The price of grain, the global supply chain, and the invasion of Ukraine

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The price of grain, the global supply chain, and the invasion of Ukraine

Russia’s invasion of Ukraine is revealing the fragility and interdependence of the global food system – it could even push 40 million people into extreme poverty, Cecilia Tortajada and Asit Biswas write.

Russia and Ukraine supply more than 30 countries that are net importers of wheat with at least 30 per cent of their overall wheat imports. Both countries are also top global exporters of barley, maize, and fertilisers.

Ukrainian grain is used to feed some of the world’s most vulnerable people. The country supplies over half of the wheat distributed by the World Food Programme, to alleviate hunger and boost food security in many developing countries.

Naturally, Russia’s invasion has affected sowing and harvesting in Ukraine. It has also affected availability and production in the rest of the world. In early March 2022, prices were reported to have increased by more than $2.60 per bushel for wheat, more than $0.90 per bushel for corn, and $0.60 for soy. Prices of fertiliser have risen too.

According to the Food and Agriculture Organization of the United Nations (FAO), global food prices in real terms reached an all-time high in March 2022. Although prices fell in June, they are much higher compared to last year.

Egypt, for instance, is highly dependent on wheat from the two countries and has seen its estimated annual cost of food and energy alone rise to 40 per cent of its foreign exchange reserves. Many other countries have been affected by lower imports, high international food prices and high transportation costs.

But rising prices aren’t the whole story. The invasion of Ukraine is contributing to food insecurity in multiple ways.

The invasion, and sanctions Russia earned for itself in the process, have also contributed to an exponential increase in energy and commodity prices.

This exacerbates the situation, especially because of how much energy is used in milling. Whether it be wheat, edible oils, animal feed, fertilisers, food processing, packaging, or transport or storage, agriculture requires energy and energy is getting more expensive.

This means food supply problems go far beyond Ukraine, Russia, and the countries that import their grain directly.

On top of power prices, international trade barriers are making things worse. Russia suspended grain and white and raw sugar exports to ex-Soviet states and suspended wheat, rye, barley, and maize exports to neighbouring Eurasian Economic Union states including Armenia, Belarus, Kazakhstan, and Kyrgyzstan.

Further, port operations in Ukraine are unusable for commercial activities and very high insurance premiums for vessels have affected exports through the Black Sea. After the agreement signed between Ukraine and Russia, however, a solution seems to have been found for exports from Ukraine via the safe corridors.

As far afield as the United States, farmers have had to grow crops that are not fertiliser-intensive, such as soybeans, on an additional two million acres, where normally they would have planted corn. This will have important implications for crop availability and prices in the country later this year.

The Center for Global Development estimates that interruptions and disruptions caused by the Russian invasion of Ukraine will push 40 million people back into extreme poverty. This is in addition to the 150 million people pushed back into poverty globally due to the COVID-19 pandemic, as estimated by the World Bank.

So, what are policymakers doing to mitigate the damage?

The United States will use the Bill Emerson Humanitarian Trust, a strategic grain reserve of commodities and cash, to provide food assistance to Ethiopia, Kenya, Somalia, Sudan, South Sudan, and Yemen, as well as cover freight transportation and inland and internal transport, shipping, and handling.

The European Union activated its 2021 contingency plan for food supply and security in times of crisis to accelerate the mapping of the risks and vulnerability of the region’s food supply chain. It is looking to reduce overall dependency, including in terms of food, feed, and fertilisers, and considering alternative organic sources of nutrients.

Both the European Union and the United States are also considering allowing farmers to use fallow land – arable land that is not harvested for one crop year to allow it to recover. This would be a temporary measure to grow crops to address supply disruptions, enhance food security, and reduce inflationary pressures in the short term.

China, the largest crop market globally, is considered self-sufficient in terms of wheat and corn. But even there, domestic corn prices have increased due to other factors like fertiliser and energy prices. In April 2022, China lifted trade restrictions with Russia for wheat and barley.

To offset crop losses, production of wheat in Canada, the United States, and Australia is expected to increase compared to 2021. American corn exports have increased and new crop supplies from Brazil and Argentina have eased stress on markets.

India has positioned itself as a main wheat exporter and large shipments from India also helped to reduce stress on markets when the conflict struck. Nevertheless, in mid-May, the Indian government announced a suspension of wheat exports to protect domestic consumption and prices.

Overall, grain demand continues to exceed supply. In response to this set of issues, policymakers must reassess their concepts of food security.

For example, a country like Singapore, which is considered one of the most food-secure countries in the world, announced in 2019 an ambitious goal of producing 30 per cent of its nutritional needs at home by 2030.

Supply chain disruptions due to COVID-19 and the invasion of Ukraine have shown the value of this choice – its experience shows that focusing on food security can be a good thing.

Pure self-sufficiency, however, limits the variety of food products available. It also makes markets more vulnerable to climate events affecting agriculture.

Urban agriculture, including ‘vertical farming’, can help some developed cities provide foodstuffs, but it is unclear if this could ever be enough to feed growing urban populations. Trading only with trusted countries may also pose serious limitations in addition to possibly reshaping global value chains, for good or bad.

Because these problems are global and interconnected in character, they need global solutions. Rather than blindly pursuing self-sufficiency, policymakers across the world need to work together. Only then can they find longer term solutions.

Together, leaders must strengthen global value chains, protect market access, and invest in technological solutions to meet the food security challenge they all face.

Dr Cecilia Tortajada is Professor in Practice at University of Glasgow’s School of Interdisciplinary Studies and Adjunct Senior Research Fellow at the Institute for Environment and Sustainability at Lee Kuan Yew School of Public Policy, National University of Singapore. She has more than 30 years’ experience studying impacts of global changes on water resources, environment, food, and societies. Asit K Biswas is Distinguished Visiting Professor at University of Glasgow.

This article was published by POLICY FORUM, September 7, 2022.