Food Prices Will Increase as the War in Ukraine Drags On

Both Russia and the United States must work to find a compromise solution and end the war in Ukraine. Meanwhile, programs to export food and fertilizer from Black Sea ports should be expanded to minimize the decline in quality of life, hunger, mass migration and deaths that the conflict will inevitably produce.

The war in Ukraine is having a devastating impact on global food production, distribution and access. Because of this, we must work to end it as soon as possible.

To minimize the damage from hunger and mass displacement already caused by the war, as well as the likely decline in quality of life, starvation, mass migration and death in the near future, international organizations such as the UN should expand programs to export food and fertilizer from Black Sea ports.

Even before the Russian invasion of Ukraine in February, food prices were rising due to supply chain issues related to Covid-19 and rising inflation, particularly in transport and fuel costs. Since January 2021, when the effects of the pandemic really took hold, the spot price for EU natural gas has increased by 970 percent. Gas flow from Russia remains restricted due to sanctions and other sources cannot be brought online quickly, suggesting higher prices are likely to persist for some time.

With natural gas accounting for 75 percent of the cost of ammonia — the cheapest and most effective fertilizer and the basis for more complex compounds — fertilizer prices have more than doubled. Many fertilizer factories around the world have reduced output or shut down due to high gas and electricity costs. The associated drop in supply will cause prices to continue to rise. Farmers must choose between passing the higher fertilizer costs on to consumers or using less, resulting in lower yields, less food, and therefore higher prices. Either way, food costs will increase.

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Food prices are now, even after adjusting for inflation, as shown in the chart below, significantly higher than at the height of the Arab Spring of 2011-13, when food shortages, political instability and war raged in the Middle East and North Africa (MENA). Hundreds of thousands dead and millions displaced internally or fleeing the region entirely.

Source: Food and Agriculture Organization

The recent UN program allowing some grain shipments across the Black Sea is positive and one of the reasons food prices have eased somewhat. However, with the program being limited and with only 185 shiploads to date 4.2 million tonnes, well below the 60 million tonnes typical for a season, food prices remain very high.

While an expansion of the UN program would go a long way towards tackling hunger, particularly in the MENA region, which has traditionally been a big buyer of Russian and Ukrainian grain, there are obstacles. First, European farmers have raised prices due to the sky-high input prices for electricity, natural gas and diesel they are facing. Because Ukraine has lower input prices and doesn’t have to pay for strict EU environmental regulations, the elimination of tariffs and quotas has allowed Ukraine to undercut European farmers. The obvious solution is to channel more grain into the MENA, not the EU. Lower food prices would help everyone in Europe and harm only a small group, farmers. This could be politically attractive to some executives.

Russia has complained that only a small percentage of exports went to intended MENA customers and too much to “unfriendly” countries like those in the EU. Without progress in negotiations with NATO, Russia could end the program. A better idea would be to send more grain to the MENA region.

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Source: United Nations

The United States has condemned Turkey’s support for Azerbaijan in the conflict with Armenia. Ankara, meanwhile, has expressed dismay at US pressure to comply with the sanctions line against Russia, which is a source of significant trade and tourism revenue. In a possible limited concession, two major Turkish banks have stopped processing Russia’s Mir credit cards. Washington would be wise to negotiate an agreement acceptable to both sides. Otherwise, Turkey could scale back or end the UN program, preferring to maintain significant economic ties with Russia and political support for Azerbaijan.

EU leaders would choose the most logical course of action if they worked towards an end to the conflict. Otherwise, Europeans will pay much higher prices for food, in addition to massive increases in gas and electricity costs, which will lead to falling living standards and, in some cases, death. Riots and large-scale riots are possible. Europe should also expect a new influx of refugees from MENA, perhaps even more than during the Arab Spring, in addition to the six million Ukrainian refugees it is currently hosting. European leaders must persuade the United States not to further fuel the conflict, difficult as that may be.

The United States has plenty of natural gas, which means prices for electricity, fertilizer, and food will be lower than in Europe. But inflation is likely to be high nonetheless, although it remains to be seen whether higher prices will generate strong public opposition to US policy towards Russia.

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Neither Europe nor the United States is moving urgently enough towards an end to the conflict. The EU’s top foreign policy leader said back in April that the war “must be won on the battlefield” and urged more arms and money to be poured into the conflict. In Washington, the White House and Congress are primarily focused on increasing military and other aid to Ukraine, rather than finding a way to end the war.

The UN also has to work harder to negotiate an end to the fighting. Although there was talk of ending the war at last week’s General Assembly, little action was taken. But ending this conflict and increasing exports of food, fuel and fertilizer from the Black Sea is entirely consistent with the UN’s mission.

Many Western politicians seem to believe that the pain is worth it because the war in Ukraine represents a legitimate struggle for fundamental rights, democracy and freedom. But most people in Europe and around the world would certainly prefer not to starve or freeze to death than lofty political ideals. “Who controls the food supply controls the people,” Henry Kissinger famously joked. Using food as a weapon, especially against third parties not involved in the conflict, is particularly cruel and immoral.

Scott Semet has worked in the global financial markets across the spectrum of financial services, private equity and venture capital for over 25 years, including building and leading the research department of major financial institutions. Recently he has focused on the intersection of business, economics and politics in Eurasia. He holds an MA from Yale University Graduate School and an MBA from Columbia Business School.

Image: Reuters.