Ukraine and Russia are important exporters of wheat, corn and sunflower oil. See, e.g., WTO Trade Profiles 2021 at 376 (Ukraine top three agricultural expoers were sunflower-seed, or cotton oil ($5.32 billion), corn ($4.885 billion) and wheat and meslin ($3.594 billion)) and 298 (Russian Federation, top two agricultural exports were wheat and meslin ($6.403 billion), sunflower seed or cotton oil ($2.206 billion). Ukraine’s exports in 2022 are certain to be disrupted by the Russian war in the country which is harming infrastructure, the ability of farmers to plant crops, increasing input costs and maritime costs. Effects on Russian exports are less clear but could be affected as well.
The United Nation’s Food and Agriculture Organization (FAO) released an updated evaluation of risks on food security both for Ukrainians and for the world from the ongoing conflict last week (March 25), See FAO, Information Note, The importance of Ukraine and the Russian Federation for global agricultural markets and the risks associated with the current conflict, 25 March 2022 Update. The Executive Summary (pages 1-4) is copied below.
“Executive Summary
“1. Market structure, trade profiles and recent price trends
“1.1 Market shares
“• The Russian Federation and Ukraine are among the most important producers of agricultural commodities in the world. 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.
“• In 2021, either the Russian Federation or Ukraine (or both) ranked amongst the top three global exporters of wheat, maize, rapeseed, sunflower seeds and sunflower oil, while the Russian Federation also stood as the world’s top exporter of nitrogen fertilizers, the second leading supplier of potassium fertilizers and the third largest exporter of phosphorous fertilizers.
“1.2 Trade profiles
“• Many countries that are highly dependent on imported foodstuffs and fertilizers, including numerous 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.
“Risk analysis: Assessing the risks emanating from the conflict
“2.1 Trade risks
“• In Ukraine, the escalation of the conflict raises concerns on whether crops will be harvested and products exported. The war has already led to port closures, the suspension of oilseed crushing operations and the introduction of export licensing requirements for some products. All of these could take a toll on the country’s exports of grains and vegetable oils in the months ahead. Much uncertainty also surrounds Russian export prospects, given sales difficulties that may arise as a result of economic sanctions imposed on the country.
“2.2 Price risks
“• FAO’s simulations gauging the potential impacts of a sudden and steep reduction in grain and sunflower seed exports by the two countries indicate that these shortfalls might only be partially compensated by alternative sources during the 2022/23 marketing season. The capacity of many exporting countries to boost output and shipments may be limited by high production and input costs. Worryingly, the resulting global supply gap could raise international food and feed prices by 8 to 22 percent above their already elevated baseline levels.
“• If the conflict keeps crude oil prices at high levels and prolongs the two countries’ reduced global export participation beyond the 2022/23 season, a considerable supply gap would remain in global grain and sunflowerseed markets, even as alternative producing countries expand their output in response to the higher output prices. This would keep international prices elevated well above baseline levels.
“2.3 Logistical risks
“• In Ukraine, there are also concerns that the conflict may result in damages to inland transport infrastructure and seaports, as well as storage and processing infrastructure. This is all the more so given the limited capacity of alternatives, such as rail transport for seaports or smaller processing facilities for modern oilseeds crushing facilities, to compensate for their lack of operation.
“• More generally, apprehensions also exist regarding increasing insurance premia for vessels destined to berth in the Black Sea region, as these could exacerbate the already elevated costs of maritime transportation, compounding further the effects on the final costs of internationally sourced food paid by importers.
“2.4 Production risks
“• Although early production prospects for 2022/23 winter crops were favourable in both Ukraine and the
Russian Federation, in Ukraine, the conflict may prevent farmers from attending to their fields and harvesting and marketing their crops, while disruptions to essential public services could also negatively affect agricultural activities.
“• Current indications are that, as a result of the conflict, between 20 and 30 percent of areas sown to winter crops in Ukraine will remain unharvested during the 2022/23 season, with the yields of these crops also likely to be adversely affected. Furthermore, considerable uncertainties surround Ukrainian farmers’ capacity to plant crops during the fast approaching spring crop cycle.
“• The conflict is also likely to affect the ability of Ukraine to control its animal disease burden, significantly increasing the risk of proliferation of animal diseases, notably of African swine fever (ASF), within Ukraine and in neighbouring countries.
“• In the case of the Russian Federation, although no major disruption to crops already in the ground appears imminent, uncertainties exist over the impact that the international sanctions imposed on the country will have on food exports. Any loss of export markets could depress farmer incomes, thereby negatively affecting future planting decisions.
“• Economic sanctions imposed on the Russian Federation could also disrupt its imports of agricultural inputs, notably pesticides and seeds, on which the country is highly dependent. This could result in less plantings, lower yields and lower qualities, exposing the Russian agricultural sector and global food supplies, at large, to non-negligible risks.
“2.5 Humanitarian risks
“• The conflict is set to increase humanitarian needs in Ukraine, while deepening those of millions of people that prior to its escalation were already displaced or requiring assistance due to the more than eight-year conflict in the eastern part of the country. By directly constraining agricultural production, limiting economic activity and raising prices, the conflict will further undercut the purchasing power of local populations, with consequent increases in food insecurity and malnutrition.
“• Humanitarian needs in neighbouring countries, where displaced populations are seeking refuge, are also set to increase substantially.
“• Globally, if the conflict results in a sudden and prolonged reduction in food exports by Ukraine and the Russian Federation, it will exert additional upward pressure on international food commodity prices to the detriment of economically vulnerable countries, in particular. FAO’s simulations suggest that under such a scenario, the global number of undernourished people could increase by 8 to 13 million people in 2022/23, with the most pronounced increases taking place in Asia-Pacific, followed by sub-Saharan Africa, and the Near East and North Africa. If the war lasts, impacts will go well beyond 2022/23.
“2.6 Energy risks
“• The Russian Federation is a key player in the global energy market. As a highly energy-intensive industry, especially in developed regions, agriculture will inevitably be affected by the sharp increase in energy prices that has accompanied the conflict.
“• Agriculture absorbs high amounts of energy directly, through the use of fuel, gas and electricity, and indirectly, through the use of agri-chemicals such as fertilisers, pesticides and lubricants.
“• With prices of fertilizers and other energy-intensive products rising as a consequence of the conflict, overall input prices are expected to experience a considerable boost. The higher prices of these inputs will first translate into higher production costs and eventually into higher food prices. They could also lead to lower input use levels, depressing yields and harvests in the 2022/23 season, thus giving further upside risk to the state of global food security in the coming years.
“• Higher energy prices also make agricultural feedstocks (especially maize, sugar and oilseeds/vegetable oils) competitive for the production of bio-energy and, given the large size of the energy market relative to the food market, this could pull food prices up to their energy parity equivalents.
“2.7 Exchange rate, debt, and growth risks
“• The Ukrainian hryvnia reached a record low against the United States dollar (USD) in early March 2022, with likely repercussions for Ukrainian agriculture, including a boost to its export competitiveness and curbs on its ability to import.
“• Although their extent remains unclear at this stage, conflict-induced damages to Ukraine’s productive capacity and infrastructure are expected to entail very high recovery and reconstruction costs.
“• The economic sanctions imposed on the Russian Federation have also led to a significant depreciation of the Russian rouble. Although this should make Russian exports of agricultural commodities more affordable, a lasting rouble depreciation would negatively affect investment and productivity growth prospects in the country.
“• Weakening economic activity and a depreciated rouble are also expected to have serious effects on countries in Central Asia through the reduction of remittance flows, as for many of these countries remittances constitute a significant part of gross domestic product (GDP)
“• The current conflict may also have global spillovers. While its impact on the global economy remains uncertain at this stage and will depend on several factors, the most vulnerable countries and populations are expected to be hit hard by slower economic growth and increased inflation, at a time when the world is still attempting to recover from the recession triggered by the COVID-19 pandemic.
“• Agriculture is the backbone of the economies of many developing countries, the majority of which rely on the United States dollar for their borrowing needs. As such, a lasting appreciation of the USD vis-à-vis other currencies may have negative significant economic consequences for these countries, including for their agrifood sectors. Moreover, the potential reduction of GDP growth in several parts of the world will affect global demand for agrifood products with negative consequences for global food security. Lower GDP growth will also likely reduce the availability of funds for development, especially if global military expenses increase.
“Policy recommendations
“• In order to prevent or limit the conflict’s detrimental impacts on the food and agricultural sectors of Ukraine and the Russian Federation, every effort should be made to keep international trade in food and fertilizers open to meet domestic and global demand. Supply chains should be kept fully operational, including by protecting standing crops, livestock, food processing infrastructure, and all logistical systems.
“• In order to absorb conflict-induced shocks and remain resilient, countries that depend on food imports from Ukraine and the Russian Federation will need to find alternative export suppliers for their food needs. They should also rely on existing food stocks and enhance the diversity of their domestic production bases.
“• The food security impacts of the conflict on vulnerable groups necessitate timely monitoring and well-targeted social protection interventions to alleviate the hardship caused by the conflict and to foster a fast recovery from it. To assist the internally displaced people, refugees and groups directly affected by the conflict, the reach of Ukraine’s national social protection system should be expanded by registering additional population groups within the Unified Social Information System.
“• In countries hosting refugees, access to existing social protection systems and job opportunities should also be eased by lifting legal access barriers and, where needed, by increasing the capacity of host countries’ social protection systems to absorb additional caseloads.
“• Countries affected by potential disruptions ensuing from the conflict must carefully weigh measures they put in place against their potentially detrimental effect on international markets including over the longer term. Particularly, export restrictions must be avoided. They exacerbate price volatility, limit the buffer capacity of the global market, and have negative impacts over the medium term.
“• The spread of African swine fever (ASF) and other animal diseases must be contained by improving biosecurity and good husbandry practices at all geographical levels, by taking steps to facilitate early detection, timely reporting and rapid disease containment, and by implementing measures that support virus detection, such as surveillance schemes and targeted sampling of animals.
“• Market transparency and policy dialogue should be strengthened, as they play key roles when agricultural commodity markets are under uncertainty and disruptions need to be minimised to ensure that international markets continue to function properly and that trade in food and agricultural products flows smoothly.”
Figure 15 of the paper (page 10) identifies countries largely dependent on Ukraine and Russia for wheat.
The FAO’s latest Food Price Index (released March 4, 2022, shows agricultural products already at all time highs.
As reviewed in a prior post, countries imposing sanctions on Russia, including the G-7 and the EU, are working to minimize the food security issues. March 26, 2022: Blockage of Accession of Belarus to WTO, additional sanctions on Russia and other recent developments. More immediately, President Putin’s war places global food security under increased pressure. We recall that the implementation of our sanctions against Russia takes into account the need to avoid impact on global agricultural trade. We remain determined to monitor the situation closely and do what is necessary to prevent and respond to the evolving global food security crisis. We will make coherent use of all instruments and funding mechanisms to address food security, and build resilience in the agriculture sector in line with climate and environment goals. We will address potential agricultural production and trade disruptions, in particular in vulnerable countries. We commit to provide a sustainable food supply in Ukraine and support continued Ukrainian production efforts. 18. We will work with and step up our collective contribution to relevant international institutions including the World Food Programme (WFP), in parallel with Multilateral Development Banks and International Financial Institutions, to provide support to countries with acute food insecurity. We call for an extraordinary session of the Council of the Food and Agriculture Organization (FAO) to address the consequences on world food security and agriculture arising from the Russian aggression against Ukraine. We call on all participants of the Agriculture Markets Information System (AMIS) to continue to share information and explore options to keep prices under control, including making stocks available, in particular to the WFP. We will avoid export bans and other trade-restrictive measures, maintain open and transparent markets, and call on others to do likewise, consistent with World Trade Organization (WTO) rules, including WTO notification requirements.’”).
The issue is taking center stage at the WTO as reviewed in a recent press notice from the WTO on the Director-General’s comments at an informal meeting of the General Council. Some of the news release is copied below.
“’For dozens of poor countries and tens of millions of people, basic food security is in danger,” she warned. “These countries already have been some of the slowest economic recoveries from the pandemic, and international cooperation on trade is necessary to help mitigate risks of poverty, hunger, even famine and social unrest.’
“The Director-General noted that the UN Secretary-General has set up a three-tiered steering committee involving heads of government, heads of international organizations and technical experts to deal with the issue of surging energy and food prices.
“The WTO is also expected to play a key role in finding solutions to the food crisis, the Director-General noted. The chair of the WTO’s agriculture negotiations, Ambassador Gloria Abraham Peralta of Costa Rica, is planning a food security conference that will take place at the end of April. WTO Secretariat staff have also been carrying out analysis on food security issues which will be shared with members shortly.
“’We at the WTO have a solid basis on which to consider workable solutions to the present crisis,” the DG declared.
“In the near-term, international cooperation on trade will be needed to minimize the impact of supply crunches for key commodities where prices are already high by historical standards and to keep markets functioning smoothly, the Director-General said. While only 12 members have imposed export restrictions on food to date, coordinated government action is needed to avoid a repeat of the cascading export restrictions that exacerbated the rise of food prices in the crisis of 2008-2010.
“In addition, countries with buffer stocks that can afford to share could coordinate the release of wheat, barley, other cereals and grains and oils into international markets, thereby alleviating the supply squeeze. Countries such as the United States, Canada, Australia, Argentina, and France could increase wheat cultivation while others such as China, Germany, Morocco, Saudi Arabia, Egypt, and Nigeria could increase global supply of fertilizer. Africa, with plentiful land and other resources, can also take steps to produce more food itself by using more adaptable varieties of wheat, maize and other crops.
“Trade facilitation measures could also be brought into play to ease the free flow of goods, while efforts should be made to allow the UN’s World Food Programme full access to humanitarian purchases. Prompt notification and information sharing regarding food supplies and stockpiles can help the international community better manage the situation and keep markets functioning more smoothly.”
WTO Members have a poor track record of not retreating from sharing core commodities during periods of shortages, which actions result in increased price volatility and significant harm to food importing nations. The transparency exercise as part of the COVID-19 pandemic on actions on both medical goods and agricultural products has improved the ability to understand actions being taken. But to date, Members continue to take actions to restrict exports when internal food security concerns arise.
I have written with former colleagues a number of papers in the past looking at the food security problems during earlier periods in the last fifteen years and the risks of social unrest that arise for many countries when core commodities become unaffordable. They are imbedded below.
Let’s hope that the focus of the G-7, EU and agricultural exporting countries and the attention being given to the issue at the WTO will result in a minimization of increased food insecurity to people around the world in the coming months.
Terence Stewart, former Managing Partner, Law Offices of Stewart and Stewart, and author of the blog, Current Thoughts on Trade.
To read the full commentary from Current Thoughts on Trade, please click here.