The politics of food supply

While the prices of grains and fertilizers are likely to remain high in the years ahead, not every region will be equally affected.

Grain and fertilizer (prices)
Producing fertilizers requires natural gas, and their prices have risen in lockstep. © Getty Images
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In a nutshell

  • Russia and Ukraine are crucial grain producers
  • Other countries will export more to compensate
  • Still, the poorest countries will suffer the most

Only recently, Covid seemed to be the greatest threat to globalization. Commentators believed that domestic producers could no longer rely on other parts of the world, where shortages and bottlenecks were bound to occur – either because of production shutdowns or due to logistics issues like quarantined harbors. 

Today, supply chains are still problematic, but fortunately the rhetoric against global supply networks is limited to concerns about energy. The debate focuses on choosing appropriate suppliers, rather than on the questionable benefits of autarky.

Supply shock

Although world trade volumes are expected to grow 3 percent in 2022, the invasion of Ukraine is a new threat to global trade flows in several key industries. Ukraine is a major supplier of grains and fertilizers, but production has been hard hit by the war. There is little fuel available to run the machinery, no financing available for the spring sowing, deadly mines in the ground, and labor is diverted from farming to fighting. The conflict has also made shipment from the Black Sea problematic because of a Russian blockade.

At the moment, Ukrainian exports travel through Romania and Poland by rail. Yet, the amounts are limited – 500,000 tons of grain per month, a mere 10 percent of prewar volumes – and transportation costs have soared. The upshot is that prices have increased dramatically. 

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Facts & figures

Russian grain exports are also suffering due to sanctions. In 2020 Russia was the world’s third-largest wheat producer and the top exporter. Before the war, Ukraine and Russia accounted for 28 percent of global wheat exports, and Ukraine alone accounted for 14 percent of the world’s corn exports.

A few countries are pocketing hefty rewards due to soaring prices and have increased their exports – among them India, the United States, Brazil and Argentina. Nonetheless, shortages remain, and many countries are aware that the situation may worsen. This could be the case if the summer harvest is lost and the Black Sea ports remain blocked, or if some countries follow the example of Kazakhstan and India and limit their exports to cap domestic prices and avoid political unrest.

Emerging trends

There is some good news, but it may not suffice. First, if one considers the world production of some key grains, the role of Ukraine is relatively modest. For example, in 2020 global wheat production was 760 million tons, while Ukraine’s was just 25 million. Moreover, the price of some other grains, including rice, has remained stable (but rose in 2021 due to the higher cost of fertilizers and the supply-chain problems). Finally, higher prices are leading to a rise in production, which will certainly contribute to reducing shortages in the future.

Similar trends apply to fertilizers, whose price will remain high since their production requires a lot of natural gas – and the price of gas is unlikely to drop soon. Russia is the world’s main exporter of fertilizers, with a 15 percent share. Although sanctions have not frozen those export flows, they have made an impact. Since the end of February, the price of fertilizers has increased by about 50 percent, which added to the price rises of 2021 due to higher energy costs.

The likeliest scenario is that the grain and fertilizer crisis will last for at least another couple of years.

Three preliminary conclusions follow. First, the price of grains (and food in general) has risen significantly because of higher energy prices, which have affected the price of fertilizers. This phenomenon has been strengthened by Covid-related supply chain problems and the war between Russia and Ukraine. Second, some problems are likely to disappear as supply chain bottlenecks weaken, grain production expands and new facilities for the production of fertilizers start operating. On the other hand, the high price of gas is here to stay, with consequences for the price of fertilizers and food in general. In the longer run, the current questionable strategies to deal with climate change will take their toll even if political tensions subside.

In the near future, prices may rise even further. Different agendas will emerge depending on whether a country is wealthy or not, and whether it has natural gas fields and farmland.

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Scenarios

Tensions will rise in poor regions that currently import energy and agricultural products, especially wheat and corn. The issue is not the amount of fertilizers and grains available in the world, but their price and the political, logistical and financial difficulties that prevent them from being shipped to large, low-income importers. In poor countries, grains and fertilizers may become too expensive for the population. Hunger and possibly starvation will follow. High fertilizer prices will prevent domestic farmers from expanding production.

This situation could lead to different scenarios. Russia, a large producer of grains and fertilizers, is also currently piling up considerable foreign-currency reserves, since the new sanctions have forced Moscow to cut its traditional imports. If the Kremlin were to pursue a global superpower policy, today it would be in an ideal position to rescue large parts of the world. Russia could further boost its bargaining power if it cooperated with India, which was an important exporter of grains and has recently been more than happy to buy Russian oil (from zero to 17 percent of its oil imports in a few months), possibly at a discounted price.

But this is unlikely to happen. Although the developing world is certainly eager to buy Russian oil and gas, Russia’s attempts to develop its presence in Africa, Latin America and Asia would probably create tensions with China, and President Vladimir Putin cannot afford it.

Other scenarios involve China and the West. In both cases, their actions will require money, and a lot of it, since many developing countries will soon be facing both political turmoil involving millions of starving people and financial disaster due to the rising interest rates on their foreign debt. 

The Chinese economy is doing well in terms of gross domestic product (GDP) growth by world standards, but is performing below expectations and the outlook for the future is dim. Yet, Beijing may be tempted to take advantage of this double crisis and tighten its grip on selected developing countries by handing out subsidies, including grains and fertilizers, and lending financial assistance. 

By contrast, the outlook for the West is more complicated. Helping the developing world means that the U.S. and Canada will have to engage in a major shipment program of grains and fertilizers, the European Union will have to dismantle its trade barriers in agricultural products and Europe and the U.S. will have to lend money that might never be repaid. This is also relatively unlikely. The EU is not going to open up to free trade in agricultural products in a few weeks. Neither Brussels nor Washington appear to be developing a strategy to help developing countries. After all, Western politicians are not eager to tell the public that their guesses about global warming were overly pessimistic, or that taxation or public debt should be increased to rescue foreign countries from starvation. Meanwhile, the purchasing power of millions of Western voters is suffering, and the electoral cycles become shorter and shorter.

The likeliest scenario is that the grain and fertilizer crisis will last for at least another couple of years, that several developing countries will suffer dramatically, and that Western countries will stage a limited number of face-saving interventions. Then the Chinese white knight will swoop in.

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