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Food Security and the Coming Storm

Eurasia Group and DevryBV Sustainable Strategies
23 May 2022
 

Executive summary

Over the last three months, Russia's invasion of Ukraine has shocked agricultural markets, bringing the problems of high food inflation and rising global hunger starkly into relief. Prior to the war, levels of hunger had already surpassed all previous records in 2021, with close to 193 million people acutely food insecure and in need of urgent assistance across 53 countries and territories. Against the backdrop of Covid-19, the conflict and countries' responses to it are now pushing global food prices even higher, along with the risk of growing poverty, hunger, and malnutrition. These developments could trigger what UN Secretary General Antonio Guterres has called a “hurricane of hunger,” with the extent and severity of the storm significantly dependent on developments in the Ukraine conflict.

Over the next three months, Eurasia Group believes the war will degenerate into a prolonged stalemate (a 70% probability). Alternatively, diplomatic efforts could yield a climbdown (a 5% probability), or there may be an escalation of the conflict into a scorched earth campaign (a 25% probability). Both the basecase of stalemate and the escalation scenario would entail serious damage to Ukrainian infrastructure and agricultural production as well as a blockage of Ukrainian exports through the Black Sea until late 2022 or beyond.

On the basis of these scenarios, Gro Intelligence has estimated the income-implied number of people globally who are food insecure, at risk of extreme poverty, and hanging on the edge of famine, according to World Bank and World Food Programme (WFP) definitions. When paired with Eurasia Group's scenario probabilities, the analysis suggests there is a 95% chance that the number of people facing food insecurity will rise by about 142 million-243 million by November, from roughly 1.6 billion in mid-May.

The number of people living in extreme poverty—on less than $2.29 per day—could increase by 103 million-201 million from just under 1.1 billion at present. Lastly, the number of people on the brink of famine, or those who face the greatest degree of deprivation, could increase by 3.5 million-6.9 million, from about 49 million. Even in the most optimistic scenario of a near-term cease-fire in Ukraine, Gro Intelligence would expect those at risk to decline only modestly over the next five months.

The war is already affecting food commodities in a number of ways, and this report highlights several key channels of transmission. The first channel is through reduced exports from the Black Sea region. Russia and Ukraine combined produce 14% of global wheat supplies and 29% of all wheat exports. The two countries account for 14% of worldwide barley production and one-third of global barley exports. They also contribute 17% of world corn exports. In addition, Russia and Ukraine are pivotal to vegetable oil markets, which have faced tight supplies for close to two years. Nearly 80% of all sunflower oil exports come from the Black Sea region.

The war has damaged producing areas in the east and south of Ukraine. Spring planting appears to be proceeding better than expected, but a reintensification of the conflict could put even the country's reduced exports at greater risk. Ukraine's Black Sea ports are blockaded by the Russian navy, preventing seaborne exports to regions such as the Levant and North Africa, and overland transport "over the country's western border is insufficient to clear the inventories building in its storage facilities.

Compounding the problem, a combination of policy measures, such as export restrictions, sanctions, and countersanctions, are impeding food and fertilizer sales from Russia and Belarus.

The second channel is via chemical fertilizer prices and availability. Russia is the world's largest exporter of nitrogenous fertilizers, the most widely used fertilizer type. And Russia and Belarus are major exporters of potash, the main source of potassium-based fertilizers. Since the onset of the pandemic, world fertilizer prices have risen by more than 230%, according to the IMF's World Fertilizer Price Index, and for some types of fertilizer and components, prices have gone much higher. The war has exacerbated a preexisting fertilizer crunch, as the price of natural gas—a critical ingredient for nitrogenous fertilizers—has climbed to new highs, and EU sanctions on Belarusian potash exports have tightened.

The third channel is through steeper energy costs. Volatile energy prices can drive up food prices through higher costs for farmers and agricultural processes and by raising transportation and input costs for agricultural products. In Eurasia Group's basecase of prolonged stalemate, European governments are likely to face pressure to cut their dependence on Russian gas, as they have already moved to do for oil. Moscow might decide to retaliate by cutting Europe off from supplies of natural gas, as it has begun to do to Poland and Bulgaria. This could force leading European food producers to reduce energy supplies to the agricultural sector in order to guarantee sufficient gas for essential services.

The fourth channel is through shipping and logistics. Shipping conditions were already strained prior to the war, but the conflict has introduced new complications. Labor shortages, closures of Ukrainian hubs, and mounting concerns over maritime safety in the Black Sea region have all become major issues for shippers. Freight insurance premiums in the region have risen sharply, and many logistics companies have “self-sanctioned,” eschewing Russian cargoes for fear of reputational damage or inadvertently running afoul of Western sanctions that technically carve out food products but have still had a chilling effect on food trade.

These conflict-induced threats compound longstanding challenges to food systems associated with both excessive post-harvest losses and climate change and sustainability. The hunger hurricane will hit a global food system that stands on very shaky foundations. Rising average temperatures and the greater frequency of extreme weather events are increasingly threatening agricultural yields, especially in the 44% of the world's cultivated lands that are situated in areas already classified as drylands. Where prices do climb and growing conditions allow, farmers should respond with increased planting. However, the elevated prices of inputs will certainly dampen the production response in some parts of the world.

Another concern is that the current race to clear more land and plant more food will further delay the adoption of sustainable farming practices, potentially worsening future food prices. International cooperation will help, but there is a tension between addressing the current food crisis in the near term and achieving long- term resilience and productivity of global agriculture and curbing the sector's own emissions.

Higher prices and uncertainty over food supply have political implications. Emerging markets—especially those with large populations of urban poor—will bear the heaviest burden. Precarious food supplies and food inflation raise the risk of mass migration, social unrest, and resource-driven conflict, as well as the proliferation of malicious, non-state actors. To preempt threats, some countries are taking protectionist measures to secure domestic food supplies, which magnify global price shocks. At the time of writing, global grain and oilseed markets face renewed pressure from India's recent decision to severely limit its wheat exports and Indonesia's policy of banning palm oil shipments. If other leading food producers follow suit, the upward pressure on food prices will be greater and the humanitarian toll much worse.

Though the threat of hunger and malnutrition is widespread, some regions are at greater risk than others. Most countries in the Middle East and North Africa (MENA) are net food importers, and droughts are deepening their import needs. Yemen, Syria, Lebanon and the Levant, and Egypt and North Africa are likely to be hit hardest. In sub-Saharan Africa, rising food prices and other socioeconomic issues may also become contentious; Kenya, where national elections are to be held in August, will be a key watchpoint.

In Southeast Asia, Indonesia is most likely affected, given the country's reliance on wheat imports from Russia and Ukraine. In South Asia, political instability caused by food inflation and economic malaise are already rocking Sri Lanka and Pakistan. India also relies heavily on Russia and Ukraine for fertilizers, vegetable oils, and some other food commodities; and as noted, it has prioritized domestic needs over the imperative to keep food trade open.

In China, coronavirus outbreaks are undercutting domestic food production capability. This may force the government to ramp up imports and keep export volumes low, which could add upward pressure to global prices. Meanwhile, acute price pressures are causing political rumblings in Latin America, particularly in Central America and the Dominican Republic, which are large net importers of food and oil. High input costs and rising prices are also affecting big agricultural producers in South America, such as Brazil, and a number of countries are seeking to shield consumers to the greatest extent possible.

Amid the mounting signs of distress, a series of policies could help to minimize human suffering. However, most would require a considerable degree of international cooperation, which might be difficult to achieve in the current environment. These include a concerted effort to keep food trade open despite sanctions and other wartime considerations. Ensuring access to existing stocks and working with major producers to ease imbalances in global food trade will likewise be critical. Multilateral funding should be deployed as efficiently as possible, and in most serious situations, debt relief should be granted. Packages should also include targeted support for smallholder farmers. Efforts should also be made to control escalating fuel prices in the near term and reduce fossil-fuel dependence in the long run. Lastly, efforts to enhance market transparency and prevent future crises through long-term planning to improve the efficiency and resilience of food systems could help prevent the next potential hurricane of hunger.1
 
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