Russia, Ukraine, and Food Supply: Look at the Prices

Three weeks ago, I wrote that the world is not facing a food crisis in the wake of Russia's invasion of Ukraine. 

I argued that the invasion's effects on food commodity markets were big but not historic. The US should not respond by incentivizing additional production, in part because the proposed measures would do little to alleviate the pressure in winter wheat markets. 

Since then, lots of articles have made the opposite case. And, I got some pushback, which I'll address in this article.

I based my assessment on prices. Commodity prices reflect scarcity. If a supply disruption makes a commodity more scarce, then prices increase to incentivize consumers to cut back and producers to supply more. Supply and demand for agricultural commodities are quite inelastic, which means small supply disruptions cause large price increases.  

For storable commodities, such as wheat, prices will increase in anticipation of an upcoming supply disruption. If you know that next year's production will be low and you own the commodity, then you will hold onto it to sell in the future, which reduces available supply today and therefore raises prices today. This means that current prices reflect not just commodity scarcity today, but also anticipated scarcity in the upcoming months and years. 

Prices can be wrong. Commodity traders may have underestimated the impact of the invasion, but they also have more information about what's really going on than do people, such as me, sitting in front of my computer. Traders know, for example, that global agribusiness firms such as Cargill and ADM are still operating in Russia.

Wheat prices have come down in the last three weeks, suggesting that the effect on global supply may be smaller than I initially estimated.  Corn and soybean prices have remained relatively constant. The supply disruptions remain centered on winter wheat

Winter wheat futures prices for delivery in 2023 have increased slightly in the last three weeks, suggesting that the long-term supply outlook has worsened slightly even as the near-term outlook has improved. 

Here are some answers to questions I received in response to my previous article. 

What about countries that rely on Ukraine and Russia for food imports?

Numerous countries, notably those in the Middle East and North Africa (MENA), import a high percentage of their calories from Russia and Ukraine. For example, wheat contributes more than a third of calories consumed in Egypt, and half of this wheat comes from Russia and Ukraine.  Lebanon imports about 90% of its wheat and gets most of its imports from Russia and Ukraine. These countries will need to find new suppliers this year.

The war will also disrupt food supplies to people in Ukraine and to refugees who have fled to neighboring countries. 

These are serious issues and I don't intend to diminish their importance. Low-income consumers in these and other countries can be severely affected by relatively small increases in food commodity prices, especially given that wheat prices were already relatively high before the invasion. Wealthy governments and donors can help bridge the gap.

Data Note: For the above figure, I used  data on consumption and total imports from USDA's PSD database (pulled from our World Trends for US Major Crops app) and data from UN's Comtrade database on exports from Russia and Ukraine to the four countries. I used data reported by the exporters rather than by the importers because there are some missing data in the latter (e.g., for Egypt in 2013 and Tunisia before 2007 and after 2018, as shown below). Total imports data from USDA's PSD also differs somewhat from that reported in FAOSTAT.

What about fertilizer?   

Fertilizer prices approximately doubled between the summer of 2020 and the end of 2021. They have not increased much since Russia invaded Ukraine. 

A couple of weeks ago, I wrote: "If sanctions cut Russia and Belarus off from world markets, then it will leave a hole that other producers will need to fill. China produces almost all of the nitrogen and phosphate it uses, so it will not absorb Russia's exports. However, the apparent lack of a post-invasion price spike suggests traders are not yet worrying about a global shortage of fertilizer." This still holds true.

Moreover, wheat and corn traders know about fertilizer prices, and they factor that information into their trading decisions. If they were worried that the invasion would create fertilizer shortages and thereby seriously curtail food production, then they would bid wheat and corn prices up. But, they aren't doing that. 

Source: The excellent weekly blogs by Russ Quinn at DTN, e.g., here

What about sunflower oil?

Negligible changes in soybean prices suggest a relatively small effect of the invasion on global oilseed supply.  However, Ukraine is a dominant supplier of sunflower oil. I plan to write more about sunflowers in a future Ag Data News article.

But shouldn't we do something?

The US 2022 winter wheat crop is already in the ground, so there isn't much the US can do to increase the global supply of winter wheat. The US can aid the MENA countries and Ukraine in accessing food supplies and should focus its food policy efforts in that direction.

I made the figures in this article with this R code.