The global food system could face its most difficult period this year with the disruption of supplies due to the Russia-Ukraine conflict, sanctions against Kremlin and surging fuel prices, say various global organisations. This could result in inflation to multi-year highs, even above the peaks seen in 2008.

The organisations’ views come on the heels of the February 24 invasion of Ukraine by Russian troops and the subsequent rise in prices of commodities — especially wheat, corn, cooking oils and barley. The supply of fertilisers has also been affected as Russia is a major supplier, while shipping and currency exchange issues have compounded things. 

Energy, food prices

The rise in prices, led by soaring fuel prices, has resulted in retail inflation surging to a 17-month high in India in March. Inflation in the UK hit a 30-month high in March at 7 per cent, while the US saw its inflation soar to 8.5 per cent,  a 40-year high at the same time. 

Zurich-based global private banking group EFG International said the hike in prices for fuel, shelter and food were the largest contributors to inflation in March. Energy prices increased 11 per cent month-on-month and food prices rose one per cent month-on-month in the US. 

According to the World Bank, soaring energy and food prices triggered by Russia’s invasion of Ukraine could exacerbate existing food security concerns in West Asia and Africa. They may fuel growing social unrest, said World Bank chief economist Carmen Reinhart in a statement. 

Developing economies hit

The Washington-based International Food Policy Research Institute has endorsed the view, saying a food crisis had been brewing ahead of the conflict. This has come before the global community could recover from the impact of Covid. “Africa is undoubtedly one of the most vulnerable regions (to food inflation),” it said.

A major concern world over is the rise in crude oil prices by 20 per cent since the war broke out. The surge in crude oil prices has begun to hurt farmers badly with access to fertilisers being affected. 

The Food and Agriculture Organisation (FAO), an arm of the UN, said its food price index averaged a record 159.3 points in March, up over 12 per cent from February. Its cereal index increased by 17.1 per cent in March and its vegetable oil index by 23.2 per cent. 

FAO has lowered its estimates for wheat and maize production, exports and utilisation due to the impact of the war. 

Asli Demirgüç-Kunt, World Bank Chief Economist for Europe and Central Asia, said the war is hitting hard emerging and developing economies of Europe and Central Asia, a region that was already heading for an economic slowdown this year from the ongoing effects of the pandemic.

The Economic Research Service of the US Department of Agriculture said all food prices are predicted to increase between 4.5 and 5.5 per cent this year. While food-away-from-home prices are predicted to increase between 5.5 and 6.5 per cent and food-at-home prices are predicted to increase between 3.0 and 4.0 per cent. Prices of food-at-home will see their sharpest spike since 2008, it said.

US rating agency Fitch said global food prices have jumped sharply since the start of the war in Ukraine and the direct impact on inflation will be felt much more acutely in emerging markets as Kremlin and Kyiv together account for one-third of global wheat and barley shipments. They also contribute about 65 per cent to the world’s sunflower oil trade. 

“The destruction of Ukraine’s port infrastructure and mining of the Black Sea have greatly reduced grain exports,” it said.

Fitch Solutions, a research agency of the Fitch Group, has raised its wheat price forecast for 2022 and 2023 as “the Russian invasion of Ukraine places a floor under prices due to a combination of investor panic and reduction in global exports from both nations.” This comes at a time when the wheat market is already very tight and buffer stocks across the globe are low, it said. 

Fitch Solutions has forecast wheat prices to average at $338 a tonne this year. It had earlier predicted the grain prices to average $248.  

Higher spend for food

The World Bank said for households spending half their income on food, a one per cent increase in food prices would result in their real income decreasing by 0.5 per cent 

The rise makes people in extreme poverty vulnerable as they spend two-thirds of their income on food.  The World Bank said governments can mitigate such impacts through social protection policies. 

But it said the problem for governments would be that their finances would have depleted in view of various fiscal measures they undertook to tackle Covid. 

“For economies still reeling from the pandemic, the inflationary pressures (due to the war) could not have come at a worse time,” it said.