- Export restrictions increased during the pandemic: As the COVID-19 pandemic intensified in 2020, there were increasing concerns about food availability, leading to grain-producing countries imposing export restrictions.12 Vietnam, which had a 16% share in global rice exports before the pandemic, held back on granting rice-export certificates till the end of April 2020. Kazakhstan suspended exports of several cereal products, oilseeds, and vegetables until June 30, 2020,13 while Russia placed restrictions on the export of items such as wheat, corn, and meslin.14 Consequently, food prices started picking in the second half of 2020, with the prices of cereals and edible oil witnessing strong growth since then.15
The conflict in Ukraine has made things worse
Food prices, already on a steady rise, received a further push from the conflict in Ukraine. According to the FAO, food prices went up by 12.4% in March from February and by 33.6% compared to a year back. And it is likely that the surge in March wouldn’t be the last, especially if the conflict drags on for a much longer time. There are three key reasons for this.
First, Ukraine accounts for nearly 10% of global wheat exports.16 With a war raging on its soil, breakdown of internal transportation, and a blockage on its coastline by Russian warships, the country’s export shipments have been disrupted. Ukraine also accounts for more than a quarter of the world’s production of sunflower seed. With supply disruptions and fears of more to come, sunflower oil—a major derivate of sunflower seed—is witnessing sharp price hikes. This has, in turn, led to higher prices of alternatives to sunflower oil as well, as shown in figure 2. Russia too is a major agricultural exporter with major shares in global production of sunflower seed, barley, and wheat—it accounts for 18% of global wheat exports. While the war hasn’t touched Russian soil and no sanctions have been imposed on Russian agriculture, potential buyers will likely face problems in payments, given that a large section of the Russian banking sector has been sanctioned (key Russian banks were excluded from the SWIFT payments system in March).17 No wonder then that FAO’s price index for cereals shot up by 17.1% in March, while its index for edible oils rose by 23.2%.
Second, the war is also driving up the cost of food production. While fuel and transportation costs have gone up, as figure 3 shows, so have the prices of fertilizers, an essential ingredient for crop yields. While the average monthly price of urea went up 22% in March, diammonium phosphate prices grew 25.6% during the month.18 The uptick in prices in March, however, isn’t surprising as the price of natural gas—a key input in producing nitrogen-based fertilizers—went up by 38.2%19 during the month on fears of supply disruptions due to the Ukraine-Russia conflict. There are also worries about disruptions to global fertilizer exports from Russia and Belarus—two countries that have also been hit by sanctions. Russia is a major exporter of nitrogen, potassium, and phosphorous fertilizers, while Belarus, which had been under sanctions even before the conflict in Ukraine, is a major producer of phosphorous fertilizers.20
Third, as the conflict continues, it will impact the planting of new crops in Ukraine. The continuing blockade of the country’s coast and the destruction of its ports and internal transport networks will keep the pressure on global food trade. Soaring fertilizer prices, meanwhile, may result in lower use of fertilizers, thereby denting crop yields in major fertilizer importers. As shipments from Russia and Belarus face disruptions, fertilizer importers from these countries may be forced to diversify or use alternate systems to make payments to the two sanctioned countries—that may not be easy, given the current sanctions.21 Diversifying imports or boosting domestic production also raises uncertainties in the near term and loss of competitive advantage, thereby raising costs. Further, as food prices rise, the risk of export restrictions has gone up as countries try to protect domestic supply. In April, for example, Indonesia put restrictions on palm oil exports citing high domestic prices. While this will increase global palm oil prices, it will also push up prices of other edible oils and fast-moving consumer goods that use edible oil (including palm oil) as inputs.22
Low-income households and major food importers are feeling the pain
As food prices surge, those at the lower end of the income ladder will be hit the most. Low-income households typically spend a higher share of their income on food items compared to middle- and high-income families.23 Furthermore, low-income households spend more on food types that have risen most in price. For example, staple foods such as cereals and breads constitute a higher share of diet of poor households—all of which have recorded strong growth in prices.24 Across countries, developing economies typically have a higher share of food in their overall consumer baskets—and hence in their Consumer Price Index (CPI)—compared to advanced economies. For example, food and beverages account for 54% of CPI in Ethiopia and 50.7% in Nigeria, compared to just 11.6% in the United Kingdom.25 Consumers in these countries will likely face a bigger hit, on aggregate, from rising food inflation (figure 5) than their counterparts in affluent countries. Also, food is a necessity compared to other consumer goods and a broad price rise across key food segments—as evident from the FAO indices—means that people won’t be able to substitute them for cheaper products. The result may be weakened discretionary spending, especially for low-income households. High fuel prices will only make things worse.