As the war in Ukraine continues, concern over food and grain prices has been mounting. In 2019, Ukraine and Russia accounted for about 14% of world wheat production and 28% of world wheat exports.[1] Ukraine and Russia are also major producers and exporters of corn, barley, and sunflower oil. If farmers located in and around Ukraine are unable to plant their spring crops (or harvest and ship exports), this will create a major shock to world grain exports. Simultaneously, global fertilizer production is down, and energy prices are high. All these factors affect the food supply chain.
To understand the potential impacts of these shocks on food supply and prices, let us first consider how markets respond to regional supply shocks. When the supply of a grain, such as wheat, suddenly shifts inward in a major exporting region like Ukraine and Russia, the price of wheat increases. (Wheat futures prices jumped up shortly after the conflict in Ukraine began and have remained high relative to historic averages). When the price of wheat increases, typically farmers in other regions of the world increase their production of wheat. They might plant wheat on more marginal land or substitute wheat for production of lower-value crops. For example, the Indian Minister of Commerce and Industry expressed intentions to increase wheat exports from 7MMT in 2020/21 to 10MMT in 2021/22.[2] Additional production of wheat in other regions of the world helps stabilize global wheat prices by bringing prices back down.
Nevertheless, some conditions may impede production of additional wheat, and other grains, in other regions of the world. For example, the Western United States is currently facing drought conditions which will limit yields. Similarly, drought conditions in South America limit production of corn and soy, and typhoons in Malaysia impede palm oil production.[3] Limited fertilizer supply might also impede production. Supply chain bottlenecks from the pandemic placed global fertilizer production behind schedule at the beginning of 2022. Furthermore, Russia and Belarus are important suppliers of key ingredients for the global fertilizer market.[4] An inward supply shock to fertilizer might not only increase agricultural production costs, but there might also be reduced fertilizer application and hence reduced yields. Rising gas and oil prices increase costs all along the food supply chain, translating to higher prices for consumers.
Consumers also respond to prices, and if more affordable substitutes are available, consumers typically demand less of the good as its price increases relative to substitutes. This also helps stabilize prices. Increased energy prices affect the costs of producing and transporting all goods in the market, so consumer substitution can play a limited role in adjusting to increased energy prices. Furthermore, in some regions of the world, there might not be a more affordable substitute for imported grains that are experiencing a major supply shock. The International Food Policy Research Institute (IFPRI) predicts that demand for wheat will increase in Yemen because it might be the most affordable staple food item for food insecure households.[5] (Economists call this a Giffen good because quantity demanded increases as the relative price of the good increases).
As food prices rise, markets are generally efficient at adjusting production toward higher priced commodities, and this can help stabilize prices. However, markets do not necessarily distribute goods in an equitable manner. Inflation is often called a tax on the poor because it captures a larger share of poor household’s total income. If food prices continue to rise, we need to become more aware of the needs of our most vulnerable neighbors, both locally and globally. The United States is a net exporter of agriculture, which will be an advantage if global food production is down in 2022. However, U.S. consumers are still subject to global food prices. Globally, we need to be aware of countries that rely on food imports, particularly from Russia and Ukraine, but might have poor access to food exports from other countries. It is challenging to accurately identify food-insecure households and efficiently redistribute food to them without impeding market forces that help stabilize food prices and incentivize production. Within our own communities, our neighbors might be severely impacted by inflation, and Americans might be called upon to help their neighbors where government safety nets fail to.
[1] Smith, Vincent H. (March 2, 2022) “As Wheat Prices Keep Surging over Russia’s Invasion of Ukraine, Here’s How to Think about US Food Costs” American Enterprise Institute. https://www.aei.org/op-eds/as-wheat-prices-keep-surging-over-russias-invasion-of-ukraine-heres-how-to-think-about-u-s-food-costs/?mkt_tok=NDc1LVBCUS05NzEAAAGDhGYKb69C2s-jZRV3KLhHnlI1yEhP2jz7tC2zj9JgIfhDWDsSQSrVgwEn4BdRRGJzvdC_knLkCEw3RXrDUaFCjYCpY1QjL7F1zorJDe2_Ju56EbM Accessed April 4, 2022
[2] Brugler, Alan. (April 4, 2022) “Wheats Firming Back Up On Monday.” Barchart. https://www.barchart.com/story/news/7838545/wheats-firming-back-up-on-monday Accessed April 4, 2022
[3] Rice, Brendan, & Hernández, Manuel A. & Glauber, Joseph, & Voz, Rob. (March 30, 2022) “The Russia-Ukraine War is Exacerbating International Food Price Volatility” International Food Policy Research Institute https://www.ifpri.org/blog/russia-ukraine-war-exacerbating-international-food-price-volatility Accessed April 6, 2022
[4] Glauber, Joseph, & Laborde, David. (February 24, 2022) “How Will Russia’s Invasion of Ukraine Affect Global Food Security?” International Food Policy Research Institute. https://www.ifpri.org/blog/how-will-russias-invasion-ukraine-affect-global-food-security Accessed April 4, 2022
[5] Kurdi, Sikandra, & Breisinger, Clemens, & Glauber, Joseph, & Laborde, David (March 23, 2022) “The Russian Invasion of Ukraine Threatens to Further Exacerbate the Food Insecurity Emergency in Yemen” International Food Policy Research Institute. https://www.ifpri.org/blog/russian-invasion-ukraine-threatens-further-exacerbate-food-insecurity-emergency-yemen Accessed April 4, 2022
