Food prices could surge another 22 percent

The war between Russia and Ukraine which together represent 30% of the world wheat market affecting 50 countries, could raise global food prices (which already are at a high level) by up to 22 percent over the next couple of years. The conclusion is drawn from the simulation model of the the Food and Agriculture Organization (FAO) of the United Nations, presented to Kathimerini by Monika Tothova. The FAO economist emphasizes that the deep uncertainties surrounding the Ukraine crisis make it difficult to safely predict when the surge in the prices of cereal, fruit, vegetables, animal feed and other key products will end.

Tothova also analyzes the disruptions in the supply chains, explains what areas are faced with a food crisis, and summarizes FAO recommendations to governments in order to bring down food prices – and what to do until that happens.

How is the Ukraine crisis causing problems in international food adequacy? How do the complications in supply chains work?

Ukraine is an important supplier on the international agricultural commodity markets. For example, in 2021, exports of wheat – a food staple for over 35 percent of the world’s population, with a limited number of substitutes – by the Russian Federation and Ukraine accounted for about 30 percent of the global market. Ukraine supplied about 10 percent. Nearly 50 countries depend on the Russian Federation and Ukraine for at least 30 percent of their wheat import needs. Similarly, both countries combined represented 55 percent of sunflower oil exports to countries around the world. They are also important exporters of maize, barley and rapeseed oil.

International food prices had already reached an all-time high prior to February 24, 2022. This was mostly due to market supply and demand conditions, but also high prices of energy, fertilizers and also other agricultural inputs. Following the start of the war, prices reached new records.

Against this backdrop, the escalation of conflict engaging such important global agricultural commodity market players resulted in a loss of supplies, at a time of already high and volatile international food and input prices. This raises significant concerns over the conflict’s potential negative impact on food security, both domestically and internationally, especially for low-income food import-dependent countries and vulnerable population groups around the globe.

Following the onset of the war, prices increased, largely driven by conflict-related export disruptions from Ukraine and, to a lesser extent, the Russian Federation. Maritime exports from Ukraine came to a halt shortly after February 24, 2022. Ukraine normally exports over 90 percent of its agricultural commodities (mostly wheat, maize and sunflower seed oil) via the Black Sea. Only a small share was exported via rail or other transport, although exporters in Ukraine in the past month have been trying to increase the quantities shipped by rail.

Exports from the Russian Federation also slowed down (but have not stopped), as the impact of international economic sanctions on agricultural trade was uncertain.

In short, countries agreed on deliveries from Ukraine before the onset of the war and their shipments have not left the ports, so they have had to look for alternatives at short notice. In the slightly longer term, countries had to start looking for alternative suppliers in an environment of tighter markets. For many customers, including those in North Africa and the Near East, shipments from alternative origins will have to be sourced from more distant locations with higher shipping costs and potential supply chain bottlenecks.

Keep in mind that although the commodity costs play an important part in keeping the supply chains flowing, high energy costs are making transportation and processing more challenging too.

What are the areas/countries facing the greatest threat for food adequacy in the near future, and in which food sectors?

The current situation is one of high and volatile prices, higher transaction and transportation costs etc, which could affect the ability of countries reliant on wheat imports to secure sufficient quantities at prices they would deem appropriate reflecting their purchasing capacity. However, there are countries which are in more difficult situations than others for a variety of reasons, starting from the ongoing crisis, balance of payment problems etc. Countries which had already in the past experienced high levels of food insecurity due to (often a combined) impact of conflict, economic crisis, natural disasters etc are among the most disadvantaged.

Take the example of Yemen, which has been the center of one of the world’s biggest humanitarian crises, and where in fact food shortages have been occurring. About 17.4 million people in Yemen are now in need of food assistance. The humanitarian situation in the country is likely to get even worse between June and December 2022, with the number of people who likely will be unable to meet their minimum food needs possibly reaching a record 19 million people in that period. At the same time, an additional 1.6 million people in the country are expected to fall into emergency levels of hunger, taking the total to 7.3 million people by the end of the year. In parts of East Africa (where a fourth consecutive drought is looming), numbers of the food insecure are also increasing. Other hotspots with a large number of people with emergency levels of food insecurity include Afghanistan, the Democratic Republic of the Congo, Ethiopia, Sudan, South Sudan and Haiti. Smaller pockets of people with emergency levels of food insecurity in 2021 were also detected in Pakistan, Nigeria and Zimbabwe.

However, the famine levels (in 2021, over 500,000 people in the world: mostly in Ethiopia and South Sudan, with smaller numbers in Yemen and Madagascar) and the emergency levels are the top of the iceberg with the most significant deterioration likely since people have already used up whatever resilience capacity they had. Even people who are not yet at emergency levels of food insecurity are likely to be affected as their purchasing power will decrease, they will need to turn to less nutritious foods or skip meals, withdraw kids from school etc – all sorts of negative coping strategies will impact their health and well-being, including increasing prevalence of undernourishment, as well as wasting and stunting of children.

Shortly after the war started at the end of February, the FAO’s simulations suggested that if the prolonged supply gap on the world markets persists, the global number of undernourished people could increase by 8 to 13 million people in 2022/23, with the most pronounced increases taking place in the Asia-Pacific, followed by sub-Saharan Africa, and the Near East and North Africa.

Humanitarian organizations are also facing higher procurement prices, including higher procurement costs, impacting their ability to serve as many people as needed.

There is a group of countries which are significant importers of wheat, such as many in the Middle East and North Africa region, although with some exceptions (such as already mentioned Yemen, then Lebanon and Syria), these are not starting with high levels of food insecurity. However, given high import prices and the importance of wheat-based diets, they are worried about the impact of high prices and their ability to secure sufficient imports. Many countries have some sort of subsidies in place to protect consumers: In this case it will be the government bearing the cost.

Although it is not just bread that keeps people alive, cereals are often considered the main calorie source in many countries, and thus an important pillar of food security. However, high input costs also impact production of other crops, such as fruit and vegetables. Elevated vegetable oil prices – where substitution between varieties is more likely to occur – were driving increases in much of 2021. Similarly, high feed costs and high energy costs will eventually transposed into high costs of animal proteins.

This crisis is also leading to food price increases. What rates of increases have we seen so far and in what kind of products?

Russia and Ukraine ‘combined represented 55 percent of sunflower oil exports to countries around the world’

We need to differentiate between price increases on different levels. For example, international prices for bulk wheat (US, hard red winter wheat) increased from about US$370 per ton in February 2022 to $530 in early March 2022 as markets were gradually internalizing the impact of decreased availabilities from the Black Sea region. By the end of March, they eased to about $450, but again increased to $510 in mid-April. Let me stress again that the war shock came at a time when prices were already elevated: In January 2021, 1 ton of wheat cost slightly over $270, at the end of 2021, it was over $360. Unfavorable weather conditions are in part responsible, but high input prices also played a role. Similar arguments apply for many other crops, with the exception of rice, where the current situation on the markets is stable.

Farmers are used to seasonal price changes and some volatility. Recently, it is not only the high price levels, but also significant volatility which is fogging buying and selling decisions, as well as impacting producers’ planting and investment decisions.

Consumers on a retail level do not buy bulk commodities, but also pay for the value added that then went into producing food. Also recall that in many processed foods, the commodity share can be quite small, and there are other costs (energy, labor, transportation, rents) which impact prices on the retail level.

Although international price quotations for bulk commodities impact prices on the retail level, they do not get translated into increased food prices at the retail level immediately. The price increases at the retail level witnessed so far – and reflected in increases in the food price inflation – are higher commodity prices that recorded in the past, higher energy costs, higher transportation costs etc.

What is the baseline scenario/timeline for the evolution of prices? When will they return to normal levels?

It is not clear what you consider to be “normal” levels.

Much uncertainty remains regarding the conflict itself, its intensity, geographical scope, and duration. Although some export flows are taking place also from Ukraine, we do not have specific information on infrastructure damage etc, nor how fast those could recover and the export trade flows could restart.

We do know at this point that the pressure on the markets is likely to continue. Most of the wheat grown in Ukraine is of the winter variety (planted in October or November, harvested from June onward): The FAO estimates that about 20 percent of this area will not be harvested due to damage from shelling, eventual losses of machinery, lack of fuel etc, and yields are likely to be lower as farmers perhaps might not be applying fertilizers in the amounts they used to. Farmers in Ukraine are currently also planting spring crops, the most important being maize and sunflower seeds. Some farmers brought up concerns about lack of inputs and fuel to carry out agricultural operations, but in general they are determined to continue cultivating their land. If exports from Ukrainian ports on the Black Sea remain constrained, a larger problem than production is likely to be logistics of export supply chains.

In the very short term, expectations point to the European Union and India increasing wheat exports, while Argentina, India and the US are shipping more maize, partially compensating for the loss of exports from the Black Sea region.

In the longer term, given high prices, producers in other countries will try to take advantage of those high prices and produce more. However, high input prices, including fertilizers, are likely to hamper the response.

Looking to the 2022/23 marketing season, the results of the FAO’s simulations indicate that export shortfalls could only be partially compensated by alternative sources, as the capacity of many of these sources to boost output and shipments may be limited by high production input costs and competition among crops. The resulting global supply gap could push up international food and feed prices by 8 to 22 percent above their already elevated levels.

Beyond the 2022/23 season: If the conflict keeps crude oil prices at high levels and prolongs the two countries’ reduced global export participation, a considerable supply gap would remain in global grain and sunflower seed markets, even as alternative producing countries expand their output in response to the higher prices. This would keep international prices elevated well above baseline levels.

Of course the FAO is monitoring the situation and revising its simulations and estimates.

What can governments do to reduce prices until prices fall?

The basic policy prescriptions for all countries are clear:

• Keep global food and fertilizer trade open. Every effort should be made to protect the production and marketing activities needed to meet domestic and global demands. Supply chains should keep moving, which means protecting standing crops, livestock, food processing infrastructure, and all logistical systems.

• Find new and more diverse food suppliers. Countries dependent on food imports from Russia and Ukraine should look for alternative suppliers to absorb the shock. They should also rely on existing food stocks and sustainably diversify their domestic production to ensure people’s access to healthy diets.

• Support vulnerable groups, including internally displaced people. Governments must expand social safety nets to protect vulnerable people. In Ukraine, international organizations must step in to help reach people in need. Across the globe, many more people would be pushed into poverty and hunger because of the conflict, and we must provide timely and well-targeted social protection programs to them.

• Avoid ad hoc policy reactions. Before enacting any measures to secure food supply, governments must consider their potential effects on international markets. Reductions in import tariffs or the use of export restrictions could help to resolve individual country food security challenges in the short term, but they would drive up prices on global markets.

• Strengthen market transparency and dialogue. More transparency and information on global market conditions can help governments and investors make informed decisions when agricultural commodity markets are volatile. Initiatives like the G20’s Agricultural Market Information System (AMIS) increase such transparency by providing objective and timely market assessments.

How is the picture looking in Europe?

From an economic point of view, Europe is in better shape than many other countries to weather the storm. It has diversified its agricultural sector. Just like farmers elsewhere, European farmers are coping with high input and energy costs. However, in general, farmers in Europe have better access to financial and other services which will help them to cope with increased production costs. Although there is great diversity among consumers, the share of income spent on food across the EU is quite limited. However, as vulnerable groups spend a larger share of their income on food and energy, the existing safety nets targeting them should be strengthened.