The Russia-Ukraine War’s Impact on Food & Agri: What Oceania’s Food & Agri Chain Has To Plan For
Costs increases across the farming sector are expected in 2022 due to high fertilizer and energy prices.
Report summary
• Grain: The global grain supply has been heavily disrupted due to the limited exports out of Ukraine, as ports are closed and rail and road logistics can handle only a fraction of the typical export volume. Ukrainian grain crops and exports will see severe reductions in the upcoming 2022/23 season, keeping global supplies very tight and prices elevated. Russia has continued to export grain since starting the war and is expected to continue to export most of its grain to the world market, as importers need those volumes to ensure food security. Global grain prices, and with them global food prices, are expected to stay elevated throughout 2022 and likely beyond. Australian grain prices have not increased as much as those of export competitors in the US or the EU.
• Fertilizer: This is another key product exported from the Black Sea region, and elevated input prices will cut into farmer margins. Regions reliant on imports, like Oceania, have to plan for continued elevated prices and, potentially, even some supply shortages in 2022.
• Energy: Increases in crude oil and diesel prices resulting from the war add to costs in farming and the supply chain. With Europe likely to reduce Russian energy imports further with a ban on Russian oil imports by late 2022, and with Russia preparing legislation to disrupt commodity exports to countries that impose sanctions or supply Ukraine with weapons, we expect energy prices to stay volatile and high. While oil prices above USD 100/bbl already feel expensive, a further >50% price upside is possible as a consequence of those sanctions. Oceania’s food & agri chain will therefore feel a knock-on effect from global price volatility.
• Logistics: A system already stressed by Covid faces additional pressures from the war. Shipping costs also feel, and will continue to feel, the rise in energy prices. Container freight rates are significantly elevated, largely due to Covid-related disruptions, and it will likely take two or more years to unwind congestion around the world and for freight rates to move closer to historical levels. With respect to goods imported into Oceania, these costs will be passed on to consumers.
• Meat and dairy: Animal protein sectors are indirectly impacted through higher input costs from feed, fertilizers, and energy. Neither Russia nor Ukraine is a major importer or exporter of pork, beef, poultry, or dairy, so global trade flows of animal protein have not been disrupted anywhere close to the magnitude of grain trade disruptions. However, elevated costs will also be felt in Oceania’s livestock industry.
• Fresh produce and tree nuts: These sectors will largely feel indirect impacts from higher fertilizer and energy costs. Ukraine and neighboring Moldova are among the top ten global walnut exporters, and the war may somewhat impact this trade flow. Still, the knock-on effects on other tree nut exporters, like Australian almond producers, are likely rather small. Russia is among the world’s top ten fruit importers – with imports including bananas, citrus, stone fruits, and lemons – which could drive trade rerouting, the effects of which, as in the case of citrus, might also be felt by Australia.
• Sugar: The war has had limited immediate impact for sugar, as the Black Sea is a minor sugar-trading region. Furthermore, oil price rallies were not fully transmitted to Brazil’s gasoline prices, where they could impact millers’ decisions regarding the allocation of cane to the production of sugar or ethanol.
• The risks of a quick change: A quick end to the war, as much as we may wish for it, seems rather unlikely. Still, a resolution of the conflict would likely add price pressure in many markets, from energy to fertilizers and grains. Ukraine’s crop production and exports in 2022/23 have already suffered damage, but volumes, especially export volumes, would likely be better in the event of a quick resolution. Still, moving grain through partly damaged road and rail infrastructure to ports that are surrounded by mines would be difficult. A recovery of Ukraine close to its full production and export potential is likely only possible in future seasons. But as we have seen, prices react sharply and abruptly in the absence of Ukraine, and prices will probably do the same on its return. Unwinding sanctions on Russia and Belarus might take longer, and the pressure on oil, gas, and fertilizer prices may not abate as quickly and strongly as farmers wish.
