One of the consequences of the war waged in Ukraine by Russia is the increase in the prices of some agricultural raw materials, primarily wheat. The reason for the rise in prices is clear when one considers the importance of Ukraine and Russia as exporters of food and other commodities. Sunflower oil and cereals (maize, wheat and barley) were the most affected from an agricultural point of view. On the fertilizer front, on the other hand, potassium (40% of global exports, if Belarus is included) suffered the greatest interruptions. In the long term, it is still unclear how the disruption of supplies from Ukraine will evolve.
However, many of the most important agricultural regions have been the scene of fierce fighting, large-scale minefields and destroyed agricultural equipment. According to Felix Odey, Portfolio Manager, Global Resource Equities at Schroders prices will remain at such high levels even in the near future and the tension between supply and demand could even worsen in 2023 and beyond.
Agricultural commodity prices on the rise: the reasons
According to the expert, in addition to the limitation of exports, another effect of the tensions on the markets for agricultural raw materials could be the change in flows and use. About 20% of the world‘s wheat is used for animal feed, so we could see the introduction of substitute products to try to preserve wheat for human consumption. Biofuels are another sector that could be affected, as they use about 10% of the world‘s wheat. First-generation biofuel companies (i.e. those using edible food rather than waste) could come under some political pressure if governments suspend or eliminate subsidies. Other risks are represented by supply limitations and damage to reputation.
Food security will become a priority for governments
The Ukrainian crisis has brought attention back to food security. In addition, the long-term picture of food supply is changing, says Schroders’ expert. The increase in population means that world food and water production is expected to increase by 70% by 2050 compared to 2010 levels. Climate and environmental factors in general mean that resource intensity must be reduced by about two thirds in the same period. In the short term, Food security is likely to become a priority for governments. Looking ahead, the system must be made more sustainable, otherwise it will be subject to increasingly damaging negative feedback loops, such as extreme weather phenomena and ecosystem degradation. Even under a 2 degrees global warming scenario, wheat and maize yields are projected to decline by 14% and 12% respectively. All of this paints a picture of high agricultural prices in the near future.