Grains and oilseeds prices have been rising since the start of the pandemic as the graph below shows and are now reaching historical highs (also in real terms). The last time we saw prices this high was just before the global financial crisis. Initially, this price surge was caused by backlogs at ports due to the pandemic as well as a crop failures in China due to floods in the past two years, resulting in rather low inventories, whilst poor weather conditions in both the U.S. and Latin America due to two “La Niña” years in a row further contributed to the surge.

The conflict between Russia and Ukraine adds to the significant rise in food prices. Last month’s invasion led to a spike in prices of wheat and oilseeds (sunflower). This is because both Russia and Ukraine are important players in global food production, especially in grains. Russia is the 3rd largest producer of wheat, whereas Ukraine comes in 8th place. When it comes to exports, their position is even more substantial. Russia is the largest wheat exporter with Ukraine coming in 5th place, together accounting for 25% of wheat exports. Furthermore, Ukraine is the 4th largest exporter of corn and is the largest exporter of sunflower oil. Barley (used in beer!) and rapeseed are other important crops that both countries produce and export.

The impact of the war will depend on the duration of the conflict and damage done to infrastructure (ports, roads, terminals, etc.). Black Sea port loadings are, for obvious reasons, suspended in Ukraine. Because ports cannot be used, Kernel, a large Ukrainian grains producer, invoked force majeure clauses under its export contracts. Some exports still can be transported via railroads through the west of the country but volumes most likely will be limited. Harvesting as well as planting activities are severely disturbed by the war as labourers have signed up to fight the Russians and diesel and vehicles are confiscated by the Ukrainian army. Russia’s ability to export crops is jeopardized because of reduced trade finance (there is a general unwillingness to trade with Russians even though buying grains is permitted under the sanctions) and extra maritime freight insurance requirements (the Sea of Azov is basically a no-go area at this moment). Logistically, it is not that easy for Russia to reroute trade flows, for example to China. In any case, the Russian government imposed grain export limitations to control food prices.

That is not all. Russia and Belarus are large producers of fertilizer. Together, the belligerent countries account for nearly 40% of worldwide potash supplies. Prices of potash already went up after sanctions on Belarus were imposed in mid-2021. Some of the Russian oligarchs that own potash mining companies have been put on the sanctions list as well. Potash from Russia is generally exported through Black Sea ports, whereas Belarus uses Lithuanian ports. Thus, the same logistical challenges apply as for grains. Alternatives are phosphate and nitrogen. China restricted exports of phosphate last year with the aim to limit the rise in domestic food prices. Nitrogen (urea) is made from ammonia and requires vast amounts of natural gas. Gas is also used to dry grains to prevent it from rotting. Gas prices peaked as advanced economies ran very low inventories after the economic rebound from covid-19 pandemic proved to be much stronger than expected. Exploration of new gas (and oil) fields slowed down significantly due to low prices at the start of the pandemic and shareholder activism (requiring either a rapid transition to renewables or large share buy-backs, depending whether the shareholder was a pension fund or a hedge fund), resulting in low capex levels. The war in Ukraine added to the pressure as the EU tries to find new suppliers, given that high dependency on Russian gas now is deemed too risky. Not surprisingly, fertilizer prices have moved in tandem with grains prices and are up by 30-40% this year.

High oil prices also contribute to the malaise. Trucks used to plant and harvest crops are heavy users of diesel, which also happens to be in short supply. Chemicals (herbicides and pesticides) have become dearer too.

Reduced supplies of grains and fertilizers from Belarus, Russia and Ukraine cannot easily be covered. High wheat prices, for example, do not necessarily translate in more planting. First, farms generally follow a rotation scheme of crops to improve soil conditions and to battle pests and weeds. Second, all prices of agricultural products have moved in tandem. Whilst wheat prices are eye-watering, prices for corn and soybeans are rather attractive as well. Third, there is little additional land available for crops and preparing land for cropping takes time and money. Fourth, some wheat-producing countries are holding back exports to ease domestic food prices (e.g. Argentina, Russia and possibly India) or to ensure food security (e.g. Ukraine). Fifth, not all wheat is for human consumption. Delicious French baguettes require French-grown wheat (sans doute) to get its distinguished crispy, nutty, buttery and airy taste, whereas Dutch wheat, by contrast, is only fed to cows. Etcetera… Some grains that are used for producing biofuels could be repurposed for producing food, but the impact is limited to corn supplies and comes at the cost of more carbon emissions.

Soon an expensive delicacy…

Clearly, reduced supply of grains from Russia and Ukraine will result in higher food prices for longer, whereas reduced supply of fertilizer will reduce crop yields. For some agricultural powerhouses, like Argentina and Brazil, higher food prices may on balance be positive as higher taxes on food exports could be generated even though margins will be pressured by higher costs of inputs. But for many Emerging Markets higher food prices will decidedly be negative; food makes up a high share of consumer spending (20-40% compared to 10-12% in advanced economies) wheras demand typically is inelastic. Even if the conflict were to be resolved quickly, the impact will be felt for some time. Especially the Middle East and Northern Africa, which import most of their food stuffs and where bread (i.e. wheat) traditionally is an important nutrient, look vulnerable with the poor obviously being most affected by high inflation. Food price inflation could trigger widespread unrest (remember the Arab Spring riots of 2011), food insecurity and could result in higher (public) debt levels and current account deficits. Many countries, already weakened by the covid-19 pandemic, will need financial support to deal with this new crisis (Egypt just applied for an IMF loan). The grain drain will leave deep scars everywhere…