Economy · June 23, 2022

The war in Ukraine has triggered a global food shortage

Russian ships and sea mines block Ukrainian Black Sea ports. Before the war, Ukraine exported an average of around 6 million tons of agricultural products per month to countries in the Middle East, Asia and Africa. Currently, only around 15 to 20% of this volume can be exported by rail, Danube River and truck (around 700,000 tons in April 2022 and around 1 million tons in May 2022). In addition, the trade risks associated with Russian exports have increased due to sanctions from various trading partners and banks. This has led to price spikes and supply chain disruptions that have significantly undermined food security in poor importing countries.

World trade in cereals with the exception of rice is just under 20 percent of total world production (about 620 million of about 3.3 billion tons produced in 2020/2021). Total production is enough to feed all 8 billion people in the world, but production in semi-arid countries is lower and some countries are below their potential. This is why trade plays an important role in the balance between global supply and demand. In the 2020/21 season, Russia supplied 52.32 million tons (7.8%) to the world and Ukraine 69.82 million tons (11.3%) of cereals.

Ukraine also exports oilseeds (sunflower, soybean, rapeseed) with an established crushing industry for the production of sunflower oil. In 2020, 52% of sunflower seeds and oil traded globally came from Ukraine. Currently, the supply chains of edible oil are broken and the prices of edible oil have risen even more than those of cereals. In recent weeks, the author has not been able to purchase sunflower oil in his Hamburg / Germany neighborhood.

Global grain and oilseed markets were strained even before the crisis due to stock tightening which led to upward price trends. This new supply shock has resulted in prices nearly doubling from two years ago. Agribusiness market demand is inelastic – people have to eat – and this leads to dire consequences in poor importing countries. The number of people whose food supply is insecure (around 800 million) and people suffering from hunger (around 44 million) will most likely increase. This will result in increased poverty and threaten social stability in poor importing countries.

Global stocks are shrinking. Global grain stocks of around 300 million tons are sufficient to cover around four months of global annual consumption. Of these stocks, around 50 percent (around 150 million tonnes) are held in China. We know from the past that prices go up if stocks hit a certain critical lows. In this situation, crisis-induced disruptions to trade accelerate market developments and may even lead to government interventions that restrict exports to protect national interests. If many countries do this, it has disastrous effects on world markets.

Current Ukrainian grain stocks are estimated at between 20 and 25 million tons. The new harvest in the fall will be much lower than last year due to the smaller acreage and the lower intensity caused by the lack of necessary inputs and funding. Estimates are tough, but market watchers say it would be 20 to 30 percent less or around 30 million tons. Assuming constant domestic demand, this would lead to a reduction in exports of around 40-50% in 2022. So, if the Black Sea ports remain blocked until the end of this year, the world will have around 55 million tons of less cereals. To put this in perspective, consider that 1 ton of grain can feed a family of six for a full year. Hence, this missing number of grains would mean that we would have less food for more than 300 million people.

Global grain and oilseed markets are hit hard by the war in Ukraine.

And it can be even worse when we consider the limited exports of fertilizers. The share of Russia and Belarus in world potassium trade is 40%. Russia alone exports around 20% nitrogen and 10% phosphate. Fertilizer prices are rising. As a consequence of the increase in the prices of cereals and oilseeds, an increase in production in poor importing countries is foreseeable, but this will be partially offset by the increase in input prices. Poor importing countries in Africa might try to incentivize more production to feed a growing population, but they would need huge financial efforts and investments to achieve this. Even with more resources channeled to agriculture in Africa, supply would react with a delay.

There are four entry points to lower the pressure: individual, national, international and ad hoc crisis measures:

  1. On an individual level in industrialized countries, we all have to ask ourselves some uncomfortable questions about our individual eating habits. We throw away too much in families (Europeans almost 200 kg and Americans about 300 kg of food per year). And we eat too much meat. Remember that it takes 3 kg of cereals to generate 1 kg of pork in the production process.
  2. At the national level, biofuel policies need to be rethought. European and American mandates for biodiesel production using edible oil and gasoline using corn should be flexible enough to reduce production during periods of (too) high prices. Secondly, in EU countries we should think more pragmatically about policies to reduce the use of fertilizers and reserve productive areas for biodiversity. For the moment, we need more production, not less. Climate goals are useful for saving the planet, but we must also feed the people of the planet.
  3. Internationally, we should use the platforms of the G-7 and the G-20 to agree on measures that would take the pressure off the international commodity and food markets. Hence, joint declarations by countries to refrain from export restrictions would be needed, it would help the reorientation of international cooperation programs towards agriculture and agribusiness, and the World Food Program budgets would need to be replenished to avoid the worst.
  4. As long as Russia blocks Ukrainian ports, other transport logistics need to be supported. These include, inter alia, investments in Ukrainian railways, including handling facilities, and more phytosanitary laboratories on the Ukrainian-Polish border.

Global grain and oilseed markets are hit hard by the war in Ukraine. Food prices are rising and the number of people whose food supply is insecure will inevitably increase.