Russia’s war against Ukraine has affected food prices directly via supply disruptions and indirectly via surging fertilizer prices.
Global food supply disruptions
Russia’s invasion of Ukraine continues to send shockwaves through global markets and put increasing inflationary pressure on the entire agricultural industry. Food prices are directly affected by disrupted supply from Ukraine and import restrictions for Russian goods in many markets. According to IHS Markit, Ukraine (4%) and Russia (3%) hold key positions in global food markets and together were responsible for around 21% of global wheat exports in 2021. Other agricultural crops of Ukrainian exports affected by war include rapeseed (15%), corn (14%), barley (14%), buckwheat (5%), rye (5%), sunflower seeds (3%).
Following the inflation and food crisis, there are several discussions on how to export or move the Ukrainian grain, and other cargo. There has been a significant increase in shipments from Danube River ports in Ukraine and Romania. However, most of the shipments are done by small ships less than 10,000 dwt, therefore the total volume is too small to offset the loss of seaborne trade, at least for now. Combined capacity of dry bulk and general cargo ship departures from Ukraine has decreased by 92% from year-ago level (10 million deadweight) to below 1 million deadweight tons.
Moreover, transporting Ukraine’s agricultural products by rail to ports in Romania is costly and time consuming. The railway border crossings have limited capacity for rail wheel replacement, as Ukraine rail (1,520 mm gauge) infrastructure links to Russia rather than Romania (1,435 mm gauge).
Recent news about building temporary silos on the borders with Ukraine to use inland transportation more efficiently can solve this problem. However, it will take months to procure equipment, move it into place, construct, and make it operational. Therefore, IHS Markit estimates that the grain volume from the Black Sea region during this season starting from the Q3 will be fairly limited and the shortage of world grain, especially wheat, will continue in the near term.
Overall, the Ukrainian food supply chain issue will remain the main upside risk to food inflation in the coming months even with significant increase in shipments from Danube ports, as far as total volume is too small to offset the loss of sea fright from Ukraine.
World fertilizer price hikes
IHS Markit experts also expect that food prices will face additional inflationary pressure from rising fertilizer prices. In the first month after the invasion, fertilizer prices increased on average by 40% compared to their pre-war levels. While this illustrates the dependency of global markets on Russian supply, it is important to highlight that the war only adds to a series of events, which led to a surge in fertilizer prices over the past two years.
The fertilizer prices have experienced an upward trend since the beginning of 2021, which has been fueled by rising input prices (gas for ammonia production), supply chain disruptions (natural disasters, COVID-19 pandemic), and trade policy.
The latter is of particular interest as it showcases the high degree of uncertainty already present in fertilizer markets before the war. In early 2021, the United States imposed countervailing duties on excessively subsidized Russian and Moroccan phosphate imports. Over the course of 2021, China and Russia then imposed bans on their own fertilizer exports to ensure sufficient supply in domestic markets, which put additional pressure on global fertilizer markets. Russia’s invasion of Ukraine, therefore, only added to an already strained market by increasing fertilizer input costs and inducing key destination markets such as the European Union and the United States to ban any imports of Russian fertilizers.
To conclude, this indirect price effect from fertilizers is even larger than food inflation as their scarce availability impedes global food production.