TWN Info Service on Sustainable Agriculture
16 March 2022
Third World Network

UN: Ukraine conflict could expose global food markets to heightened risks
Published in SUNS #9535 dated 16 March 2022

Geneva, 15 Mar (Kanaga Raja) – Conflict-induced disruptions to food exports by the Russian Federation and Ukraine could expose global food markets to heightened risks of tighter availabilities, unmet import demand and higher international food prices, according to the UN Food and Agriculture Organization (FAO).

In an in-depth analysis assessing the possible risks emanating from the conflict in Ukraine, FAO said the Russian Federation and Ukraine are among the most important producers of agricultural commodities in the world.

It said both countries are net exporters of agricultural products, and they both play leading supply roles in global markets of foodstuffs and fertilisers, where exportable supplies are often concentrated in a handful of countries.

“This concentration could expose these markets to increased vulnerability to shocks and volatility,” it cautioned.

Many countries that are highly dependent on imported foodstuffs and fertilizers, including several that fall into the Least Developed Country (LDC) and Low-Income Food-Deficit Country (LIFDC) groups, rely on Ukrainian and Russian food supplies to meet their consumption needs. Many of these countries, already prior to the conflict, had been grappling with the negative effects of high international food and fertilizer prices, said FAO.

According to the FAO report, the Russian Federation and Ukraine are among the most important producers of agricultural commodities in the world.

It said in the cereal sector, their contribution to global production is especially significant for barley, wheat and maize. Combined, the two countries, on average and respectively, accounted for 19, 14 and 4 percent of global output of these crops between 2016/17 and 2020/21.

In the oilseed complex, their contribution to global production was particularly important for sunflower oil, with just over half of world output originating, on average, in the two countries during this period.

Their average shares in global rapeseed and soybean production are comparatively more limited, standing at 6 and 2 percent, respectively.

FAO said the critical role that the Russian Federation and Ukraine play in global agriculture is all the more evident from an international trade perspective.

Both countries are net exporters of agricultural products, and they both play leading roles in supplying global markets in foodstuffs, for which exportable supplies are often concentrated in a handful of countries, exposing these markets to increased risks of vulnerability to shocks and volatility.

For instance, in the wheat and meslin (a mixture of wheat and rye) sector, where the top seven exporters combined accounted for 79 percent of international trade in 2021, the Russian Federation stands out as the top global wheat exporter, shipping a total of 32.9 million tonnes of wheat and meslin (in product weight), or the equivalent of 18 percent of global shipments.

Ukraine stood as the fifth largest wheat exporter in 2021, exporting 20 million tonnes of wheat and meslin and with a 10 percent global market share.

FAO said the prominence of the two countries in the world trade arena is similarly noteworthy in global markets of maize, barley and rapeseed, and even more so in the sunflower oil sector, where their substantial production bases endowed them with a combined world export market share of close to 64 percent.

The high export concentration that characterises food commodity markets is also mirrored by the fertilizer sector, where the Russian Federation plays a leading supplier role, it added.

FAO said that in 2021, the Russian Federation ranked as the top exporter of nitrogen (N) fertilizers and the second leading supplier of both potassic (K) and phosphorous (P) fertilizers.

Both the Russian Federation and Ukraine are key suppliers to many countries that are highly dependent on imported foodstuffs and fertilizers, it added.

Several of these countries fall into the Least Developed Country (LDC) group, while many others belong to the group of Low-Income Food-Deficit Countries (LIFDCs). For instance, Eritrea sourced the entirety of its wheat imports in 2021 from both the Russian Federation (53 percent) and Ukraine (47 percent).

FAO also said that wheat imports of many countries situated in North Africa and Western and Central Asia are highly concentrated towards supplies from the Russian Federation and Ukraine.

Overall, almost 50 nations are dependent on both countries for over 30 percent of their wheat import needs, it added.

FAO said the very high likelihood of disruptions to Ukraine’s grain and oilseed harvests, combined with the threat of trade restrictions on Russia’s exports of cereals and other basic foodstuffs (as reflected in either record or near- record benchmark price quotations) would jeopardise the food security of many countries around the world, and of discern, to many economically vulnerable countries.

As for fertilisers, the reliance at the global level on Russian N, P and K, is less pronounced with some 25 countries having a dependency rate of 30 percent or more, said FAO.

Ukraine does not feature heavily as a dependent fertiliser exporter, with the exception of purchases by Benin and a handful of countries in the European Union (EU). Many countries located in Eastern Europe and Central Asia have an import dependency of well over 50 percent on Russian fertilisers, for all three ingredients.

Again, with the prospect of a trade embargo on Russia’s exports, or a self-imposed export restriction, the global fertiliser market would be subject to considerable disruptions. This prospect is already reflected in record urea (N) benchmark fertiliser quotations, said the FAO report.

FAO said record (natural) gas – the main source of fuel for N-fertilizer production – could render once-unprofitable investment in energy production commercially viable, such as fracking installations in the United States.

“This would eventually ease international fertiliser prices, but the term of supply response is not expected to be quick, and fertiliser shortages could extend to crops this year and into the next,” it added.

According to FAO, the upshot is that countries that are highly dependent on the Russian Federation and Ukraine for essential food and fertiliser supplies will need to prepare contingency plans to source from other countries, in the expectation that these countries can exact a rapid supply response.

TRADE RISKS ARISING FROM UKRAINE CONFLICT

In assessing the possible trade risks emanating from the conflict in Ukraine, the FAO report said conflict-induced disruptions to food exports by the Russian Federation and Ukraine expose global food markets to heightened risks of tighter availabilities, unmet import demand and higher international food prices.

FAO said that based on its forecasts for the ongoing 2021/22 season (July-June) before the conflict and on the pace of exports to date, between March and June 2022, Ukraine was expected to export approximately 6 million tonnes of wheat while the Russian Federation was estimated to ship 8 million tonnes.

However, port closures in Ukraine and anticipated sales difficulties in the Russian Federation because of economic sanctions call into question whether these exports will actually be realized, it added.

“While a sudden and steep reduction in shipments by the two countries could increase exports by alternate origins, such as the European Union (EU), and potentially Canada and the United States of America (USA), the potential for these exporters to fully make up for lower shipments by Ukraine and the Russian Federation is foreseen to be limited.”

Indeed, wheat inventories are already especially tight in Canada and the USA following reduced harvests in 2021/ 22, said FAO.

Among other suppliers, Argentina’s exports in 2021/22 will also likely remain limited by the Government efforts to control domestic inflation, while Australia has reached its maximum shipment capacity logistically.

FAO said that in such a setting of significantly reduced global export availabilities, other countries could enforce measures (formal or informal) to slow or restrict exports in order to protect domestic supplies and/or address domestic price inflation.

The resulting supply gaps for importers may be especially important for buyers in the Near East and North Africa and, given the importance of wheat as a food staple, they could result in some countries increasing imports now in order to secure supplies in fear that wheat markets will get tighter and prices rise further, it added.

The report said this would put additional pressure on global supplies. Of the top global wheat importers, Egypt, Turkey, Bangladesh and the Islamic Republic of Iran source, on average (2016/17- 2020/21), 60 percent or more of their wheat imports from Ukraine and the Russian Federation.

The report said that based on 2021/22 import forecasts and actual imports for the first half of the marketing year, Egypt, Turkey, Bangladesh and the Islamic Republic of Iran have roughly 6.6, 4.0, 3.7, and 1.7 million tonnes, respectively, of outstanding imports for the second half of the 2021/22 marketing season.

Lebanon, Tunisia, Yemen, Libya and Pakistan also rely heavily on Ukraine and the Russian Federation for their wheat imports, sourcing on average (2016/17-2020/21) roughly half of their wheat purchases from Ukraine and the Russian Federation.

As for maize, FAO said based on its forecasts before the conflict and on export data, for the remainder of the 2021/ 22 season, Ukraine and the Russian Federation were expected to export approximately 14 million tonnes and 2.5 million tonnes of maize, respectively.

As in the case of wheat flows, it is unlikely that these exports, or at least the large majority, will be realized. While Russia’s maize exports do not make up a significant portion of global maize trade, Ukraine’s expected maize exports in 2021/22 were forecast to make up 18 percent of the 2021/22 global trade in the grain, which would have made the country the world’s third largest maize exporter, said the report.

It said that maize supply gaps for importers could be especially relevant for China and the EU (Ukraine’s primary maize export destination), as well as also for Egypt and Turkey, which on average (2016/17-2020/21) source roughly one third of their maize imports from Ukraine.

Based on 2021/22 import forecasts and imports for the first half of the marketing year, China, the EU, Egypt and Turkey have roughly 11.5, 3.7, 4.6, and 1.6 million tonnes, respectively, of outstanding imports for the second half of 2021/22. These countries will need to meet their import needs from other suppliers, said FAO.

“Shifts in demand to other major maize exporters, including Argentina, Brazil and the USA, are expected to occur.”

While Argentina’s export levels for 2021/22 may remain limited by the Government’s efforts to control domestic inflation, increased exports could be expected from Brazil and the USA. It is likely that Brazil and the USA will only be able to partially meet the unfilled 14 million tonnes of maize exports from Ukraine in 2021/22.

FAO said that the global maize 2021/22 trade forecast may potentially be reduced, based on expectations that the export loss from Ukraine may not be fully compensated for by other exporters, and high prices may deter importers from importing maize for feed and instead shifting to other cheaper feed options.

As for sunflower seed oil, FAO said prior to the escalation of the conflict, improved supply situations would have enabled Ukraine and the Russian Federation to raise their exports of the product in 2021/22 (October-September) to 6.6 and 3.7 million tonnes, respectively.

FAO estimates that about half of these volumes were already shipped by the countries between October 2021 and February 2022, leaving a balance of 3.3 and 1.9 million tonnes to be respectively exported by Ukraine and the Russian Federation in the remaining seven months of the 2021/22 marketing year, were its forecasts to be realized.

However, much uncertainty surrounds current export prospects. In Ukraine, shipments of sunflower seed oil have come to a virtual halt due to conflict-induced logistic bottlenecks at port facilities and the suspension of crushing operations across the country, said the FAO report.

In addition, as of 5 March 2022, Ukrainian sunflower seed oil exports were also subject to licensing requirements. Yet, details as to how these export licenses will be issued are yet to emerge. In the case of the Russian Federation, questions also exist on the potential impact of the financial sanctions on sunflower seed oil exports, it added.

Given the significant export shares of Ukraine and the Russian Federation in the global sunflower seed oil market, any disruption to their shipments would have notable implications for major sunflower oil importers, namely India, the European Union, China, the Islamic Republic of Iran and Turkey, said FAO.

It estimates that, combined, these major sunflower oil importing countries still require inflows to the tune of 5.4 million tonnes between March and September 2022.

FAO said that should these import requirements not be fulfilled through Ukrainian and Russian supplies, these importing countries would have to shift to other suppliers of sunflower seed oil or to other vegetable oils.

This implies that the impacts of the conflict could go beyond the sunflower seed oil sector, with spillover effects onto other vegetable oils, such as palm, soy, and rapeseed oils, it added.

FAO said recent international vegetable oil price developments suggest that global markets are already reacting to the conflict along these lines, with sunflower seed oil quotations from Argentina, the world’s third largest exporter, rising sharply since late February, in tandem with a marked increase in international palm oil quotations.

As for rapeseed and derived products, FAO said although Ukraine stands out as the world’s third largest rapeseed exporter, its share in global rapeseed trade is more limited, suggesting that there could be greater room for alternate suppliers, such as Canada and Australia, to compensate for potential reductions in Ukrainian rapeseed exports.

On the other hand, in the global rapeseed oil market, where the Russian Federation accounts for 10 percent of world trade outflows, much like sunflower seed oil shipments, uncertainties exist regarding the potential impact of the sanctions imposed on the country, said the report.

IMPACT ON FOOD PRICES

In assessing the potential impact on international food prices caused by a conflict-induced reduction in cereal and vegetable oil exports from Ukraine and the Russian Federation, FAO said it simulated two scenarios to account for a range of conceivable export developments during the 2022/23 marketing year, namely:

(1) A moderate shock: under which wheat and maize exports from Ukraine and the Russian Federation, combined, underwent a 10 million tonne reduction each, while their exports of other coarse grains were reduced by 2.5 million tonnes and those of other oilseeds by 1.5 million tonnes; and

(2) A severe shock, entailing a 25 million tonne reduction in their combined exports of wheat and of maize in 2022/23, alongside a 5 million tonne decrease in their shipments of other coarse grains and a 3 million tonne cut to those of other oilseeds.

Both scenarios were anchored on the assumption that reference crude oil prices would reach USD 100 per barrel in 2022/23, up from an initial baseline value of USD 75 per barrel.

According to FAO, its results indicate that:

(a) The global reference price of fertilizer would undergo a 13 percent increase in 2022/23, relative to its already elevated baseline level, in response to the more expensive production inputs implied by the higher crude oil price, but also by the higher crop prices. This increase would influence production costs for 2022/23 growing seasons.

(b) In this input price context, the capacity of alternate origins to boost output and exports to compensate for reduced Russian and Ukrainian shipments could be only partial and would vary depending on the magnitude of the market shock and the relative elasticities of supply and demand. Under the moderate shock scenario, this would result in global trade volumes of wheat contracting by 8 million tonnes, as only an additional 2 million tonnes would be supplied by alternative exporters. For maize, the world trade reduction would amount to 7 million tonnes. Under the more severe scenario, global trade volumes would fall by 16 million tonnes for wheat and by 12 million tonnes for maize.

(c) International prices of the four commodities with important Ukrainian and Russian export shares would rise in response to reduced export supplies, with their rate of increase determined by the magnitude of the shock, supply elasticities of alternative suppliers and the commodities’ relative demand elasticities. Compared to their already elevated baseline values, wheat price would increase by 8.7 percent under the moderate shock scenario and by 21.5 percent under the severe shock scenario. For maize, the increase would be to the tune of 8.2 percent in the moderate case and of 19.5 percent in the severe case. For other coarse grains, prices would rise by 7 to 19.9 percent, and by 10.5 to 17.9 percent for other oilseeds.

(d) Market impacts would also be felt in related sectors. For instance, a reduction in exportable supplies for oilseeds (mainly sunflower) would push prices of other oilseeds up. A cut in feed wheat and maize availabilities would similarly bolster prices of feed products. Combined, these factors would drive livestock prices up, with the more feed-intensive poultry and pork sectors directly affected the most.

FAO said that because of the numerous uncertainties that surround the conflict itself, including its duration and scale, and given its potential to inflict lasting damages to productive assets and ancillary infrastructure, two separate scenarios were simulated to assess the impact of reduced Ukrainian and Russian export participation for five seasons, until marketing year 2026/27.

These scenarios were developed under the assumption that reference crude oil prices would remain on an upward trajectory to reach USD 108 per barrel in 2026/27.

According to FAO, the results of this scenario analysis are that:

(a) Continued gains in crude oil prices would keep the global reference price of fertilizer on the rise over the next five marketing years, contrary to expected trends under the projection’s baseline, which foresaw oil and fertiliser prices easing over this period. As a result, the 2026/27 export price would stand 25 percent above the originally foreseen baseline value.

(b) Even as alternative producers would expand their output in response to the higher prices instigated by reduced Ukrainian and Russian food export participation, a considerable supply gap would remain in the global market. In the moderate shock scenario, this compensation rate or share of the global export shortfall covered by non-Russian and Ukrainian origins over the next five seasons would range between 30 and 52 percent for maize and between 19 and 48 percent for wheat. Under a severe shock scenario, the compensation rate would range from 47 to 67 percent for maize and from 30 to 57 percent, in the case of wheat.

(c) International prices of the four commodities with important Ukrainian and Russian export shares would remain elevated in response to the overall reduced export supplies. Compared with their baseline values, by 2026/27, wheat prices would rise by 10 percent under the moderate shock scenario and by 19 percent under the severe shock scenario. Similarly, the simulation’s projected maize price would be 8.5 percent and 14 percent above the baseline in 2026/27.

(d) In related sectors, livestock prices would range 3-6 percent above baseline levels in 2026/27 in the moderate shock scenario and 5-10 percent under the severe shock scenario.

Apart from the trade risks, the report also highlighted the logistical, production, humanitarian, energy, as well as exchange rate, debt and growth risks that are likely to emanate from the conflict in Ukraine.

FAO said that globally, in terms of impacts on food security, under the moderate shock scenario, the number of undernourished people would increase by 7.6 million, while this level would rise to 13.1 million people under the more severe setting.

It said from a regional perspective and with respect to the projected baseline levels in 2022, the most pronounced increase in the number of people undernourished would take place in the Asia-Pacific region (up 4.2 to 6.4 million), followed by sub-Saharan Africa (up 2.6 to 5.1 million) and the Near East and North Africa (up 0.4 to 0.96 million).

The report said if conflict-related factors prolong the countries’ export reduction into the 2026/27 marketing year and keep reference crude oil prices elevated, international food prices would stay above their baseline level.

Compared to the baseline estimate, FAO said this would raise the number of undernourished by 8.1 million people in a moderate setting and by 11.2 million in a severe shock scenario.

From a regional perspective, the most pronounced increase in the number of people undernourished would remain in the Asia-Pacific region, followed by sub-Saharan Africa and the Near East and North Africa, it added.