflict, input prices for farming will increase globally. Higher input prices will feed into higher production costs and eventually be passed on as higher food prices. According to USDA data, fertilizers account historically for 35% of the marginal cost of production for wheat and maize, and research shows that in the long run a doubling of fertilizer prices leads to a 44% increase in food prices. In poor countries, high fertilizer costs could also lead to lower usage, with the risk of depressed yields in the 2022/23 crop season – adding to the shortage of imported grains and putting food security even more at risk.
Ukraine and Russia are key suppliers to many countries – several of which are among the poorest of the world – that are highly dependent on both imported foodstuff and fertilizers (Figure 5). Overall, UN trade data suggest that around 40 countries source more than one quarter of their total imported wheat from Russia and/or Ukraine (using end-2019 data). While Russia is not experiencing any war-induced problem in grain production, the government has temporarily restricted grain exports to neighbouring Eurasian Economic Union – of which Armenia, Belarus and Kazakhstan are heavily if not entirely dependent on Russia for wheat imports – and it is possible that restrictions might be extended to other areas of the world if the conflict continues. On the other hand, the high likelihood of disruptions to Ukraine’s grain harvests and planting discussed above could severely jeopardise food security in some economically vulnerable countries that depend heavily on Ukrainian exports. Lebanon, Tunisia, and Ethiopia feature at the top of the list – relying on Ukraine for respectively 64%, 49% and 31% of their wheat imports. Egypt, Mauritania Morocco, Uganda, and Jordan also source from Ukraine more than 20% of all their imports.
Disruption in Ukrainian and/or Russian wheat exports coupled with already high and volatile grain prices could challenge food security across these poor economies where wheat is a key food staple. Using FAO data on food balances, we computed the effect that disruption in the supply of Ukrainian grains would have on the daily per capita food calories in the most exposed countries (Figure 6). A 50% reduction in wheat imports from Ukraine would decrease daily available food calories by as much as ~30% in Lebanon, and close to 20% in Indonesia, Tunisia, and Thailand. Globally, FAO estimates that even under a moderate stress scenario, the number of undernourished people could increase by 7.6 million people due to the Ukraine-Russia conflict.
Political consequences could be dire. Anger over food costs played an important role in the Arab Spring protests in 2011, and many countries in the most exposed regions have consumer subsidies in place to shelter their domestic consumers from price fluctuations on wheat. For governments, however, shielding domestic consumers from the fluctuations in global commodities markets comes at a steep fiscal cost – when wheat supplies cannot be secured from affordable exporters. Some are already finding it difficult to maintain the existing level of subsidies: as prices surged, Egyptian Prime Minister Madbouly said on February 16 that the government will raise the price of a subsidised loaf of bread for the first time since the 1980s. The longer the war in Ukraine continues, the higher the risk that it creates tensions in other well-known geopolitical hotspots.
On the back of Russia’ invasion of Ukraine, we expect curtailment to Ukrainian grain supply to continue well into next year, due to the high risk of disruption in the upcoming sowing season. In the immediate term, the effect will be felt most severely across a number of low-income countries where food prices have proven to be a factor of significant political instability in the past. In the medium term, the combined effect of reduced supply in Ukraine as well as across other major grain producers and restrictions to the export of fertilizers imposed by Russia will be to push farming costs and hence food prices higher – even in areas of the world that do not depend on Ukrainian exports for their food security.
In the short term, European countries have little room to counteract the impact of these effects – if not by trying to step up domestic grain production as much as possible while compensation for higher input cost. A European Commission proposal announced on March 23rd goes in this direction – by foreseeing to distribute 500 million euros to aid farmers and by letting farmers temporarily grow crops on the almost 6% of EU agricultural land that is set aside to boost biodiversity (fallow land). The Commission also said it supported EU countries using possibilities to reduce blending of biofuel – usually made with crops like cereals, vegetable oils and sugar – in road fuel to prioritize food and feed usage.
In the medium terms, the uncertainty on the length of the war and of the ensuing economic hostilities with Russia warrants a heightened focus on food and fertilizers security as well as on higher efficiency in the use of fertilizers (which are often overapplied proportionate to yield). Innovations that enhance the efficiency of agricultural equipment and that can reduce the use of fertilizers – such as vertical and precision farming techniques – a will likely receive a boost from this experience and may significantly develop over the next few years.
Silvia Merler – Head of ESG and Policy Research
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