E Economics

Global Food Prices Spike Could Lead To Social Unrests In Several Emerging Countries

22 March, 2022
Food Prices

The spike of food production costs and export restrictions linked to Russia’s invasion in Ukraine are creating more upward pressures on global food prices at the worst time. Populations were already contending with global food prices at record high in February because of supply disruptions linked to Covid-19 and adverse weather conditions altering crops in several regions. In this context, food security has been recently cited by several countries as a means to ban or restrict exports of key staples, thereby aggravating the situation. In the meantime, most of EM currencies have fallen against the dollar, further raising food prices in developing economies. Therefore, several countries are on track to experience a bigger food prices surge than during the 2011 “Arab Spring”, and this could potentially result in social unrests and even revolts.

Rising food production costs and restrictions linked to Ukraine invasion will push food prices higher

Russia’s invasion of Ukraine had significant consequences. Ukraine has already banned exports of some agricultural commodities and introduced licenses for its key export goods namely wheat, corn and sunflower oil. In the meantime, Russia will suspend exports of wheat, meslin, rye, barley and corn to the Eurasian Economic Union (EEU) until Aug 31 in a move to secure its home market with enough food, the economy ministry said on March 10. These moves have resulted in a spike of grain prices worldwide, especially wheat. The fact is that, according to the FT (citing UN Comtrade data), together, Ukraine and Russia account for a quarter of globally traded “wheat & meslin”.

Meanwhile, sanctions on Russia and Belarus from Western countries coupled with counter-sanctions have also resulted in a spike of food production costs such as fuel and fertilizers. They represent more than 20% of costs to produce most of cereals in the U.S.

Oil’s surge has sent diesel futures in Europe and the U.S. to an all-time high. Rising fuel costs will raise bills for farmers who have to run machineries. In addition, prices for fertilizers, used to grow practically all crops, have skyrocketed partly reflecting the rebound of natural gas prices (a key ingredient to make nitrogen-based fertilizers). Moreover, Russia, the 2nd biggest producer of Nitrogen and Potash and the 4th biggest producer of Phosphate (according to the March U.S. Geological Survey) is seeking to end fertilizer exports. Ukraine has also banned exports of fertilizers given the Russian invasion, the agriculture ministry said on March 12. Lastly, the European Union has approved new sanctions against Belarus designed to close loopholes and end carve-outs on potash exports. In this context, the Green Markets North American Fertilizer Price Index hit a new record high this month.

These developments suggest that global food prices will keep rising in the short term despite they already hit a record high last month.

Populations were already contending with global food prices at record high

The spike of food production costs and export restrictions linked to Russia’s invasion in Ukraine couldn’t come at a worst time. Populations were already contending with global food prices at record high in February in a context of supply disruptions linked to Covid-19 and adverse weather conditions altering crops in several regions.

The Food and Agriculture Organization’s (FAO) food price index, which tracks the most globally traded food commodities, averaged 140.7 points last month (a record high and up 20.7% YoY).

According to several studies, “COVID-19 resulted in the movement restrictions of workers, changes in demand of consumers, closure of food production facilities, restricted food trade policies, and financial pressures in food supply chain“. However, one year later, food demand recovered quickly while supply took more time to adapt, supporting prices.

This trend was amplified by adverse weather conditions in major agricultural producing countries like Brazil, Argentina, the United States, Russia and Ukraine. More recently, Bloomberg highlighted that “stretches of North Africa’s grain belt suffer the worst drought in 30 years. Rain is scant in Morocco this growing season, with the amount of moisture since September at its lowest in at least three decades. Parts of Algeria and Tunisia also are dry, running the risk of smaller harvests that may boost reliance on foreign supply at a time of near-record food costs.

Elsewhere, Zerohedge noted “Abnormally dry to exceptional drought conditions are expected to persist across 60% of the continental U.S. as spring in the Northern Hemisphere begins. Forecasters expect little to no rain for certain parts of the western U.S. through June. From April to June, above-average temperatures are expected from Southwest to the East Coast and north through the Midwest, according to a new outlook published by the National Oceanic and Atmospheric Administration (NOAA). NOAA’s map shows a greater than 50% chance of drought persistence for nearly 60% of the continental U.S.

Finally, the condition of China’s winter wheat crop could be the “worst in history,” the agriculture minister said in early March, raising concerns about grain supplies in the world’s biggest wheat consumer.

Food securitiy has been recently cited by several countries to ban or restrict exports of key staples

In this context, since late February, governments around the world have taken steps to safeguard domestic food supplies, thereby aggravating the situation.

In early March, the Telegraph reported “Hungary announced it would ban all grain exports to insulate itself from market volatility, while Bulgaria – another significant wheat exporter – said it would purchase at least half of three million tonnes of wheat still in the country’s silos.Moldova, albeit a small shipper, decided to suspend wheat and sugar exports from March 1 until April 24.

In the middle East, Turkey has imposed temporary export bans on select agricultural products to stabilize local market conditions and keep prices from running higher. In the meantime, Egypt banned the export of key staples, including flour, lentils and wheat.

Elsewhere, Argentina has halted registration of export sales of soy oil and meal.

Emerging countries are on track to experience a bigger food prices surge than during the 2011 “Arab Spring

In a context where the Fed started tightening its policy, most of EM currencies have fallen against the dollar, further raising food prices in developing economies.

The case of Turkey is interesting given that its current-account deficit has been amplified by the sharp rise of both oil and wheat prices, leading to further depreciation of the Turkish Lira.

Several countries were also vulnerable to the spike of wheat prices such as Egypt. On Monday, Egypt hiked its benchmark interest rate for the first time since 2017 in a surprise meeting and let its currency weaken sharply.

Other several countries are also on track to experience a bigger food prices surge than during the 2011 “Arab Spring”, and this could potentially result in social unrests and even revolts.