Food prices have surged to record highs since the start of the war. For many around the world, even regular meals may soon become too expensive.
Just when it seemed that the pandemic had given way to hope and healing, the world economy suddenly finds itself jolted by the drumbeats of war, rising commodity prices, and a return of the inflation bugbear. When Russia invaded Ukraine in February, the initial panic was felt primarily in global energy and financial markets. But as the conflict drags on, people across the world are horrified not only by the human tragedy of the war, but also by the surging cost of providing food for their families.
Ukraine and Russia are major agricultural producers and exporters. Yet much of Ukraine’s food exports are currently stuck in fields and ports that cannot be accessed by the wheels of international trade. Continuation of the conflict also puts at risk the sowing of crops later this year in Ukraine, which will weigh on global wheat, barley, maize, rapeseed, and sunflower production. Couple that with rising fertilizer and fuel prices, and it seems there is a perfect storm brewing in global agriculture. No wonder, then, that food prices as measured by the Food and Agriculture Organization’s (FAO’s) Food Prices Index are at their highest level since the series started in 1990. While high food inflation impacts all of us, low-income countries and families will be the most affected. Subsidies in the near term may help, but for some countries, continued fiscal support will be difficult as government finances have already been battered by two years of COVID-19. These economies therefore run the risk of something worse—economic and social instability.
Food prices were on the boil before the war
It would be incorrect to solely blame the ongoing conflict in Ukraine for high food prices. Prices have been rising—and quite strongly—since mid-2020. Between May 2020 and February 2022, FAO’s Food Price Index went up by 55.2%, led by a 159.4% rise in prices of edible oils, followed by strong growth in prices of sugar, dairy, and cereals. Multiple factors can explain this surge.
Food prices were on the boil before the war
It would be incorrect to solely blame the ongoing conflict in Ukraine for high food prices. Prices have been rising—and quite strongly—since mid-2020. Between May 20205 and February 2022, FAO’s Food Price Index went up by 55.2%, led by a 159.4% rise in prices of edible oils, followed by strong growth in prices of sugar, dairy, and cereals. Multiple factors can explain this surge.
- Economic recovery has pushed up prices: In May 2020, food prices fell to their lowest levels in four years, partly due to the pandemic, as economic activity declined sharply in the wake of lockdowns and other social-distancing measures across the world. As global economic growth started to recover—global GDP is estimated to have grown by 5.9% in 2021 after a 3.1% contraction in 2020—commodity prices, including that of food items, started receiving a boost. The pandemic also severely impacted global and domestic supply chains, and food supply chains haven’t been spared either. This has aided the uptick in food prices and contributed to a rise in global hunger.
- Higher freight costs: Freight costs have gone up sharply since the initial months of the pandemic. While shipping and logistical challenges due to lockdowns and safety restrictions (from the virus) are one reason for high freight rates, rise in fuel prices has also added to the misery. Since May 2020, the Baltic Dry Index9—an indicator of freight prices—has gone up by nearly 400%, although this data point masks an even sharper spike seen in the second half of last year Food transportation and energy used in food production are, therefore, much more expensive now than in early 2020.
- Fertilizer prices have increased: A key reason behind rising food prices is higher fertilizer costs. Fertilizers are an essential ingredient in the food-production process and prices of major fertilizers have been going up sharply. For nitrogen-based fertilizers, the major cause of high prices is the rising price of natural gas—another key component in food production. Average monthly natural gas price, as indicated by the World Bank’s Natural Gas Index, went up by nearly 600% between June 2020 and December 2021. The high cost of transportation hasn’t helped either, as is evident in trends for the Baltic Dry Index. Export restrictions have also pushed up fertilizer prices. For example, China, which is one of the world’s leading exporters of phosphate, put restrictions on its export in 2021, amid tight domestic supplies.
- Export restrictions increased during the pandemic: As the COVID-19 pandemic intensified in 2020, there were increasing concerns about food availability, leading to grain-producing countries imposing export restrictions. Vietnam, which had a 16% share in global rice exports before the pandemic, held back on granting rice-export certificates till the end of April 2020. Kazakhstan suspended exports of several cereal products, oilseeds, and vegetables until June 30, 2020, while Russia placed restrictions on the export of items such as wheat, corn, and meslin. Consequently, food prices started picking in the second half of 2020, with the prices of cereals and edible oil witnessing strong growth since then.
The conflict in Ukraine has made things worse
Food prices, already on a steady rise, received a further push from the conflict in Ukraine. According to the FAO, food prices went up by 12.4% in March from February and by 33.6% compared to a year back. And it is likely that the surge in March wouldn’t be the last, especially if the conflict drags on for a much longer time. There are three key reasons for this.
First, Ukraine accounts for nearly 10% of global wheat exports. With a war raging on its soil, breakdown of internal transportation, and a blockage on its coastline by Russian warships, the country’s export shipments have been disrupted. Ukraine also accounts for more than a quarter of the world’s production of sunflower seed. With supply disruptions and fears of more to come, sunflower oil—a major derivate of sunflower seed—is witnessing sharp price hikes. This has, in turn, led to higher prices of alternatives to sunflower oil as well. Russia too is a major agricultural exporter with major shares in global production of sunflower seed, barley, and wheat—it accounts for 18% of global wheat exports. While the war hasn’t touched Russian soil and no sanctions have been imposed on Russian agriculture, potential buyers will likely face problems in payments, given that a large section of the Russian banking sector has been sanctioned (key Russian banks were excluded from the SWIFT payments system in March). No wonder then that FAO’s price index for cereals shot up by 17.1% in March, while its index for edible oils rose by 23.2%.
Second, the war is also driving up the cost of food production. While fuel and transportation costs have gone up, so have the prices of fertilizers, an essential ingredient for crop yields. While the average monthly price of urea went up 22% in March, diammonium phosphate prices grew 25.6% during the month. The uptick in prices in March, however, isn’t surprising as the price of natural gas—a key input in producing nitrogen-based fertilizers—went up by 38.2% during the month on fears of supply disruptions due to the Ukraine-Russia conflict. There are also worries about disruptions to global fertilizer exports from Russia and Belarus—two countries that have also been hit by sanctions. Russia is a major exporter of nitrogen, potassium, and phosphorous fertilizers, while Belarus, which had been under sanctions even before the conflict in Ukraine, is a major producer of phosphorous fertilizers.
Third, as the conflict continues, it will impact the planting of new crops in Ukraine. The continuing blockade of the country’s coast and the destruction of its ports and internal transport networks will keep the pressure on global food trade. Soaring fertilizer prices, meanwhile, may result in lower use of fertilizers, thereby denting crop yields in major fertilizer importers. As shipments from Russia and Belarus face disruptions, fertilizer importers from these countries may be forced to diversify or use alternate systems to make payments to the two sanctioned countries—that may not be easy, given the current sanctions. Diversifying imports or boosting domestic production also raises uncertainties in the near term and loss of competitive advantage, thereby raising costs. Further, as food prices rise, the risk of export restrictions has gone up as countries try to protect domestic supply. In April, for example, Indonesia put restrictions on palm oil exports citing high domestic prices. While this will increase global palm oil prices, it will also push up prices of other edible oils and fast-moving consumer goods that use edible oil (including palm oil) as inputs.
Courtesy Deloitte, by Akrur Barua.
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