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How Has the Ukraine War Affected Global Food Supplies and Prices?

  Commodity prices rose across the board two weeks after Russian troops invaded Ukraine. The Bloomberg futures index posted its biggest weekly gain since 1960, rising 13%. Brent crude hit nearly $130 a barrel, its highest level in 10 years. Many fear that a drop in supplies of basic commodities such as oil, metals and agricultural products could negatively impact the global economy, which is still recovering from the pandemic. In particular, the impact of the war on food security and agriculture is becoming more and more apparent, not only adding huge costs to farmers, but consumers are also about to feel the impact.

  As each day the war went on, it became increasingly clear that the impact of the war on the agri-food industry was profound. Both Ukraine and Russia are global leaders in cereals and oil crops, as well as huge consumer markets for food. In 2020, Russia's oil production accounted for about 12% of the world's oil production, and natural gas production accounted for about 16% of the world's. Russia is the top wheat exporter, accounting for 17% of world wheat exports, while Ukraine supplies about 12% of global wheat exports and 13% of corn exports.

  In fact, nearly 90% of China's corn imports in 2019 came from Ukraine, falling to 29% in 2021. About 54% of Ukraine's barley exports are sent to China, accounting for 28% of China's barley imports, and it is the main source of China's barley imports.

  More than two weeks into the war, countries around the world have imposed the largest economic sanctions in human history, cut off major Russian banks from the SWIFT messaging system, and froze Russia's foreign exchange reserves. Commodity traders are reluctant to buy oil and other commodities from Russia because they may not be available on global markets, disrupting supply chains for some commodities. At the same time, suppliers in other parts of the world have failed to increase production enough to make up for the loss of production in Russia and Ukraine.

  Of course, agri-food companies operating in Ukraine are bearing the greatest burden, but the impact is also widespread, as many companies along the agri-food value chain have experienced or are about to experience the ripple effects of the war. While it is impossible to grasp the full picture, we believe that the global agri-food industry may be being impacted in six different ways, and the consequences. So how should the agri-food industry respond?

Multinationals operating in the Ukraine/Russia region face a dilemma

  Both the people of Ukraine and the companies operating in the country face an unimaginable crisis. For national and multinational food producers, it is impossible to predict what will happen on the ground even if the military conflict ceases, and concerns about local food supplies are a daily occurrence.

  For multinational food manufacturers and traders with operations in Russia, the situation is more complex, but on a different level. On the one hand, these companies are facing the effects of sanctions and the deteriorating economic situation; on the other hand, the demand for products from Russia or locally in Russia has increased due to a decrease in food imports.

  Therefore, the main consequence is the significant uncertainty and numerous obstacles for the business to do business, and the future is unclear.

  In response, many international food companies in Ukraine temporarily closed their operations, and others suspended exports to Russia. Production facilities in Ukraine are expected to reopen if the security situation allows, as food is a basic social need. But, especially for multinational companies, their future business in Ukraine and/or Russia is a real and thorny issue on the table.

  They will have to decide whether to continue operating in the region, reduce operations, or leave the market altogether. Their actions will depend on a variety of factors, including the development of the conflict and the security situation, the importance of the local market in terms of supply or demand, and reputational considerations. So far, more than 330 well-known companies have ceased operations and operations in Russia, including well-known food brands such as Coca-Cola, Kellogg, Kraft Heinz, Danone, McDonald's, Starbucks, Pepsi and Yum! multiple brands, etc.

Sanctions and disruption to trade flows create difficulties for importers and exporters

  The closure of Ukrainian ports and the security situation in the Black Sea are the main reasons for the logistical difficulties and a key challenge for many food and agricultural products companies that trade with their Ukrainian and Russian counterparts. Although food products are excluded from financial sanctions, importers and exporters may still have difficulty settling payments if trading partners cooperate with sanctioned Russian banks.

  So, the consequence is that the interruption of grain transportation leads to food supply problems in different regions, but governments may intervene in the market to ensure food supply within their own countries; especially African countries, they have about 40% of their wheat from Ukraine, and must take countermeasures .

  In response, agricultural importers will have to find alternative markets to source grains and vegetable oils. Exporters will find ways to continue trade, but due to increasingly difficult logistics, shipments to Russia and Ukraine will be diverted to other markets, potentially leading to oversupply elsewhere. Over time, exporters in the European region in particular may reduce their exports to Russia amid prolonged conflict and ongoing sanctions.

Global grain, oilseed and fertilizer prices are rising

  The agri-food sector entered 2022 on the back of higher commodity prices overall, with larger gains in grains, oil crops and fertilizers in particular. Various frictions in the global economy and supply chains have been disrupted by the epidemic, so the limited supply of goods is reflected in the form of rising prices. Meanwhile, major central banks around the world are pumping huge sums of money into their economies in response to the pandemic. In short, too much banknotes are overissued and too few commodities are available, so prices have risen sharply. Global commodity prices have risen more than 60% since the start of 2021, according to the Bloomberg Commodity Index.

  In addition, as the sanctions on Belarus and Russia have a large impact on the fertilizer supply chain, input costs for farmers are also increasing. At this time last year, fertilizer was about $300 a ton; today, it's $1,100 a ton.

  At present, the country that is suffering from the problem of fertilizer supply is Brazil, because nearly 84% of the fertilizers in this big agricultural country are imported, while Russia is the main source of Brazil's imported fertilizers, accounting for 22%, with a total of 9.27 million tons. After Russia invaded Ukraine, fertilizer exports took a nosedive and could be suspended altogether.

  The Black Sea region is critical for the supply of grains, oil crops and fertilizers, and the war and disruptions to logistics have also pushed up the price of food from non-Russian or Ukrainian origins. Combined, these factors make forecasting future crop prices very difficult and will lead to greater market volatility. This is not good news for farmers around the world, and the level of benefit and risk has increased.

  Therefore, further increases in the prices of grains, vegetable oils and fertilizers have led to further increases in costs in the food supply chain. Buying decisions are further complicated by heightened market volatility.

  Due to their heavy reliance on grains and vegetable oils, the impact of higher prices will be felt early on by the feed industry, the bakery industry, the brewing industry and processors of vegetable oil products. In response, these agri-food companies have little choice but to pay higher prices and try to pass them on to their customers. Given the low profit margins in the food processing industry, passing on costs will be necessary. However, doing so may also be difficult, as food companies have been doing for the past few months. In some cases, companies will seek to adjust product formulations to maintain yields, possibly by using different vegetable oil feedstocks, such as palm oil instead of sunflower oil.

Trade disruptions lead to additional demand for other crop-producing regions

  When it comes to the impact of war conflicts, it is clear that it has mainly had a negative impact on agricultural cultivation and food production. What Ukrainian farmers have to worry about now are the guns of the Russian army, and they are afraid to continue farming; even if they want to prepare for this year's planting season, they are not receiving seeds. According to local agricultural information in Ukraine, the corn seeds ordered and paid for a few weeks ago have not yet been shipped. This year's crop decline in Ukraine is a foregone conclusion, creating huge uncertainty in the corn and vegetable oil markets in particular.

  This week, Ukraine announced another ban on exports of wheat, corn, sunflower oil, oats, rye, barley, sugar and cattle. Immediately, the U.S. Department of Agriculture projected a decrease of 3 million tons to 32 million tons of Russian wheat exports in the "Global and Domestic Supply and Demand Report", and lowered its global wheat export forecast for 2021/2022 by 3.6 million tons to 203.1 million tons. It should be noted that this represents only a preliminary assessment of the short-term impact of Russian military operations in Ukraine.

  This will lead to more demand and higher prices for crops from other food-producing regions. For example, Asian palm oil, North American and Australian wheat are receiving last-minute rush orders. It seems reasonable to assume that during the 2022-2023 planting season, farmers and producers around the world will certainly find ways to increase yields and provide additional options for declining food supplies.

  However, supplies from other producing regions are unlikely to rise immediately and certainly not fully replace the high-yielding crops in Russia and Ukraine. Rising fertilizer costs and limited availability pose downside risks to farmers, and North American grain-producing regions will depend on the weather this year. Because, last year, western Canada and parts of the United States suffered severe droughts, which damaged crop yields and even lost crops on some farms.

The shock of the war would spread down to all agri-food businesses through soaring energy bills

  Rising energy prices are an indirect effect, especially in relation to European agri-food businesses. According to data from the Netherlands in 2019, on average, energy costs account for 1-3% of the total cost of food manufacturing, with industrial bakeries and flour mills having relatively high energy costs. Energy prices have been on the rise since 2019, giving us reason to think that the current energy cost ratio will be higher. On top of that, higher energy prices will also filter through to food manufacturers through increased fuel costs and purchase prices, as they buy a relatively large share of ingredients from energy-intensive industries such as agriculture and packaging.

  As a result, rising energy prices have put more cost pressures on agricultural and food businesses, including those that rely on heavy-duty agricultural machinery to operate, increasing the risk of farm operations. This means that farmers will have to provide more capital up front at a time of many uncertainties.

  In the short term, agri-food companies will try to pass on high energy costs. For companies that are relatively dependent on natural gas, prepare for a scenario in which Russia's energy supply is cut off. Soaring energy prices could eventually make investing in energy efficiency more attractive and spur companies to switch from traditional energy-powered production processes to other sources of energy. It will also depend on whether governments adopt more supportive policies and subsidies, but that's a bigger issue.

Deteriorating macroeconomic outlook could drag on agri-food sector growth

  Given the uncertainty of the situation, it is too early to make concrete figures on the impact of the Ukraine war on key economic indicators. This is a huge concern not only for Europe, but for the whole world. So, the main consequence is that in the countries and regions most affected by the conflict, slower economic growth could have a negative impact on household consumption.

  For some agri-food companies, that could be a reason to reassess forecasts for this year. For agri-food investors, this could be an opportunity to double down on growth in less negatively impacted countries after two years of the pandemic and ongoing war.

  The prices of food, fertilizer and fuel, on which farmers depend most, are all at record highs, and no one can predict whether the upcoming planting season in the northern hemisphere will be good or bad. More importantly, we are still not free from the plagues and lockdowns of the pandemic, supply chain challenges, reduced workforces, and disrupted shipping; if this continues for longer, what will happen in the future?

  The course of the war in Ukraine is currently unpredictable and will naturally affect future prices of commodities. The longer the war lasts, the greater the impact on the supply of commodities. It should be noted that severing the Russian economy from the rest of the world could affect not only Russia, but also businesses and consumers that depend on the Russian economy. For example, countries like Germany rely heavily on energy supplies from Russia, which is why the European Union has not yet banned Russia from exporting crude oil and natural gas. It is not only the Ukrainians who are traumatized by the war, it is not only the Russians who are severely sanctioned, all ordinary people in other countries in the world are following Putin to suffer!

  The increased costs will be passed on first to farmers, then to food manufacturers, but ultimately to consumers around the world, touching the wallets of each of us and every household. Consumers should see at least another 5% to 7% rise in food prices over the next six months, which is still a conservative estimate. Meanwhile, as the global economy struggles to recover while prices continue to rise, analysts are warning that we may be heading for the risk of a "stagflation recession" marked by high price inflation and low growth.