The triple threat of food, fuel and finance - focus on food crisis

Global hunger 

Source: https://www.actionagainsthunger.org/world-hunger-facts-statistics

What could have led to this food crisis that we faced right now?  Let us take first take a look at World bank's Food Security update on 29 July 2022. (Souce: https://www.worldbank.org/en/topic/agriculture/brief/food-security-update)

July 29, 2022 – Record high food prices have triggered a global crisis that will drive millions more into extreme poverty, magnifying hunger and malnutrition, while threatening to erase hard-won gains in development. The war in Ukraine, supply chain disruptions, and the continued economic fallout of the COVID-19 pandemic are reversing years of development gains and pushing food prices to all-time highs. Rising food prices have a greater impact on people in low- and middle-income countries, since they spend a larger share of their income on food than people in high-income countries. This brief looks at rising food insecurity and World Bank responses to date.  

Overview

As of July 29, 2022, the Agricultural Price Index is 19% higher compared to January 2021. Maize and wheat prices are 16% and 22% higher, respectively, compared to January 2021, while rice prices are about 14% lower. (See “pink sheet” data for agricultural commodity and food commodity prices indices, updated monthly.)

Domestic food price inflation remains high around the world. Information from between March and June 2022 shows high inflation in almost all low- and middle-income countries; 93.8% of low-income countries, 89.1% of lower-middle-income countries, and 89% of upper-middle-income countries have seen inflation levels above 5%, with many experiencing double-digit inflation. The share of high-income countries with high inflation has also increased sharply, with about 78.6% experiencing high food price inflation.

According to the World Bank’s April 2022 Commodity Markets Outlook, the war in Ukraine has altered global patterns of trade, production, and consumption of commodities in ways that will keep prices at historically high levels through the end of 2024 exacerbating food insecurity and inflation.

Food prices were already high before, and the war is driving food prices even higher. Commodities that have been most affected are wheat, maize, edible oils, and fertilizers. Global commodity markets face upside risks through the following channels: reduction in grain supplies, higher energy prices, higher fertilizer prices, and trade disruption due to shutting down of major ports. 

Over the coming months, a major challenge will be access to fertilizers which may impact food production across many crops in different regions. Russia and Belarus are major fertilizer exporters, accounting for 38% of potassic fertilizers, 17% of compound fertilizers, and 15% of nitrogenous fertilizers.

On April 13, 2022, the heads of the World Bank Group, International Monetary Fund, United Nations World Food Programme, and World Trade Organization released a joint statement calling on the international community for urgent action to address food insecurity, to keep trade open and support vulnerable countries, including by providing financing to meet the most urgent needs.

Following the start of the war in Ukraine, trade-related policies imposed by countries have surged. The global food crisis has been partially made worse by the growing number of food trade restrictions put in place by countries with a goal of increasing domestic supply and reducing prices. As of July 15, 18 countries have implemented 27 food export bans, and seven have implemented 11 export-limiting measures.

From the above article, we can deduce that the food crisis is the result of rising costs (inflation) and worsened by the Ukraine conflict as the world recovers from the Covid19 pandemic.

Russian-Ukraine Conflict

Timeline of Ukraine Conflict 2022

From the timeline above, we noted the build-up leading to the Russian-Ukraine conflict that started on 24th February 2022.  Following this, let us look to Ukraine.

Crop Calendar for Ukraine

Since the conflict that started on 24 Feb 2022, Russia has been on the receiving end of various global sanctions.  While the remaining Ukraine farmers continue to work in the fields, it is expected that the coming harvest (July till Nov) will be reduced due to the effects of:

• the war, 
• the lack of manpower (people left the towns or joined the fight), 
• export challenges (due to the Russian naval blockade) estimated over 20 million tons of grain are still stuck in the silos at the ports.
• the lack of fertilizer - which will affect the amount of yield from the current cropping.

The Visual Capitalist has put together a poster that provided a good overview of the situation of food and fertilizer shortage.

From Visual Capitalist that explained the food and fertilizer situation from the Ukraine conflict

Impact of fertilizers on world cropping

Source: https://gro-intelligence.com/insights/russia-ukraine-crisis-ignites-fertilizer-prices-at-critical-time-for-world-crops 

Markets are counting on bumper harvests in the upcoming North American season to help replenish dwindling global stocks of many commodities. But as US farmers get ready to begin sowing crops soon, they face sharply higher input costs. 

Fertilizer expenses in North Dakota, for example, are more than twice year-earlier levels. That’s expected to depress 2022 net profit per acre by 20% compared with last year for corn farmers in the southeast part of the state, while soybean farmers should see a 6% increase in net profit on a per-acre basis. 

Source: https://ourworldindata.org/fertilizers

Utilizing a range of long-term evaluations, spanning a total of 362 seasons of crop production, of crop yields and nutrient budgets across the world, Stewart et al. (2005) concluded that between 30-50 percent of yield increases could be attributed to synthetic fertilizer inputs (and typically even higher in the tropics)

Using the assumption of synthetic fertilizers contribute 30% to 50% of the yield.  If we are to remove the 40% in terms of Russia's contribution, this works out to an estimated drop of 10% to 22% in terms of harvest yield.  We will need to factor in other components of fuel costs, supply chain costs and the situation in Ukraine.  

Summary

As the world's economy was handicapped by Covid19, this led to inflation that affected the costs of all things, including grain.  With most countries printing money as their way out to avoid a Covid-led economic collapse, they are now hit by inflation from the printing.  As prices surge, the disposable income for households (especially from developing countries) has shrunk. This has caused food items to be more expensive.  When the war broke out, fertilizer export from Ukraine which accounted for over 40% of the world's fertilizers was stopped.  With the sanctions applied, Russian fertilizers could not be sold.  This would lead to a greatly reduced yield from the current cropping.

With the above, the supply chain challenges have added a financial burden, partly accelerated by the fuel crisis.  In cases like Singapore, the need to import eggs from Eastern Europe can be viewed as both a procurement feat and should raise concerns pertaining to issues of regional supplies.  In fact, it does point to the food supply challenges that we have in our region.  

News article where UN warns of food, fuel and financial crisis.  

Source above dated 13 June 2022: https://www.aa.com.tr/en/politics/un-rights-chief-warns-of-global-food-fuel-financial-crises/2612403

Be it heatwaves, flash floods, earthquakes or storms, these weather extremities and natural disasters can have an impact on the yield of the crops.  In a world where the developed countries could outbid these grains, it is not surprising that the developing countries suffered greatly, especially when food can easily amount to a significant portion of their disposable income.  This will leave them facing the triple threats of fuel, food and financial crisis.

When the crisis hit, it will affect the lower income families & countries first.  The impact is not the same towards the different income demographics and there are risks of these boiling over to domestic chaos.  When the basic human need of food is not met, the people can turn to drastic actions.  Will this be another Arab Spring?

some agricultural ETFs

With this, this does point to my investing interest towards the demand of food and its supporting ecosystem.  There are some agriculture ETFs that we can consider as we look into this.  As always, let us research before we invest.