By Eric Vandenbroeck and co-workers

Russia’s invasion of Ukraine came when global agriculture and food supply chains were already fragile.

The Ukraine war is exacerbating preexisting global grain supplies and price problems. Although all will feel higher prices, North African and Middle Eastern countries along the Mediterranean will be more directly and severely affected. Sudden spikes in food prices are directly linked to increased social unrest and conflict. Further, instability in this region could put fertilizer supplies at risk, putting only more upward pressure on food prices.

 

Terrible Timing

Russia invaded Ukraine when global agriculture and food supply chains were already fragile. A drought in 2021 across the U.S. and Canada, two of the world’s largest producers and exporters of wheat and other grains, reduced crop yields. Dryer weather also hurt major agricultural exporters in the Southern Hemisphere, reducing the volume of some grains, such as corn, on the market. 

Smaller producers like Syria and Iraq also suffered droughts, reducing their output and increasing import demand. And Russia, the world’s largest wheat exporter, cut its export quota for 2022 to secure domestic supply. Even before the war, the U.S. Department of Agriculture’s global outlook for critical goods like wheat, corn, and select oilseeds projected lower supply, higher demand, and reduced stocks at the end of the year.

 

Higher fertilizer prices since the second half of last year were also starting to bite. Russia’s decision at the end of the year to prohibit the export of nitrogen fertilizer until April made things worse, as did China’s move to ban exports of phosphate fertilizer until at least June.

The high cost and scarcity of fertilizers at the end of 2021 led many farmers, including those in Ukraine, to plant fewer hectares for the coming season than they had planned. It also affected decisions about which crops to grow – for example, farmers were averse to planting fertilizer-intensive crops such as corn.

The effects of the pandemic on energy and logistics cannot be overlooked either. Restarting economies in 2021 generated higher industrial activity, pushing energy prices. This, in turn, pushed up the cost of shipping goods. Additionally, prolonged logistical bottlenecks increased input prices of final products, including food. 

Although agriculture and food processing labor shortages were much improved in 2021 compared with 2020, there were still production interruptions and calls for higher wages. Simply put, there have been far more factors pushing food prices than the reverse.

 

Market Uncertainty

The Ukraine conflict contributes to these price pressures by knocking two major producers of grains, oilseeds, and other commodities out of the market and inserting enormous market uncertainty. Russia and Ukraine account for 28.5 percent of global wheat exports, 18.7 percent of corn exports, 29.6 percent of barley exports, and 78.3 percent of sunflower oil exports – a staple in the human diet and animal feed.

From the first days of the war, Black Sea ports were closed while Russian warships patrolled the area. Then on March 9, Ukraine’s Cabinet passed a resolution banning the export of rye, barley, buckwheat, millet, sugar, salt, and meat for the rest of the year. Even before that decision, large shares of Ukraine’s 2021 agricultural production was still awaiting transport: approximately 30 percent of its wheat, 45 percent of its corn, and a quarter of its barley and sunflower oil. Those goods will not make it to the market in 2022 for the rest of the year. Even before that decision, large shares of Ukraine’s 2021 agricultural production was still awaiting transport: approximately 30 percent of its wheat, 45 percent of its corn, and a quarter of its barley and sunflower oil. Now, those goods will not make it to the market in 2022.

Though Russian ports and shipping lanes are open, Western sanctions have spooked potential buyers, shippers, insurers, and buyers of Russian goods. Finding enough shipping containers, shipping companies, ports for entry, and buyers of Russian goods has become increasingly difficult. Speculation about future sanctions targeting containerships would further jeopardize grain exports.

 

Affected Countries

The countries most immediately affected are those that meet two conditions: They are heavily dependent on imports of grains and oilseeds, and they have as their leading suppliers Russia and Ukraine. Mediterranean countries in North Africa and the Middle East are first in the line of fire. Egypt and Turkey have suffered the most to date. Turkey relies on imports for 40 percent of its wheat and 33 percent of its corn. Russia and Ukraine combined provide Turkey with 75 percent of its wheat imports and 50 percent of its corn imports (as well as 51 percent of its sunflower oil imports).

Similarly, Egypt depends on imports for approximately 60 percent of its wheat and corn consumption, and it gets 86 percent of its wheat imports and 40 percent of its corn imports from Russia and Ukraine combined.

Turkey was already battling severe inflation, and demonstrations related to the price of basic food goods had occurred. The country’s Agriculture and Forestry Ministry assured the public that grain supplies are secure through the next harvest. Still, even if that is the case, Ankara has proved unable to tame inflation and stabilize the lira. In other words, it has not found a way to shield the public from higher food prices, particularly those related to imports.

Egypt has already canceled two wheat orders, citing overpricing in one case and a lack of sellers in the other. The Egyptian government heavily subsidizes wheat products, and previous attempts to curb these subsidies triggered mass unrest. Cairo will face the same choice again in the coming months. 

Instability in either of these countries would be alarming, given their significance in regional affairs. And neighboring North African and Middle Eastern countries are not faring much better: In Morocco, a severe drought increased Morocco’s dependence on imports, especially wheat and cooking oil, over the past couple of years. Morocco has a relatively lower import dependence for grain of about 40 percent, but it relies on imports for nearly all of its corn.

Ukraine and Russia provide Morocco with 20 percent of its wheat imports and just under 10 percent of its corn. In late February, a group called the Moroccan Social Front led nationwide demonstrations against rising food prices.

Tunisia relies on Russia and Ukraine for about half its wheat imports and 60 percent of its corn imports. The Tunisian government is now unable to pay for incoming wheat shipments because of drastic price hikes. Widespread shortages of grain products have been reported. Lebanon gets approximately 45 percent of its cereal imports from Russia and Ukraine. In the past two years, imports have been even more critical for the country. The 2020 Beirut port explosion destroyed most of the country’s primary grain silos, and authorities have worked to compensate for a predicted wheat shortage.

Syria also has a relatively lower dependence on grain imports (approximately 50 percent), but Russia and Ukraine figure prominently in that supply. The two countries provide 61 percent of Syria’s wheat imports, 42 percent of its barley imports, and 20 percent of its corn imports. Syria has already started rationing wheat products.

Under these circumstances, and with no sign of improvement in the short term, mass unrest is nearly inevitable.

 

Future Crops

The conflict in Ukraine could also hurt the production of future grain crops – though the extent to which it will depend on how long the war lasts. The most obvious factor is the destruction of productive farmlands on which the fighting is taking place. Military movements across these areas will not only damage existing crops but could interrupt the planting of next season’s crops.

The barley harvest runs from March to April. Corn planting takes place in April and early May. If fighting persists for a few more weeks, it risks disrupting these production processes and jeopardizing future crop production.

Fertilizers are also a significant concern. The market for fertilizers – especially nitrogen-based fertilizers – is already outpricing certain crops for production. Russian sanctions didn’t affect fertilizer exports simply because they were already off the market as of the end of last year, and there was no guarantee, even absent a war, that Russia would resume exports anytime soon.

New sanctions have dealt a major blow to fertilizers through Belarus, providing 17 percent of the world’s potash fertilizer exports. Adding Russia to the mix brings up to 30 percent of potash fertilizer that is no longer available on world markets. And while Russia continues to export gas to Europe, significant cuts in Russian gas supply to buyers like Germany, Poland, Lithuania, the Netherlands, and Belgium, which together account for 16 percent of nitrogen fertilizer exports, will threaten the market.

 

Alternative Suppliers

Increasing global supply when a major player is taken offline is challenging. Grain production, for example, depends on multi-month crop calendars that cannot be rushed. (Governments worldwide have strategic grain reserves, but most are earmarked for domestic emergencies.) Fertilizer production depends heavily on resource extraction and infrastructure development; a country can’t produce raw materials it doesn’t have, and even if they do, it takes years to develop the facilities to process and export them.

Even so, alternative supplies to grains, oilseeds, and fertilizers exist. For wheat, corn, and other grains, the best candidates are the U.S., Canada, Australia, Kazakhstan, and Argentina. (Australia had a robust wheat crop to help compensate for some supply losses.)

And because prices and supplies are so low, even smaller producers like Romania, France, and India are becoming more competitive. But just because a country can export does not mean they will. Hungary has already banned grain exports from ensuring domestic supply, while Argentine wheat farmers have stopped selling their wheat over confusion about pricing and uncertainty.

Fertilizer alternatives are trickier. Many countries are at risk of instability over food supplies. Egypt and Algeria supply the world export market with 9 percent of nitrogen fertilizers. Algeria is a major producer of natural gas, a key ingredient for nitrogen fertilizer.

Egypt and Morocco supply over 30 percent of potassium fertilizer exports for the global market. Given the state of the fertilizer market and supplies, stability in these countries has become increasingly important. Any disruptions to their fertilizer export activity would hit fertilizer markets at a highly vulnerable time. If there were any doubts over continued high food prices, the war in Ukraine put those doubts to rest. How long the spike will last depends entirely on how long the war lasts. So far, North African and Middle Eastern countries along the Mediterranean have borne the brunt. In turn, this creates the risk of instability in a region where governments were already on a weak footing. Now’s a good time to consider going gluten-free for the rest of the world.

 

 

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