Russia’s war in Ukraine is cutting the world off from a food source that is difficult to replace. If there is no peace, there will be a bad harvest in the world’s granary in the autumn, and the prices for agricultural commodities will explode. The poorest of the poor will be hit the hardest.
Normally, at this time of the year in the port of Odessa, the harvests are largely shipped. By February, workers at this Black Sea point had loaded tens of millions of tons of wheat, barley and sunflower seeds onto freighters. Only the export of maize stretches through spring and into early summer. However, according to position data from ships, not a single large container ship has called at Ukraine’s most important port since the Russian attack. The country is largely cut off from international maritime trade.
This is potentially very dangerous news for the world’s supply of an important staple: grain. Bayer CEO Werner Baumann even warns of a world food crisis.
One thing is certain: in the past 30 years, large parts of southern and eastern Ukraine and the neighboring areas of Russia have developed into the most important breadbasket on the planet. The Black Sea region accounts for more than 30 percent of world trade in wheat and more than 20 and 70 percent in sunflower and its oil, respectively. It is more than a quarter for barley and around 17 percent for corn.
A fifth of the wheat comes from Russia
As late as the early 1990s – after the collapse of the Soviet Union – the region was a net importer of grain. Both countries invested heavily in production and storage capacities and also attracted international capital. Geographically and climatically speaking, Russia’s agricultural land is extremely large at over 200 million hectares. In Germany it is 17 million hectares. When it comes to wheat, Russia is a step ahead and now accounts for around 20 percent of global exports.
The black earth soils in the southern, central and Volga regions are very fertile, and the conditions for growing wheat are fundamentally advantageous, according to the Leibniz Institute for Agricultural Development in an analysis from 2019. Russia also benefits from conveniently located ports on the Black Sea , through which most of the grain is exported. The Black Sea ports are closer to the high-demand sales markets in the Mediterranean region and the Suez Canal than any other trader in agricultural commodities in the world.
Big dependencies
Today, exports from Russia and Ukraine account for about 12 percent of the world’s traded calories, write the experts of the International Research Institute for Food Policy (IFPRI), Joseph Faithr and Daniel Laborde. The two countries are among the top five exporters in the world for many types of grain.
Russia’s war is thus cutting off the world from an elementary food source that is difficult to replace. While Ukraine is currently not fulfilling its export commitments of 14 million tons of corn to the Middle East, North Africa and China, agricultural market experts are already reporting that Russian ports are idle.
The western sanctions are beginning to have an effect: buyers are starting to avoid Russian export offers of wheat because the partial blockade of the banks means they are not sure how to pay, while exporters do not know whether they will get their money. The most important export port Novorossiysk – also the main port of the Russian Black Sea fleet – is on the sanctions list of the West.
The sector, in which President Vladimir Putin had announced new investments of 60 billion euros by 2035 in 2019, could now benefit from a falling ruble on the world market. But the industry is paralyzed by the consequences of his war. Similarly in the battered Ukraine: Farmers are currently more likely to volunteer as combatants than to think about the next sowing. If the conflict worsens and persists, production in this part of the granary will be headed for a fall harvest failure due to the war.
Prices higher than in the crisis year 2008
The most important indicator for the prices of agricultural commodities – the Food Price Index of the Food and Agriculture Organization (FAO) – is already on the alarm. In February, the index rose to a new all-time high of 140.7 points. That is 20.7 percent more than the previous year. The index had already risen to a ten-year high in January, for which chief economist Abdolreza Abbassian cited crop losses, expensive fertilizers, logistical problems and high energy prices as reasons.
Everything is meeting an overall increasing demand for agricultural goods, according to the FAO, while pandemic-related lockdowns and reduced or lost incomes have also played a role. According to the FAO, agricultural commodities cost 31 percent more on the world market in the first year of the pandemic than in the previous year. Oilseeds like rapeseed twice as much. The price of corn has also almost doubled, and wheat and soybeans have also become significantly more expensive because, for example, storage costs had risen during the Corona period.
In any case, the food price index already exceeded the level at the peak of the food price crisis in March 2008 in January. “And it will continue to rise,” warns Marita Wiggerthale, an expert on global agricultural issues and world food security at Oxfam. The Ukraine war is not even priced into it. Corn prices per bushel are also about as high as in 2008. Not to mention oil prices, which have recently come threateningly close to the level of the 2008 food crisis. “Back then, 50 percent of the price increase was due to higher crude oil prices,” says Wiggerthale, looking back on the crisis.
The South pays the price
Because of the drastic increase in the cost of living, there were unrest in more than 20 countries at the time. On average, Germans only spend about twelve percent on food, while in the Global South it is between 60 and 100 percent. That is why the World Food Program and organizations such as Welthungerhilfe warn against underestimating the consequences of the recent price explosion for global food security and especially for regions at risk. This is especially true for low-income countries that are dependent on food imports and whose food situation has already deteriorated drastically during the corona pandemic.
Important importing countries such as Egypt and Nigeria, but also Indonesia, are increasingly sourcing their grain from the Black Sea region. Shortages, such as those caused by armed conflicts, act as explosive price drivers there. Export restrictions, such as those imposed by Ukraine, the fourth largest wheat supplier, on Monday to protect its own supply of wheat, poultry, sunflower oil and other agricultural goods, are further aggravating the situation. According to the US agricultural authorities, 36 percent of Ukrainian wheat went to East and Southeast Asia – mainly Indonesia, Pakistan and Bangladesh – followed by 31 percent to the EU, 16 percent to Africa and 14 percent to the Middle East, mainly to Egypt.
The IFPRI Institute warns that particularly vulnerable countries that are highly dependent on the Black Sea region should be considered. Of particular concern were countries in the Middle East and North Africa, which sourced more than 50 percent of their grain needs from Ukraine and Russia. Kenya is said to stock up around 70 percent in the region. In addition to the EU (mostly for animal husbandry) and China, countries such as Egypt and Libya are also considered vulnerable when it comes to maize. According to the so-called global “Import Bill,” grain worth $248 billion was imported last year, $147 billion of it in developing countries.
Despite its price warnings, the FAO is not yet predicting a global supply crisis, since the world grain harvest in 2021 was just above the previous year’s level and “globally speaking, the stocks are sufficient”. Nevertheless, the question arises as to who will step into the breach if seeding in Ukraine fails and Russian ports continue to be avoided. The USA, which was supplanted by Russia as the world market leader for wheat, only has a world market share of 10.8 percent, Australia comes to 12.5 percent and the EU to 18 percent. When it comes to corn, the USA is still ahead with 31.5 percent, followed by Argentina (21.5 percent) and Brazil (16.4 percent).
Fertilizer prices weigh on production
The prices of fertilizers are also directly driven up by the war. Russia and Belarus, a loyal partner of Putin, are combined world leaders for the important agricultural input. “Further shortages will have global consequences,” warns the IFPRI institute, “particularly in developing countries, where price increases are significantly contributing to reduced fertilizer use and correspondingly smaller crops – at a time of reduced global inventories and record prices.”
Rising fertilizer prices are also expected to make food more expensive in the northern hemisphere. The boss of the agricultural trader Baywa, Klaus Josef Lutz, expressed these fears against the background of the Ukraine war. “I could imagine that we would see 15 to 20 percent higher food prices,” he told the broadcasters RTL and n-tv.
Farmers’ representatives also point out that the extreme increase in natural gas prices is making the production of nitrogen fertilizer more expensive. But the prices for phosphate fertilizers have already doubled. The German Farmers’ Association does not rule out a drop in yields for the 2022 harvest if prices remain at the same level and there are supply bottlenecks. Russia had already imposed an export ban on the nitrogen fertilizer ammonium nitrate in February, which experts say will have a particularly noticeable effect in Europe and Brazil. Brazil uses the fertilizer for its corn harvest.
The article first appeared at Capital.de.