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Ukraine War and the Global Food Crisis
The financial crisis of 2008 was preceded by two events. There was a steep hike in oil prices, which touched $ 147 per barrel. There was also a sharp increase in food prices as agricultural land was diverted for the production of bio-ethanol in Brazil and the USA. We might be witnessing a repeat of history argues former Indian Ambassador D.P Srivastava.
The oil and gas prices, as well as wheat prices, started going up last year. The trend started much before the Ukraine crisis erupted; the war has accentuated the trend. Russia and Ukraine account for 30 percent of global wheat and 67 percent of sunflower oil export. The sharp increase in prices has produced a humanitarian crisis beyond European shores to countries in Africa, the Middle East; and Asia. Climate change will accentuate the problem. Recent heat wave in different parts of the world, including India, has affected the wheat crop.
The UN Secretary-General Antonio Guterres stated ‘when war is waged, people go hungry.’ He noted in his speech to the UN Security Council session in May that 60 percent of the world’s undernourished people live in areas affected by conflict (1). Most of the 140 million people suffering from hunger globally lived in 1 of just 10 countries: Afghanistan, the Democratic Republic of the Congo, Ethiopia, Haiti, Nigeria, Pakistan, South Sudan, Sudan, Syria, and Yemen.
David Beasley, Executive Director of the World Food Programme (WFP) mentioned that even before the Ukraine crisis struck, the world was already facing an unprecedented, perfect storm because of conflict, climate change and the Covid-19 pandemic. He said that the number of people suffering from starvation increased from 80 million to 135 million before COVID-19. ‘Because of the pandemic, the number rose to 276 million, then due to war in Ukraine, it further increased to 323 million. Of that 276 million, 49 million were at risk of famine in 43 countries.’ He added that the famine is now threatening the countries in the Sahel and the Horn of Africa.
Director-General Food and Agricultural Organization (FAO) Qu Dongyu pointed out that the last 5 years have seen yet again spike in global levels of hunger. Citing the Global Report on Food Crises, he said that approximately 40 million more people experienced acute food insecurity in 2021 compared to 2020. This brought the total to 193 million people in 53 countries and territories. According to his estimate, another 18.8 million people will be added to the list. He added ‘When prices got out of control in 2007 and 2008, riots and protests were seen in more than 40 countries. Now, protests are taking place, including in Sri Lanka, Indonesia, Pakistan, and Peru with destabilising dynamics in Burkina Faso, Mali, and Chad. These are only the signs for more to come.’
The account given by the heads of the two leading UN agencies dealing with the issue – WFP and FAO, brings out that the dimensions of the humanitarian crisis engulfing the world go beyond the Ukraine crisis. The origins of the problem lie as much in conflict situations as the economics of the oil and gas trade. The rising gas prices have led to an increase in fertilizer prices. This has compounded the effect. The Sri Lankan crisis is partly the result of the ban on the import of fertilizer by a government facing a foreign exchange crisis.
It is a paradox that oil and gas prices command a premium when the climate concerns were supposed to herald the end of the age of fossil fuels. This is a result of restrictive production policies of OPEC + countries. This includes OPEC as well as a non-OPEC group of countries led by Russia. Since 2016, they have kept the production low with a view to pushing up oil prices. The problem was compounded by the over-jealous statements of climate activists. Last year, IEA gave a call for no new investment in new oil fields. This came at a time when the investment in upstream oil and gas sectors had already fallen sharply from $ 749 billion in 2014 to $ 350 billion in 2021. This decline in investment makes it difficult to find replacement oil to compensate for the decline in production from the aging fields, leave alone cater to new demand. At the same time, the world economy recovering from the pandemic boosted oil demand. The resulting mismatch in demand and supply led to an increase in oil prices.
There was also a parallel increase in gas prices beginning in early 2021. The problem came to a head when North Sea winds dropped in September. Wind power accounts for 18 % of the generation mix in the UK as well as Germany. The rush to find alternate sources led to a sharp increase in gas prices. Since the Ukraine crisis has erupted, the situation has become far more complicated.
Replacement of Russian gas over time by EU countries has already led to an increase in LNG prices. The European gas prices had shot up from around $ 9.327 on January 12 2021 to $ 72.53 per MMBtu on 7th March 2022 when Biden Administration proposed sanctions against Russia. The higher gas prices have translated into higher Urea (fertilizer) prices. This has gone up from around $ 230 per ton to $ 640 per ton in one year.
Sara Menker, CEO of Gro Intelligence in a statement at the UN Security Council session said that global fertilizer prices have nearly tripled year on year and are quadrupled over the past two years. She attributed this price increase to supply shocks, ‘restrictions on natural gas which impact the ability to produce fertilizer, sanctions and export restrictions amidst the Russian Federation-Ukraine conflict’. She added ‘This risks significant crop yield reductions in key producing regions, such as Brazil, United States, and Western Europe later this year and in 2023, severely impacting global food security and inflation for three to five years.’
She added that the price of traditionally cheap palm oil has tripled driven by demand for bio-fuel and drought.
There has been a sharp increase in wheat prices. According to the FAO cereal index, ‘International wheat price rose for a fourth consecutive month, up 5.6 percent in May, to average 56.2 percent above their value last year and only 11 percent below the record high reached in March 2008.’ This will impact food prices in countries in Africa, M.E., and Asia severely dependent upon wheat import. This will also test social cohesion in these countries. According to the US Department of Agriculture, India has only a small share in global wheat exports - 5% as against 16% for Russia and 10% for Ukraine in 2021-22. Due to the recent heatwave, the Indian share of global exports is likely to drop to 3% in the year 2022-23.(2)
The Brazilian representative in his statement at the UN Security Council pointed out that ‘the conflict in Ukraine exacerbated the international food supply and production chains, which were already stressed to a breaking point by the pandemic. However, unilateral economic measures have a secondary impact on the operation of markets through sanctions on the finance and transport aspects of agricultural trade.’ He made a significant observation that ‘food insecurity is not a by-product of food scarcity, but rather of lack of affordability and access.’
The representative of the Holy See cautioned against treating food only as a commodity, supplied through ‘the cold logic of the market’. He drew attention to Pope Saint Paul VI’s proposal to establish a global fund to assist those most impoverished, drawing partially from military expenditures.
There has been discussion about creating a humanitarian corridor through which the grain can be exported. This idea is worth considering. To be effective, this will require that not only the grain, but shipping and payment channels for exports by either side are exempted from sanctions. In the ultimate analysis, this goes beyond ‘humanitarian assistance’ to restoring the entire supply chain from production to transport. Above all, the oil and gas prices have to come down. Higher gas prices have already tripled the price of fertilizer, a critical input in agricultural production all over the world.
(1) SC/14894, 19 May 2022, https://www.un.org/press/en/2022/sc14894.doc.htm
(2) USDA, Grain: World Markets and Trade, https://apps.fas.usda.gov/psdonline/ 2 circulars/grain.pdf