On February 24, 2022, chilling information circulated around the world about Russia's attack on Ukraine. While at the moment the countries of Western Europe (and especially NATO member states) are not afraid of a conflict on their territory, one thing is clear from the beginning - Europe and other countries of the world will feel the economic impact of the war in Ukraine. From the beginning of the conflict, there has been talk of rising food prices.
Are these fears right and what increases can we expect?
The situation on the market was not rosy anyway
We expected an increase in food prices even before the outbreak of the war in Ukraine - it was known for a long time and concerns a global scale. Many factors influenced the situation. Of course, the main one was the coronavirus pandemic and the associated lockdowns in individual countries. Isolation, tightening the sanitary regime and obstruction of transit traffic resulted in the collapse of the supply chain and an increase in prices - both for products and transport services.
The coronavirus pandemic had other consequences that influenced the increase in food prices - increased inflation (and as we know - it is currently at the highest rates for a long time), the suspension of economic activity also resulted in a reduction in energy demand, which contributed to an increase in gas prices (of which a large exporter is Russia). On the other hand, more expensive gas translated into an increase in the prices of artificial fertilizers, used on a large scale in agriculture. Credit Agricole experts also predict an increase in the prices of oilseeds and everything indicates that only an increase in prices can be expected in the coming weeks. And during the last six months, the prices of chemical fertilizers have increased by over 300% anyway! However, some salvation for the agricultural industry may be the reductions introduced by the government, which will help to slightly lower the cost of purchasing these products, and thus limit the increase in the prices of food itself.
The issue of climate change should not be forgotten yet - this year, prolonged droughts could be observed in some parts of the globe (including the food basin of the western part of the United States), which resulted in a reduction in yields. This may indirectly affect the food market also in Europe.
Therefore, as can be seen, there have been many unfavorable factors causing a gradual increase in food prices in recent months. The conflict in Ukraine, in turn, only exacerbated the situation, making it unlikely that any improvement should be expected in the near future.
The conflict in Ukraine and the food market
There is no doubt that the conflict in Ukraine will translate into a further deterioration in the food market and an increase in prices, as both of these countries together account for about 25% of global wheat exports. Russia is the largest (in terms of volume) exporter of wheat in the world, and Ukraine itself also ranks high in this statistics, 5th place. The economic and political blockade of Russia and the devastation caused by the armed conflict in Ukraine may significantly collapse the world wheat market and lead to a shortage of this grain and an increase in prices. By the way, this effect is already visible - the price of wheat increased by 5% on February 24, 2022, the day the Russian invasion of Ukraine began. After a week, the price of this grain was already 20% higher. The increase in the price of wheat, compared to March 2021, is now 62%.
Apart from wheat alone, Ukraine and Russia also export maize (13,2% of world exports belong to Ukraine, 2,2% - to Russia), barley (11,8% - Ukraine, 17,5% - Russia) and rapeseed (13,4% and 3.8%). It is not hard to guess that these agricultural products will become more expensive. How could this affect the overall price of the food? Unfortunately, disputes, because both corn, barley and rapeseed are raw materials used for the production of fodder. And the cost of feed is included by agricultural producers in the final price of their products.
Credit Agricole analysts, in a report prepared on February 28, forecast that an increase in food prices should be expected in the near future: "the dynamics of food and non-alcoholic beverages prices may, on average in 2022, amount to a dozen or so percent against the currently forecast 6,7%".
Who should be afraid and who can rest easy?
It should be noted that the increase in food prices caused by the conflict in Ukraine will not affect all countries in the world equally. Much depends on the level of local agricultural production and the dependence of domestic food resources on imports from Ukraine and Russia.
One of the countries with a fairly stable situation at the moment is Poland. This is due to relatively high own production and excess production. Poland itself is quite a significant exporter of food and agricultural products, and supplies from Russia and Ukraine have never been significant. Nevertheless, the increase in prices in global markets will certainly affect the portfolio of Polish consumers. Much also depends on the method of resource management. As analysts emphasize, there is a need for rational management of food and balanced management of its exports. According to the announcements of the representatives of the Polish government, in the event of a deterioration in the market situation, farmers and consumers will be able to count on appropriate assistance from the authorities, which will activate mechanisms to stabilize the situation and ensure liquidity on the market.
The countries that have so far been one of the largest Ukrainian recipients of Russian crops will find themselves in a worse situation. We are talking here, for example, about the countries of the Middle East or the countries of North Africa. It is not yet certain what the supplies from Ukraine and Russia will look like in the near future, but there is no doubt that the countries from these areas may expect lower imports and disruptions in the existing supply chain. According to Business Insider, 80% of Egyptian wheat imports came from Russia and Ukraine. In turn, the import of grain from Ukraine to Tunisia fulfilled even 60% of the country's demand.
These numbers can only show the scale of the problem. If exports from Ukraine and Russia are significantly disrupted, and the Middle East and North African countries fail to secure the supply chain and fail to find a new source of import, they will have to take into account grain shortages. This, in turn, raises concerns about an increase in social discontent.
Is the situation a foregone conclusion?
It is difficult to say exactly how the situation will develop and what shortages in supplies from Russia and Ukraine will be faced in the coming weeks. On the one hand, the weather conditions promised good crops, but it is not known how the war damage will affect the agricultural land and how much it will reduce it. Another issue is the logistics of deliveries itself: so far, most of Ukraine's grain exports have traveled in Black Sea ports. If these are destroyed or annexed by Russia, the issue may become more difficult.
The crisis on the world food market may deepen Russia's isolation in the international arena. Although today for many people imposing sanctions on Russia and cutting off its world (including from international trade) seems right, getting rid of a significant supplier of raw materials (including food) will become another challenge for the international community. Much depends on the development of events, the impact and results of the sanctions imposed so far and the Ukrainian-Russian talks. There is no doubt that ending the conflict and the withdrawal of Russian troops from Ukraine would be the first step to normalizing the situation (although the journey will certainly be long anyway). At the moment, however, it is difficult to say about the further fate of the war in Ukraine and how exactly it will affect the food market and the prices of food products in the long term.