The “Breadbasket of Europe” jolted by acute food price inflation

The ongoing armed conflict between the Russian Federation and Ukraine has threatened the stability of the global economy, including an inflation in food prices. As per the US Department of Agriculture, Russia and Ukraine account for approximately 33% of the global wheat exports, about 20% of the global corn trade and about 80% of the global sunflower oil production. The volatility in food prices resulting from such conflicts are result of these dependencies.

This disruption to food supplies and the urgency to find an alternative source is likely to crush global supply chains, which are already struggling with increased demand and rising prices. As per the United Nations Comtrade database, Russia was the largest exporter of wheat in 2020, while Ukraine and Russian are the second and third largest exporters of barley during the same year. Depending on duration of the conflict, there could be a large inventory of wheat and other grains waiting to be shipped, which might cause an acute food price inflation. The ban on all commercial vessels in the conflict region near the Black Sea, coupled with the closure of Ukrainian ports is likely to disrupt majority of Ukrainian food exports. Ukraine is known as the “Breadbasket of Europe”, and there are also countries in Middle East and Africa which are dependent on the country for wheat. Due to this reason, the risk to food security is high and must be mitigated on priority.

Amid the search for substitutes to ensure food security, sanctions from the US and NATO allies will make it difficult for Russian exports to arrive at Western markets over the long-term. As per GlobalData, the market value for cereal crops in Russia increased steadily from around $13 billion in 2018 to about $19 billion in 2020, but the growth slowed down drastically thereafter. The market value for cereal crops in Russia is projected to further decline by about 7% in 2022.

A rise in energy prices could also have an adverse impact on food prices. For example, a rise in the price of natural gas will affect food prices if farmers cannot afford the increase in costs. This is because natural gas is a critical ingredient of fertilizer. If farmers cut usage due to the increased costs, it is likely to reduce crop quality and production. The pandemic-induced supply chain obstructions and labor scarcity had already caused significant inflation in food prices. This armed conflict between two major exporters ahead of the harvest season will heighten the adversity.

SOURCE: GLOBALDATA

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