G-20 News

UN agency warns war in Ukraine could trigger 20% rise in food prices

Over the past two years, COVID-19 has presented many challenges to global food security. Today, what is happening in Russia and Ukraine adds another daunting challenge. Russia and Ukraine play an important role in global food production and supply. Russia is the world’s largest wheat exporter and Ukraine the fifth. Together they provide 19% of the world supply of barley, 14% of wheat and 4% of maize, accounting for more than a third of world grain exports. They are also the main suppliers of rapeseed and represent 52% of the world market for sunflower oil exports. Global fertilizer supply is also highly concentrated, with Russia being the main producer.

Supply chain and logistics disruptions to Ukrainian and Russian grain and oilseed production and restrictions on Russian exports will have significant impacts on food security. This is especially true for some 50 countries that depend on Russia and Ukraine for 30% or more of their wheat supply. Many of them are least developed or low-income, food-deficit countries in North Africa, Asia and the Near East. Many countries in Europe and Central Asia depend on Russia for more than 50% of their fertilizer supply, and shortages could stretch into next year.

Food prices, already on the rise since the second half of 2020, reached a record high in February 2022 due to strong demand, input and transport costs and port disruptions. World prices for wheat and barley, for example, have increased by 31% in the course of 2021. Prices for rapeseed oil and sunflower oil have increased by more than 60%. Strong demand and volatile natural gas prices have also pushed up fertilizer costs. For example, the price of urea, an essential nitrogen fertilizer, has more than tripled over the past 12 months.

The intensity and duration of the conflict remain uncertain. Likely disruptions to the agricultural activities of these two major commodity exporters could seriously worsen global food insecurity, at a time when international food and input prices are already high and volatile. The conflict could also limit agricultural production and purchasing power in Ukraine, leading to increased local food insecurity.

Main risk factors identified

Cereal crops will be ready for harvest in June. It is unclear whether Ukrainian farmers would be able to harvest them and deliver them to market. Massive population displacements have reduced the number of laborers and agricultural workers. Access to agricultural fields would be difficult. Livestock and poultry farming and the production of fruits and vegetables would also be limited.

Ukrainian Black Sea ports have closed. Even if the inland transportation infrastructure remains intact, shipping grain by rail would be impossible due to the lack of a functioning rail system. Ships can still transit through the Turkey Strait, a critical trade hub through which large quantities of wheat and corn cargo pass. Higher insurance premiums for the Black Sea region would aggravate already high shipping costs, adding to food import costs. And it remains unclear whether the storage and processing facilities will remain intact and staffed.

Russian Black Sea ports are open for now and no major disruption to agricultural production is expected in the short term. However, the financial sanctions against Russia have caused a significant depreciation which, if continued, could harm productivity and growth and, ultimately, further increase the costs of agricultural production.

Russia is a major player in the global energy market, accounting for 18% of global coal exports, 11% of oil and 10% of gas. Agriculture requires energy in the form of fuel, gas, electricity, as well as fertilizers, pesticides and lubricants. Manufacturing ingredients and animal feed also requires energy. The current conflict has caused an increase in energy prices, with negative consequences for the agricultural sector.

Wheat is a staple food for more than 35% of the world’s population, and the current conflict could lead to a sudden and sharp reduction in wheat exports from Russia and Ukraine. It remains unclear whether other exporters would be able to fill this void. Wheat stocks are already low in Canada, and exports from the United States, Argentina and other countries will likely be limited as the government attempts to secure domestic supplies.

Countries dependent on wheat imports are expected to increase their levels, which will put further pressure on global supplies. Egypt, Turkey, Bangladesh and Iran are the world’s largest wheat importers, buying more than 60% of their wheat from Russia and Ukraine, and all have bumper imports. Lebanon, Tunisia, Yemen, Libya and Pakistan are also heavily dependent on the two countries for their wheat supply. Global corn trade is expected to contract due to expectations that Ukraine’s export loss will not be made up by other exporters and due to high prices.

Export prospects for sunflower oil and other alternative oils also remain uncertain. Major importers of sunflower oil, including India, the European Union, China, Iran and Turkey, need to find other suppliers or other vegetable oils, which could have a training on palm, soy and rapeseed oils, for example.

Policy recommendations

Keep global food and fertilizer trade open. Every effort should be made to protect the production and marketing activities necessary to meet national and global demands. Supply chains must keep moving, which means protecting standing crops, livestock, food processing infrastructure and all logistics systems.
Find new, more diverse food suppliers. Countries dependent on food imports from Russia and Ukraine should look for other suppliers to absorb the shock. They should also rely on existing food stocks and diversify their national production to guarantee the population’s access to healthy food.
Support vulnerable groups, including internally displaced persons. Governments must expand social safety nets to protect vulnerable people. In Ukraine, international organizations must step in to help reach people in need. Many more people around the world would be pushed into poverty and hunger by conflict, and we need to provide them with timely and well-targeted social protection programs.
Avoid ad hoc political reactions. Before adopting measures to secure the food supply, governments should consider their potential effects on international markets. Reductions in import duties or the use of export restrictions could help solve each country’s food security problems in the short term, but they would raise prices on world markets.
Strengthen market transparency and dialogue. Greater transparency and information on global market conditions can help governments and investors make informed decisions when agricultural commodity markets are volatile. Initiatives such as the G-20 Agricultural Market Information System (AMIS) increase this transparency by providing objective and timely market assessments.
Source: FAO