29 Apr 2022
Food insecurity is worsening due to the prolonged Russian invasion of Ukraine. Available energy and food supplies are diminishing as Russia is one of the leading energy, fertiliser and grain producers.
Ukraine is another major grain exporter and holds key transit infrastructure through which Russian supplies flow. As the ongoing war impacts energy and fertiliser availability next season, ANZ Research expects crop production to be challenged as well.
“Disruptions across a range food items have seen the Food and Agriculture Organization (FAO) food index hitting a record high.”
Infrastructure damage, higher input prices and export uncertainty will not only weigh on Ukrainian crop production but also leave their marks on the Russian harvest. These factors are converging at a time when the world is still working towards recovery from the devastating pandemic.
According to the United Nations (UN), infrastructure damage in Ukraine has led to nearly 25 million tonnes (mt) of grains being stuck in-country. The World Food Programme estimates up to 20 million people in eastern Africa are facing severe hunger. Disruptions across a range of food items have seen the Food and Agriculture Organization (FAO) food index hitting a record high. Reduced grain production, protectionism measures and logistical challenges could potentially trigger a severe food crisis.
Deteriorating agriculture production threatens the UN’s Sustainable Development Goal of ‘zero hunger’ by 2030. Under-nourishment had declined over 2002-14 before stabilising from 2014-2019.
However, years of progress are now being undone. The number of undernourished people rose from 683 million in 2019 to 768 million people in 2020 due to the pandemic and extreme weather. This cumulated into acute food insecurity and an increase in the number of under-nourished people to 800 million last year.
This year, the Russian invasion of Ukraine is the key trigger for deepening the food crisis further.
The number of under-nourished people is now heading towards the levels recorded in 2002 when there was widespread famine in Africa. According to UN estimates, 660 million people in the world will still face hunger in 2030 due to the lasting impact of the COVID-19 pandemic. This number could be still higher if we account for the ongoing conflict in Ukraine.
Global grain inventories have been shrinking since 2017. The US Department of Agriculture (USDA) estimates global grain stockpiles will fall a further 21 million tonnes to 784 mt in the 2022-23 marketing year. The number looks more precarious if China’s inventories are excluded (in practice they are not available for the rest of the world). China imports have risen sharply since 2010 in an effort to ensure food security and contain food inflation.
The country holds nearly 58 per cent of global grain stocks, exacerbating the grain supply shortage in the rest of the world. Global stocks excluding China stocks are estimated to fall this year to 328mt, the lowest since 2016. That means the stock-to-use ratio will fall to a multi-year low of 15 per cent in 2022-23.
Inventories in the Black Sea region will be unavailable too due to the ongoing conflict between Russia and Ukraine.
Stocks of various types of grains are facing similar trends, with China holding 141 mt of wheat inventories against rest-of-world inventories of 126 mt. Global wheat inventories are estimated to hit a six-year low of 267 mt in 2022-23.
The ratio of annual ending stocks against consumption for the world ex-China are expected to decline to 15 per cent in 2022 from 16.4 per cent this year. This is only marginally higher than the record low stock-to-use ratio of 14.3 per cent in 2007/08. In the case of corn, China holds nearly 67 per cent (204 mt) of global inventories. Global inventories excluding China cover only one month of consumption.
Fertiliser prices have rallied sharply in the past year, driven up initially by the energy crisis (as gas is the feedstock for nitrogen fertiliser), freight disruptions associated with the pandemic and, more recently, the Ukraine situation.
Russia and Belarus are major exporters of both potash and nitrogen. Russia exports nearly 7 mt annually, or 30 per cent of global nitrogen, phosphorus and potassium (NPK) fertiliser exports. It accounts for 80 per cent of European Union nitrogen fertiliser imports, due largely to cheap natural gas supplies. Sanctions and energy shortages have made fertilisers, particularly synthetic fertilisers, much costlier to produce.
China is the world’s largest producer of nitrogen fertiliser and prices in China have skyrocketed during the pandemic as the cost of natural gas has risen.
Last year China limited the amount of phosphate available for export to ensure it has enough stockpiled to meet domestic demand.
Excessively high fertiliser prices mean farmers are limiting their use, reducing yields. This is particularly the case in developing nations where farmers simply don’t have the cash to buy fertiliser.
This means crop production will be hit particularly hard in Africa, South America and parts of Asia. Meanwhile, demand for fertilisers from key agriculture markets remains strong amid rising grains prices. Higher crop prices are incentivising these farmers to use more fertiliser to increase productivity.
The combination of tight supplies and strong demand should keep prices elevated, though we have to be mindful of the recent price rally.
Food shortages are expected to worsen as climatic issues, energy shortages, the pandemic and the invasion of Ukraine all impact the world’s ability to produce sufficient food.
China appears to be one step ahead of the rest of the world in terms of securing additional food supplies and their policy to increase imported product reserves is now serving them well as other countries scramble to import product at inflated prices. High global food prices will cause hunger in developing nations and erode wealth globally, as it will continue to underpin inflation.
Food-exporting nations like Australia and New Zealand may continue to benefit in a net sense from high commodity prices but it’s hard going for lower-income earners. In addition, as global prices become too expensive, demand will fall, as consumers’ ability to purchase higher-value proteins such as dairy products and red meats is reduced. Demand for basic foodstuffs such as grains is not expected to wane to the same extent – people have to eat.
The world will need to wait for global supply to increase before these markets rebalance and prices temper. It’s also worth noting high food prices are not conducive to geopolitical stability. Hunger induces migration and topples governments.
The food crisis is another factor to add to the growing list of potential geopolitical risks as the world tentatively emerges from the shadow of COVID-19.
Soni Kumari is Commodity Strategist and Susan Kilsby is Agriculture Economist at ANZ
The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.
29 Apr 2022
08 Jul 2019