FOOD CRISIS

Losing Wheat

A global food crisis is looming as climate change, war and supply chains cause prices of agricultural commodities to skyrocket

Wars, pandemics, droughts. These are not story lines from a dystopian sci-fi. 2022 has been a laborious year. The world, for the most part, is shielded from Covid19, but is still far from overcoming it. The new normal has caused mayhem in the energy, labour and semiconductors markets, amongst others, but food is quickly becoming the biggest challenge. The UN Food and Agriculture Organisation has warned that global food systems are on the brink of collapse. Major agricultural commodities such as wheat, oats, coffee, fertilisers and edible oils have seen huge price hikes in futures markets, which will force millions at the edge of starvation.

There are three key causes of the global food scarcity. Firstly, climate change. Brazil, the largest producer of soybeans in the world, will have one of the worst harvest seasons ever recorded this year. Two consecutive La Niña’s have caused extreme droughts in the region, severely affecting crop output. As a consequence, soybean output is expected to decline by 10%. Argentina, another major exporter, will see a similar fall too. Markets have reacted accordingly, sending prices up by 34% since December. An unusual drop in China’s demand, the largest importer, might weather the storm in the short-term. China processes most of its imported soybeans into animal feed, but demand has been falling as the pig population is still recovering from the 2018 African swine fever epidemic. High freight shipping rates driven by booming energy costs will further keep demand in check. Still, prices reached all time highs in April.

Droughts aren’t just affecting South America. Canada exports over half of the world’s oats. Last year, the country’s prairie provinces saw severe hot and dry conditions, which led to production dropping by nearly half to an 11-year low. In response, Canadian farmers are expected to increase the seeded area this season as demand for the sustainability-approved crop is strong, but expect the rising demand to be hampered in the short-term due to high prices and low stock.

Further east, in the horn of Africa, rising temperatures are stirring the coffee pot, harming one of the region’s most important export crops. Arabica beans, a tastier variety than robusta, are highly sensitive to temperature. Recent daytime temperatures have been threateningly high. It’s estimated by 2050, warmer temperatures will shrink the total area in which arabica beans grow by around half. Kenya’s government-funded Coffee Research Institute is trying to help farmers adapt by encouraging agroforestry, where trees are planted to shade the coffee bushes, or trying to breed new varieties. A recently discovered variety, coffea stenophylla, shows promise due to its similar taste to Arabica, combined with heat resistance. This small berry could help future-proof the $473bn a year crop against climate change.

The Russia-Ukraine conflict is further aggravating the food problem. Both countries account for 28% of wheat and 15% of corn shipments. But Russia has restricted wheat exports to feed its own people. And Ukraine ships most of its grains from ports like Odessa, which are currently mined and blockaded. Much of the previous season’s grain harvests sit in silos. Ukrainian farmers have nowhere to store the next harvest due to start in June, which may lead to grains rotting, further impacting prices. The UN Security Council met on the 19th of May to discuss how Ukrainian grains can access global markets. One option is to transport them via train. But a poor rail infrastructure means current inventories would take 18–24 months to clear. Expanding rail capacity would be challenging as investors would deem it too risky. The other option is to negotiate with Moscow for the safe passage of merchant ships transporting grains. Putin is unlikely to accept these terms however, as crippling the Ukrainian economy is in his interest. Other major producers Argentina, Australia and the EU have promised to collectively sell 17% more, but markets have remained unfazed. In the coming weeks it will be decided whether the port of Odessa will make or break global food markets.

Edible oils markets are also sizzling. Ukraine and Russia both account for three-quarters of global sunflower seed oil exports. War has caused shortages. In the UK, major supermarkets have rationed sales as shelves are practically empty. Crisp manufacturers have also been crunched by high bills, forcing many to either pass costs to consumers or change their recipes. Many Britons will be salty.

Businesses are rushing to secure alternatives. Palm oil is the usual suspect. It’s the highest producing, yielding, and consumed vegetable oil, and is commonly used for cooking, cosmetics and biofuels. Indonesia, which produces 61% of global supplies, temporarily restricted exports on April 28th in an attempt to tame the price at home. The ban is expected to end on May 23rd but prices are still up by 11% since February. Soaring bills will also complicate companies’ sustainability efforts. Palm oil has questionable origins. Businesses moving to other oils like rapeseed or coconut will struggle to buy from ethical sources as building environmentally responsible supply chains can take years. That would leave a greasy stain on their records.

Eastern Europe is also a critical supplier of fertilisers. Russia exports 14% of the world’s urea, a nitrogen-based fertiliser which makes up half of global fertiliser use. Urea is manufactured synthetically using natural gas. Moscow introduced quotas for nitrogen fertilisers in December to curb the domestic growth of food prices. The cap, alongside rising energy costs have tightened the market. One-fifth of potash, another key fertiliser, comes from Belarus. Most of it is shipped through Lithuania but Western sanctions have left their supplies stranded on the shores of Klaipeda. China, another major player, is the largest producer of phosphate, but Beijing has banned exports until June 2022 to ensure it can service its domestic market. Fertilisers are key to improving yields per hectare, which translate into low, stable crop prices. The cost of fertilisers already skyrocketed before the war due to rising energy and transportation costs. The impact will be felt in every agricultural region in the world.

Crumbling supply chains are the third cause of inflation. In labour markets, the reopening of the economy after covid has meant stronger competition for workers. On the supply side, the labour force is smaller than before the pandemic. As demand for goods and services have quickly grown, labour supply has not been able to keep up. Additionally, lower middle income countries like India and Indonesia are important commodity exporters. But Covid19 vaccination rates are only at an average 69 doses per 100 people, which makes them more liable to future disruptions across labour and transportation. In energy markets, brent crude oil and natural gas prices shot up by 62% and 157% respectively before February 2022. The war in Ukraine added fuel to the fire. Rising energy costs make shipping grains and manufacturing fertilisers more expensive. Unclogging the blocked supply chains will be game-changing.

Pay loads

The rising price of calories is shaking global economies. Developing countries will be hit especially hard. Tunisia and Bangladesh import about half their wheat from Eastern Europe. For Sudan, it’s most of it. In Sri Lanka, food and beverage expenditure makes up almost half of consumer’s spend. A plunging rupee, a ban on chemical fertilisers, and rising energy costs have made it unprofitable to sow crops. Farmers have been caught unprepared. Across the Arabian Sea, Egypt gets 80% of its wheat from Russia and Ukraine. The government has been forced to cap the price of bread to avoid another anarchic spring. On the other side of the Mediterranean, Lebanon imports most its wheat from Ukraine. The Levantine state is undergoing a severe economic crisis as the Lebanese pound took a dive after the government defaulted on its debt and Covid19 hit. The 2020 explosion in Beirut destroyed a grain elevator, depriving the country of its 15 tonnes of strategic grain reserves. The Lebanese people have been left with less money to buy pricier food.

The UN estimates 323m people are at risk of starvation in 2022, with 49m of those one step away from famine. It’s common to believe that people starve because there isn’t enough food to go around. But that certainly isn’t the case. Food shortages often come down to price and distribution — people either aren’t able to afford it, or cannot access it. In the near term, inflation will likely remain unchanged as the war in Ukraine ravages on, and supply chains remain clogged. Increasing food flow by lifting export bans, flooding global markets with Ukrainian grains, and providing financing relief for countries at-risk can alleviate markets. Until then, bringing bread to the table has rarely been more challenging.

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Jiten Chablani

Jiten Chablani

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Strategy consultant exploring economics, innovation and growth in business. Views are my own.