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How bad will the global food crisis be?

High food prices have peaked? Even before being brokered by the UN grain deal between Kyiv and Moscow gave the green light last week for shipments leaving Ukraine’s Black Sea ports, food commodity prices have been decline. Fears of a recession, a bumper harvest in Russia and hopes for a resurgent grain trade flow have pushed prices lower.

But falling prices don’t mean the food crisis is over. Analysts say the fundamentals driving the market higher are unchanged. The ongoing war is just one of a multitude of issues that could drive hunger rates higher for years to come.

The Ukraine conflict comes at a time when food prices have been driven up by a range of factors – mainly drought affecting key crop producing countries and supply chains dealing with the effects. remnants of the pandemic. In poorer countries whose economies have been marred by the Covid-19 shutdowns, war has only exacerbated a dire situation.

“What makes this global food crisis different from similar situations in the past is that there are many key causes behind it,” said Cary Fowler, the US special envoy for food security.

The real impact of this combination of factors will only become apparent next year, analysts say. One said: “I am more worried about 2023 than 2022.

Storm clouds on the horizon

War is certainly a major drag on global food production. With Ukraine’s ports blocked and capacity on alternative routes limited, exports have fallen dramatically. In June, the country exported just under 1 million tons of wheat, corn and barley, 40% lower than in the same period in 2021, according to Ukraine’s Ministry of Agriculture.

Ukraine’s harvest has begun this month and growers are scrambling to stock up for the new crop. But if farmers can’t sell their grain, it will affect 2023 because they won’t have the money to pay for seeds and fertilizer for the next crop. An international food policy official warned that they may not even have a crop.

High commodity prices in late spring may have encouraged greater production elsewhere. But that will be compensated by increase input costs for many farmers, especially fertilizer and diesel used for transport and agricultural equipment.

Food policy officials warn that soaring energy prices, which are expected to rise further in the winter, also affect the production of nitrogen fertilizer, a key nutrient for crops.

“If we don’t arrange [the issue with] Arif Husain, chief economist at the UN World Food Program, warned that the affordability crisis will become an availability crisis next year.

By far the main food concern has been grain supplies, especially wheat and vegetable oils, of which Ukraine is a major exporter. But some analysts are concerned about the price of rice, the cornerstone of the diet across Asia.

Currently, inventories in leading producing countries such as India, Thailand and Vietnam are at a high level. However, there are worries about export restrictions, if high wheat prices will push many consumers to switch to rice instead.

Only about 10% of total global grain production is exported, so a restriction by any one exporter can have a major impact on international prices.

In 2007-08, export restrictions by India and Vietnam combined with major rice importers, such as the Philippines, caused prices to more than double.

“We are closely monitoring rice prices,” said analysts at Nomura, a Japanese investment bank, adding: “If a rise in wheat prices leads to rice substitution, this could reduce the quantity existing stocks, triggering restrictions by major producers and leading to higher rice prices. time.” Officials are also monitoring the availability of fertilizer for rice production in Asia.

Human influences

Long before Russia invaded Ukraine, food insecurity was at record levels. Due to pandemics, droughts and other regional conflicts, just under 770 million people will go hungry in 2021, the highest number since 2006, according to the United Nations Food and Agriculture Organization.

The FAO predicts the war in Ukraine will increase the number of undernourished people by 13 million this year and another 17 million in 2023. According to the World Bank, for every 1 percentage point increase in food prices, there will be more. 10 million people down. fell into extreme poverty.

Across much of Africa, the Middle East and Central Asia, consumption of staples is higher than production. According to commodity data group Gro Intelligence, it is the countries in these regions that are most affected by the global price increase. Many emerging economies are facing the additional burden of currency depreciation due to rising food prices.

The impact is strong for countries in the Middle East and Africa that depend on imports from Ukraine and Russia. Egypt turned to the IMF for help, inflation in Turkey jumped to nearly 80% while the World Bank described the crisis in Lebanon as one of the most severe in the past 100 years.

Even countries that do not buy from Russia or Ukraine but are high net importers of agricultural goods are facing higher import costs. Prices of staple foods such as bread, pasta and cooking oil rose the fastest. A loaf of bread in Bulgaria costs almost 50% more in June than it did a year earlier. Cooking oil in Spain is now almost twice as expensive as it was a year ago, and the price of sugar in Poland has increased by 40%.

In low-income countries, where food makes up a large part of consumer spending, it is much harder to make cuts to offset the rising cost of living. In Egypt, where food and non-alcoholic beverages account for more than a third of household spending, residents are facing a 24% increase in food prices. In Ethiopia, where the budget for food is even higher, food inflation is 38%.

“If you live in a country where, on a good day, you spend between 50 and 60 percent of your disposable income on food. Husain said.

In Africa especially, “there is a risk of famine next year,” said Gilbert Houngbo, president of the United Nations’ International Fund for Agricultural Development. This, in turn, “could create social unrest and mass economic migration,” he added.

The spike in food prices in 2007-08 and 2010-11 led to riots around the world, and soaring food prices are a major factor in the recent unrest taking place in the United States. Sri Lanka. The other hardest hit governments have so far tried to stem the social unrest using subsidies.

“That is providing a Band-Aid,” said Michael Pond, analyst at Barclays. “But at some point, the pressure can be so strong that governments cannot provide that Band-Aid. And that’s where things can boil down to,” he added.

Not going back to normal

Not everyone thinks the crisis will get worse. Earlier this month, Morgan Stanley released optimistic report on the future of food prices, suggesting that the increase in 2023 will be lower than expected. An increase in grain production by farmers, including in Ukraine as tensions ease, should curb food inflation, the report said.

However, while some international traders hope that the reopening of the Black Sea trade route for Ukrainian grains could signal the beginning of a “de facto ceasefire”, There is still uncertainty about Russia’s intentions. It is continuing to attack areas around Ukrainian ports.

And even if the war ends tomorrow, Ukraine’s agricultural and port infrastructure needs to be rebuilt and the waters off Ukraine’s coast already destroyed. The country’s farmers may not be able or unwilling to return to work on their land.

Many Western government officials and analysts expect the current food crisis to linger over the years, with the war dragging on climate change, pandemics and other conflicts around the world. gender. “Any one of these factors has pushed food inflation [higher] Pond said.

Laura Wellesley, senior research fellow at Chatham House, said diversifying import sources between countries, which depend on Ukraine for grains and vegetable oils, means prices will continue to soar and cause problems. It will be the same about energy. “The overall picture looks like tight supply and high prices, not likely to drop any time soon.”

Economists warn that consumers may need to get used to permanently higher food prices. Capital Economics forecasts that market levels will “remain at historically high prices” due to increased volatility in the weather. “There is no denying that we are seeing lower yields and harvests over the past few years due to the growing impact of climate change,” said Caroline Bain, lead commodity economist at the research firm. climate.

Some analysts wonder if the conflict will begin the process of dismantling a trading system designed to deliver low-cost goods, including food, to all corners of the globe. .

The global food trade system that gives us access to all foods isn’t going back to normal anytime soon, says Wellesley. “That could mean continued high food and fertilizer prices and a reconfiguration of trade dependencies, perhaps with a greater focus on regional supply chains.”

Additional reporting by Federica Cocco in London

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