(Bloomberg) -- Even before Russia invaded Ukraine, food prices had been rising around the world, driven by the higher shipping costs, energy inflation and labor shortages that have followed in the pandemic's wake, along with extreme weather. Global food prices are at all-time highs, with a benchmark UN index soaring more than 40% over the past two years. War in one of the world's major breadbaskets, plus the sanctions imposed on Russia and measures taken by some countries to protect their own food supply have raised the threat of a full-blown hunger crisis. Here are some of the factors at work.
Disrupted production
The war in Ukraine initially slowed key agricultural supplies that the Black Sea region ships to world markets, from wheat to vegetable oil to fertilizer, as Ukraine's ports were shuttered and vessels stayed away. Sales remain tepid out of Ukraine, and the spring plantings remain in doubt as war engulfs the country's farmlands. Growers in Ukraine are plunging ahead wherever possible, but ongoing fighting may mean crops won't get planted or harvests of other crops already sown may suffer. A major Ukraine food exporter, MHP SE, pivoted to supplying the Ukrainian army and civilians in bombed-out cities. On the other hand, Russia's wheat shipments bounced back, with some of the grain exported to countries that usually imported from Ukraine.
The energy crunch
Energy prices began to soar in 2021 as the demands of economies reviving from the pandemic outstripped supplies, and energy and food are deeply intertwined. In Europe, soaring prices for natural gas — a key input for the production of nitrogen fertilizers — has already forced some facilities to curtail production. The price of fuel, used by farmers to heat barns and run equipment used to produce food, is also skyrocketing. Adding to the stress are sanctions against Russia, a major energy supplier to the world, with the U.S. and U.K. moving to ban imports of Russian crude and other oil products. Surging energy costs as a result of Russia's war in Ukraine prompted the U.S. to tap roughly a million barrels of oil per day from its strategic reserves for six months starting in May, an unprecedented move that reflects the Biden administration's concern about rising gasoline prices and supply shortfalls.
Fertilizer
Prices of fertilizer, crucial for growing most crops, had already been rising worldwide before the invasion amid supply snags and production woes. Now the war has brought new issues. Russia, a big supplier of every major type of crop nutrient, urged domestic fertilizer producers to cut exports in March, stoking fears of shortages of crop inputs that are vital to growers. Russia's move adds uncertainty to the global market when farmers in Brazil — the world's largest fertilizer importer — are already having trouble getting nutrients for crops. Russian President Vladimir Putin said his country will supply fertilizers to nations that have “friendly relations” with Russia, though it first needs to guarantee fertilizer supplies for the domestic market. The astronomical surge in prices is even prompting some U.S. farmers to plant more soybeans than corn, a move that could add to a global squeeze on supplies.
Food nationalism
Governments are taking steps to keep food supplies closer to home, a move likely to prolong food inflation. Hungary, Argentina, Turkey, Serbia and Egypt have all imposed or threatened limits on agricultural exports ranging from wheat to cooking oil in an attempt to suppress domestic prices and safeguard local food supplies. Disrupted trade flows in the Black Sea region are likely to hurt the nations in Africa and Asia that rely on Europe's breadbasket to feed their populations. For example, Egypt is the largest wheat importer and got 86% of its supplies from Russia and Ukraine in 2020.
Panic buying
Shock waves are spreading to store shelves, with worries of surging sunflower oil prices triggering heavy buying in Turkey. Even Indonesia, the world's biggest exporter of edible oils, is feeling the strain: Supermarkets have restricted cooking oil purchases to one pack per shopper and families are bringing their young children to line up so they can buy more. Worries over food supplies are also growing in the world's two most populous nations, China and India. Chinese buyers are scooping up U.S. corn and soybeans to secure supplies as Beijing ramps up its emphasis on food security.
Demand destruction
When purchases fall because consumers can't afford to buy, economists call that “demand destruction.” In India, the blistering rally of vegetable oil has led to a drop in purchases. The nation is the biggest importer of edible oils, indispensable for frying, baking and other forms of cooking, and consumers are extremely sensitive to prices. In the U.S., budget constraints mean that food banks and pantries are having to ration what goes out to feed the nation's hungry as Americans struggle with soaring costs for gasoline, utilities and rent, leaving less money left over for groceries.
Alternatives for supply
Other global suppliers may take strides to fill stockpile shortfalls. India, for example, has increased wheat shipments in recent years and could boost exports to a record 12 million tons if the conflict drags on. But many nations that could typically offset shortages are themselves facing production problems. In Brazil, a major supplier of corn and soybeans, crippling drought has parched crops. Dry weather also wilted fields in Canada and parts of the U.S. last year. Wheat plantings for 2022 in the U.S. are expected to only increase by 1%, according to a recent government report, and it will be months before those acres get harvested.
The Reference Shelf
- A report from the United Nation's Food and Agriculture Organization on the ramifications of the war in Ukraine on the global food system.
- Bloomberg Intelligence's Alexis Maxwell says scarce fertilizer supply leaves farmers with poor options.
- Bloomberg articles on rising costs for farmers and demand destruction.
- Bloomberg Opinion's Amanda Little says food is just as vital as oil to national security.
- Boston Globe article on how hunger fueled the Arab Spring.
- A story from the Wall Street Journal about how soaring prices for food and gasoline spurred protests from U.S. consumers in the 1960s and 70s.
©2022 Bloomberg L.P.
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