What caused the food crisis to deteriorate?

Ukraine famers at Zaporizhzhia  

According to the FAO, food prices went up by 12.4% in March from February and by 33.6% compared to a year ago. 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. In Ms. Patricia Buckley, Director of Deloitte Services LP’s view, there are three key reasons for this.

First, Ukraine accounts for nearly 10% of global wheat exports. With a war raging on its soil, a breakdown of internal transportation, and a blockade 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 seeds. 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 for alternatives to sunflower oil as well.

Russia is also 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.