Filenews 24 April 2022
By Ioannis Komantis
Russia's invasion of Ukraine is undoubtedly a huge event with war, political, economic and social implications and consequences. Above all, of course, it is the human tragedy of the thousands of dead and wounded and the millions of refugees within Europe. Along with these tragic consequences are added the side effects in the economic sector, the main one being the energy sector. At the same time, however, there is an equally important side effect which, in my view, began to be perceived with some delay. I am referring, of course, to the area of the world food market and, in particular, to cereals and cereals. A crisis that will erupt in the coming months and that will upset global balances, exacerbate existing food problems and hit the most vulnerable. The above prophecy of Nostradamus, therefore, seems to be verified with the threat of pestilence coming to be added to the pandemic, starting from the gates of two states that in his days were not too many cities. In this analysis I will try to give a sense of how what and why we should be particularly concerned with this aspect of the Ukrainian-Russian crisis.
The timing of the outbreak of the crisis could not have been worse. A global food system that has just begun to assess the effects of the pandemic was at its nadir. At the beginning of the pandemic, food supplies and stocks at food banks were at very satisfactory levels. This sufficiency averted the worst in the previous two years. But the theoretical exit from the pandemic has found inventories at their lowest point for decades, with supply chains not yet fully restored so that the gap begins to close.
Thus, the food market and, in particular, the cereals market was already in a state of imbalance before Russia's invasion and the outbreak of war in Ukraine.
This imbalance, which persists due to the disruption in supply chains, has resulted in a continuous increase in prices in recent months. For the richer countries this meant an increase in the prices of both cereal derivatives and meat prices since most of the production is absorbed into animal feed. For the poorest countries, the increases meant an increase in the rate of malnutrition.
But Russia's invasion of Ukraine has turned, almost overnight, an inflation problem into a supply problem that translates not only into sharp price hikes, but also into upcoming supply disruptions.
For poor countries we will now be talking about pestilence. This is because the two warring countries hold more than 30% of the world cereal marketing market. And the abrupt and unexpected interruption of this supply has created a state of shock to the global system.
As Abdolreza Abbassian, an independent analyst and former senior economist of the UN Food Programme, said in a statement to the Japan Times, the shock to the food market from the invasion is unprecedented. "I've never seen such a situation before in the 30 years I've been active in the field."
To understand how the global interconnection works in this market, it is enough to mention that another global granary, Brazil, was found with a problem due to the crisis in Ukraine. This is because the war stopped, among other things, the production of fertilizers. Ukraine is therefore a very important producer of fertilizers on the world market. The abrupt interruption of the supply of fertilizers from Ukraine, completely disrupted this market and as a result Brazilian producers did not find sufficient quantities of fertilizers. This means not only a rise in cereal prices, but there is now also a question of sufficient supplies.
In China, mass purchases of cereals and other types of food have already begun, fearing the coming shortage of supply. China is also the world's largest importer of food.
The facts and the aftermath of the hunger crisis
The first fact is the great dependence that we have developed as a global society on supplies from Russia and Ukraine for our bread, our couscous, our spaghetti. And this dependency reaches about 25% in global terms.
The second fact is that these two countries, apart from the quantity of supply, were also able to offer competitive prices. Countries such as Egypt – the world's largest importer of wheat – Turkey, the Middle East and North Africa, have an almost complete dependence on supplies from these two countries.
The third fact is that the fear of shortages has already begun to manifest itself in moves of isolationism and cutting off of supplies in the global market from many countries. Hungary has already banned exports. Serbia is moving in this direction. Argentina and Turkey have introduced strict controls on local production. Even small countries like Moldova have closed their markets.
This trend of isolationism can start a domino effect of developments with unpredictable consequences that will inevitably focus not only on the poorest countries but also on those with high dependence on global markets.
"We will see an explosion in hunger around the world," Ian Bremmer President of the Eurasia Group told Bloomberg TV.
The price of grain played and still plays an important role in the history of mankind. Food shortages, from antiquity to the present day, are the biggest factor of revolutions and political reversals. The French Revolution the change of regimes from Egypt to India, from Yemen to Ethiopia are indicative of the explosive mixture that is being created. Therefore, the prediction of Mr. Bremmer above is a bad omen.
And we have indications that such an eventuality can be repeated. For example, in 2010, Russia banned grain exports after a series of bad crops. This resulted in a rapid increase in the global price of wheat, a factor that contributed to the eruption of revolutions in the Arab Countries, which became known as the Arab Spring.
For Ukraine, cereal production is intertwined with the very identity of the country. The flag of the country depicts its yellow granaries under the blue clear sky. The Black Sea basin is one of the most fertile regions in the world. Ukraine houses 25% of the world's extremely fertile black soils- the famous Chernozem. With most farmers unable to go out to work or having joined the war effort, production for at least 2022 seems lost.
"It looks like we're going to have a huge hole in the global wheat supply for 2022," observes with concern Scot Irwin, professor of agronomy at the University of Illinois.
Double hit
As in all crises, the degree of dependence of a country determines the severity of the effects on it. In the case of Russia and Ukraine, however, we have a double blow, but not in terms of the fact that exports from the two warring countries will be affected. The second twin refers to the products affected: wheat and barley. In the barley market Russia is the world's largest exporter while Ukraine is the fifth largest. Barley is in many countries the main ingredient for the production of flour, so all the possible effects analyzed above extend to barley. In other words a double bang.
Which countries will suffer the double blow to an extent?
According to the U.S. Department of Commerce, the main importers from Russia and Ukraine of both cereals are:
Above - Egypt, Ethiopia, Yemen, Lebanon, Palestine, Israel
3rd column - total imports, 4th column from Ukraine, and 5th column from Russia
Impact on developed economies
We do not need much analysis to assess what can happen in these already fragile countries.
Speaking at the European Parliament on 28 February, Michael Scannell, Assistant Director-General in the EU's Directorate for Agricultural and Rural Development, painted a picture of the impact of Russia's invasion given that the two countries account for more than 30% of cereal marketing on the world market.
Therefore, Mr Scannell pointed out, the EU will be affected not only in cereal products but also in the feed and supply of meat and milk.
The Scannell statement also highlighted the collateral but very significant loss in the field of animal husbandry. As Erin Coller, an economist at the Food and Agriculture Organisation of the United Nations explained, speaking to the magazine Investment Monitor, while only 13% of corn production is consumed directly as food, about 60% of the production is devoted to the preparation of animal feed. "The countries to which Ukraine exports the majority of its corn production are China and the EU," he added. And while these two "superpowers" have the financial capacity and displacement if they need to procure quantities from other countries in the event of a quantitative shortage in the market – which will happen if the conflict is prolonged further – then the ones that will be hit the hardest are several countries in Africa where, unlike Europe, corn is the main source of food.
How the grain crisis will affect us
After all, the question is how much will consumers in developed countries be affected by the grain crisis? The answer is given to a comment by the Paul Donovan Chief Economist of UBS. In developed countries cereal prices are a small percentage of consumer prices. As Mr. Donovan mentions, only 20% of the total for the US. On the contrary, labour costs are much more important.
It is a fact, however, that consumer prices will rise, even in developed economies, and this is because consumers are convinced that their spending on food and food is higher than in reality. And this belief will lead to a more conservative management of food expenditure. This in itself will gradually lead to a change in consumer habits.
Because food is a necessity and not a luxury, an increased expenditure on food will necessarily lead to a reduction in other costs on goods and services. And what Mr. Donovan points out is that although any reduction may be small in size, it comes at a time when the world's production of goods is at an all-time high.
An even small reduction in consumption can potentially disproportionately affect production and thus the much anticipated recovery of the global economy.
Let us hope, therefore, that this pointless and irrational war will end immediately, because with the data that we now have in front of us, we are going to justify Nostradamus.
*From the April issue of Forbes magazine
