Implications of Russia’s invasion for global grain markets
Russian invasion of Ukraine has far-reaching consequences – politically, militarily and not least economically. But it is not only in these areas, in which the global community faces serious challenges. Global food security could also be at risk, as Ukraine and Russia are among the largest producers and exporters of grain.
Summary
Russia’s full-scale invasion of Ukraine on 24 February 2022 marks the beginning of a new phase in history. The military outcome of the invasion is unclear, but it is clear that it will have immense and lasting implications for politics, economics and business. Public discourse in Germany has so far focussed mainly on military issues such as the delivery of weapons, on sanctions, on energy markets, and the provision of humanitarian aid. While all of these interrelated issues are undeniably crucial, Russia’s invasion also has far-reaching and extremely threatening implications for agricultural markets and food security. Production and exports are affected in Ukraine and Russia in the short-term and global implications will be visible even under an optimistic scenario in the long-run.
Background
Between 1992 and 2002, Ukraine, Kazakhstan, and Russia combined for average annual net exports of 3 million tons (m t) of grain – a negligible amount. Between 2017 and 2021, however, their net exports exceeded 100 m t in each year. Since 2015, they have accounted for roughly 25% of global grain exports.
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This impressive export performance is the result of a major turn-around in their agriculture. Following the onset of transition in the early 1990s, grain production began to recover, slowly at first, and more rapidly in recent years. Yield increases have been largely driven by imported technology in the form of farm machinery, crop varieties, agronomic know-how and transportation infrastructure. This turn-around has enabled the region to generate substantial and growing export surpluses over the last decade. Looking back, the agricultural potential of one of the most fertile regions of the world is finally being tapped, after decades of Soviet mismanagement.
Effects of the invasion on production and exports
In the black soil regions of Ukraine and Russia, winter wheat was planted last fall; wheat acreage and potential production are therefore largely fixed. Overall, the crops are emerging in good condition as winter departs. However, the invasion will severely affect farm operations in Ukraine. Even if the wheat crop can be harvested, yield reductions of about one-third appear inevitable.
The situation for spring crops is worse. These crops have yet to be planted. Soil preparation and seeding of spring barley would usually begin in early March in the south of Ukraine and move north. The most important spring crop in Ukraine is corn, which is planted from early April into mid-May. Seed, fuel, labour – all essential inputs are missing, or it is currently impossible to bring them to the right places at the right times. It is therefore highly unlikely that Ukraine will be able to harvest anywhere near the 42 m t of corn that it harvested in 2021.
Altogether, in an optimistic assessment, Ukrainian wheat exports will likely fall from 24 to 16 m t, and coarse grain (largely corn) exports from 40 to 13 m t. In this case, Ukraine will export 29 m t of grain in 2022/23, compared with 64 m t in 2021/22.
In addition, a large share of Ukraine’s best cropland is located in eastern and southern oblasts, and all of Ukraine’s harbour cities are located along the Sea of Azov and the Black Sea coast. Some of these cities (e.g. Kherson, Mariupol) have seen heavy fighting. Hence, it is likely that grain terminals, harbour facilities and rail connections have been damaged there.
Russian grain production will probably not be affected, but Russia’s ability to export will, due to logistic restrictions and financial sanctions. As a result, the volume and timing of Russian grain exports will likely be affected.
Effects on world grain markets and hunger
Ukraine’s expected shortfall of 35 m t is only 7.6% of total global grain projected to be exported in 2021/22. On some markets a shortfall of 7.6% might not be grounds for concern. However, recall that this is an optimistic estimate of the possible shortfalls. Moreover, global demand for grain, as food for humans and feed for animals, is inelastic, meaning that small shifts in availability trigger large swings in prices. Since the invasion began, global grain prices have shot up to levels even higher than those seen during the so-called “food price crisis” of 2007/08. In high-income countries such as Germany, price increases for grain will contribute to food price inflation. However, Russia’s invasion of Ukraine does not pose any fundamental threat to food security there. It is likely that the governments of many high-income countries will respond by implementing social policy measures such as increased welfare payments and minimum cost-of-living allowances.
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The situation in low-income countries is much worse. Food price inflation poses an existential threat to the health and survival of hundreds of millions in these countries. Households that already spend 50% and more of their income on food have little scope to reduce other types of expenditure when food prices increase, and that ‘other’ expenditure is generally for other essentials such as housing, health care and education.
The global food security situation was already dire before Russia invaded Ukraine. After years of frustratingly slow but nonetheless steady reductions in both the number and the share of undernourished people worldwide, progress had slowed and halted in the mid-2010s, and reversed in 2020 and 2021 primarily due to COVID-19. Between 2017 and 2021, the number of undernourished persons worldwide increased by 200 million.
While hunger and food insecurity have been on the rise again in recent years, global grain stocks are currently at near historically low levels. Stocks play an important role on commodity markets. When grain stocks are low, markets get nervous and prices rise – the correlation is very strong.
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Hence, Russia’s invasion of Ukraine pours oil on a growing fire and threatens to trigger a major increase in hunger and malnutrition worldwide. The effects of the price hikes triggered by Russia’s invasion of Ukraine are already being felt in low-income, import-dependent countries in the Middle East, Northern and Sub-Saharan Africa and Southeast Asia. 17% of the world’s food insecure population live in countries where wheat is the main food grain; a further 27% live in countries where corn is the main food grain. In recent weeks countries have seen costs of importing wheat, corn and other grains increase by 50% and more compared with one year ago. The United Nations and various aid agencies are already sounding the alarm as the costs of providing food aid and food assistance skyrocket.
Conclusion and outlook
Global grain prices are high and will stay that way for the foreseeable future as markets adjust to the fact that considerably less grain than anticipated will be available following this year’s harvest, and probably for several years to come. The international community, and policymakers in the EU in particular, will need to increase global grain production, provide financial assistance to low-income countries, avoid export bans and reconsider the food vs. fuel debate. Beyond hoping for an immediate withdrawal of all Russian troops from Ukrainian territory, a coordinated humanitarian response is imperative to limit the food insecurity in Africa and Middle East exacerbated by Russia`s unjustified military invasion of Ukraine.
