Black Sea (Ukrainian and Russian origin) wheat exports are projected to be 5M mt lower in 2022-23 compared to 2021-22, while at the same time, the Russia-Ukraine conflict has limited nitrogen fertilizer supplies globally. The limited supply of fertilizer has jeopardized wheat yields in South America and Africa, causing an increase in wheat prices in alternative supplying markets. For example, on May 27th, the price of wheat in the EU was USD 445/mt, in Argentina was USD 470/mt, and in Russia was USD 420/mt. Higher prices in alternative markets have paralyzed the wheat supply, as many developing countries that generally buy cheaper Black Sea wheat have not been able to shift promptly to other exporters.
For alternative sources of wheat, there are not many countries that can provide a large volume. The EU and Canada are expected to increase their export volume considerably as they haven’t increased their export quotas. On the other hand, Australia and India, other countries that could potentially provide large volumes of wheat, have decreased their export quotas considerably to protect their local market, and therefore a limited volume is expected from them.
Another significant change can be seen in the feed supply in the livestock industry. While 20% of the global wheat supply is generally used for feed purposes in the livestock industry, 80% of the global corn supply is used for livestock. However, many importing countries have switched from corn to feed wheat as the price of these feed components has narrowed down.
On the vegetable market side, trade restrictions, substantial decreases in production from different crops, increase in agricultural inputs costs, and port lockdowns have severely affected the global vegetable supply, leading to price increases in different countries and regions. In addition, the Russia-Ukraine conflict has made fertilizer prices skyrocket in many importing countries and has directly affected the production cost of several vegetable crops such as onions, lettuce, tomato, carrots, and potatoes.
In the case of Ukraine and Russia, several factors have aligned and contributed to generating supply disruptions within several vegetable crops. For potatoes, both countries have had a considerable decrease in production over the last years due to a reduction in their planted area, along with labor shortage deriving from the COVID-19 pandemic.
In the US and Canada, severe droughts in potato-producing regions have caused shortages in the market, causing prices to hike. In fact, on March 22, prices in the US increased by 46% YoY due to the lower availability and increased demand from the processing potato industry. Furthermore, if prices keep rising through 2022, it is expected that the US will grant access to other potato suppliers other than Canada to curb prices in the local market. Additionally, self-imposed export restrictions have been a constant regulation across countries like Tunisia, Botswana, Turkey, and Morocco, which have restricted their exports to curb prices in their local markets.
Question 1. What Are Some Short-Term and Long-Term Consequences of This Food Crisis?
Rene: This is the worst food crisis since 2008. The number of interacting factors this time are more diverse, starting with the COVID-19 pandemic, followed by port congestions and port lockdowns. So the consequences of this crisis tend to be deeper than the one we faced in 2008. So in the short-term, we are seeing prices rising and supply disruptions primarily due to the Russia-Ukraine conflict, as both countries supply around 28% wheat and 18% corn. Therefore, the countries that strongly depend on importing those two grains will have to find new alternatives. We will also see a shift in demand with a probable increase in the consumption of rice and cassava. In the long-term, we can see an increase in famine in developing countries, possibly leading to a civil uprising and political instability, similar to what happened in the Arab spring. We can also see an acceleration of trade agreements between countries, lowering trade barriers, while some other countries also create export barriers and expand local agricultural policies.
Question 2. When Can We Expect the Situation to Calm Down?
Rene: When the Russia and Ukraine conflict stops, we can expect things to calm down. Although COVID-19 is becoming softer is not totally behind as there is a new lockdown in Shanghai and Beijing. Additionally, the container shortage seems to continue at least for the following year. So I don’t think this crisis will stop at least in the next two years, and we will need to be prepared to face it for quite some time.
Dario: I agree since there are so many variables that could calm the situation or worsen it. For the moment high price levels will remain until 2024 according to the World Bank. For example, the famous container crisis could be slightly relieved in 2023 as new container ships become available. As for food, we must wait for the results of this year's harvest and those to come since the lack of inputs and increasing prices can heavily influence the final results. From the side of country-level variables, it will depend on coordinated actions being carried out between the different world entities that can take action to calm the situation.
Question 3. Are There Potential Ways to Alleviate the Potential Shortages?
Dario: If the Russia-Ukraine conflict ends, we may expect the global prices of several products, such as grains, fertilizers, and fuels, to decrease. It is important to increase the available supply to normal levels so that small-sized farms may have access to the supply in order to return to normal production levels. Also, it may be a good idea to support the Food and Agriculture Organization's proposal to create a financing mechanism for food imports that would help the import financing costs of low and middle low-income countries. A critical point to which we can all contribute is that one-third of the food in the world goes to waste, and 25% of that food could feed 100M people.
Rene: For me, the alternative mainly depends on public policies. One of them is the reduction of trade barriers, which is already in place in some countries, and the acceleration of free trade agreements with new partners. Also, the encouragement of local production of staple crops comes together on inducing changes in habits, replacing mainly wheat and corn, so there is the potential to give incentives to small farmers to produce other crops such as sorghum, cassava, and rice in countries that are currently depending on the supply on corn and wheat.
The Q&A session discusses the following questions:
1. How will the food crisis affect developing countries?
2. How can suppliers penetrate new markets amid this crisis?
3. Are there new opportunities for suppliers amid the food crisis?
4. How does climate change affect food security?
The slides can be viewed here.