A global food shortage is looming. Driven by soaring energy costs, supply disruptions and an escalating war between two of the world’s major breadbaskets, global food prices are at record highs, compounding security concerns food and making access to food more difficult.
In Peru, farmers are protesting a fertilizer shortage that is expected to cut corn, potato and rice production by 40%. In Sri Lanka, people line up at ‘fair price’ government stores to buy essentials such as rice, dal, milk and flour, as prices in private grocery stores are three to four times higher. students. Meanwhile, Sri Lanka has chosen to default on its debt to pay for imports of essential goods like food, fuel and medicine.
Even the fast-food chain McDonald’s has suffered from shipping delays and a shortage of potatoes used to make its famous fries. The company has been rationing its fries in countries including Japan, Taiwan, Malaysia and Indonesia since late 2021. Last week, McDonald’s Philippines announced it would only offer regular-sized fries, halting sales of its large portions.
Food prices at their highest
According to the Food and Agriculture Organization of the United Nations (FAO), food prices are now higher than during the Arab Spring uprising in the early 2010s. As a result, food prices are now at a new record high in nominal and real terms, surpassing even the prices reached during the Arab oil embargo of 1973-74. The basket of foodstuffs that make up the FAO Food Price Index show year-on-year price increases of +37 percent for cereals, +23.6 percent for dairy, + 56 percent for vegetable oils, +22.6 percent for sugar and + 19 percent for meat.
Indonesia bans palm oil exports
Last Friday, Indonesia – the world’s largest producer of palm oil – announced its intention to ban exports of the most widely used vegetable oil. Indonesia’s finance minister said it would hurt other countries, but it is necessary to ensure cooking oil in the domestic market remains plentiful and affordable. Palm oil is also used in cakes, chocolates, margarine and cookies, as well as in cosmetics, detergents and biofuels. This will aggravate the shortage of vegetable oil and further increase food prices.
Ukraine, the breadbasket of Europe
Even before the war, agricultural commodities rose due to supply chain disruptions and high energy costs. However, Russia’s invasion of Ukraine has exacerbated pre-existing pressures on global food prices and supply. The FAO estimates that a third of Ukraine’s farmland will go unharvested or planted this year as the war escalates.
Ukraine is one of the main agricultural producers in the world and is known as the breadbasket of Europe. It accounts for 9% of world wheat, 12% of corn and barley and 50% of sunflower oil exports. Additionally, Ukraine’s ravaged farmland and damaged infrastructure such as highways, rail systems, bridges and ports will make exporting crops more difficult.
Record fertilizer prices
Another major reason for the food shortage is the record price of fertilizers. According to the US Department of Agriculture, fertilizers make up about 36% of a farmer’s operating costs for corn and 35% for wheat. Note that Russia and Belarus are the main fertilizer exporters, accounting for 37% of global potassium exports, 14% of phosphate exports and 16.5% of nitrogen exports. However, Western sanctions have made Russian and Belarusian fertilizers expensive and more difficult to import. As a result, the CRU Group Fertilizer Index recently hit a new all-time high at 390, well above the record high of 360 set in 2008 and quadrupling the level it was at the start of 2021.
Increased production, transport costs
Rising energy prices and transportation costs also lead to higher food prices. One-third of food costs are energy-related, while two-thirds of nitrogen fertilizer costs come from gas. Fuel also accounts for around 30% of airline spend and 50% of shipping company costs. The re-routing of trade to Europe as well as the high war risk premium have also increased the transport costs of cargo ships and tankers transiting the Black Sea.
Lockdowns in China
Bloomberg News reported that China’s oil demand will drop 20% in April, the most since the Wuhan lockdown. Containment in large cities reduces fuel consumption and decreases food demand. However, the closures disrupted China’s planting season as villages were sealed off under COVID restrictions. As a result, one-third of farmers in Jilin, Liaoning and Heilongjiang provinces, which account for 20% of China’s grain production, cannot obtain fertilizer and seeds stored in bunkers in Shanghai.
Rice production will plunge by 10%
Unlike wheat and maize, which have seen their supplies cut off from one of the world’s major breadbaskets, global rice supplies have been relatively stable. However, the International Rice Research Institute (IRRI) has warned that harvests could fall by 10% next season as fertilizer supplies remain tight. Faced with high input prices, farmers will use less fertilizer to reduce costs, which will reduce future rice yields and further complicate the food supply shock in the global market.
Philequity Management is the fund manager of the leading mutual funds in the Philippines. To visit www.philequity.net to learn more about funds managed by Philequity or to view previous articles. For inquiries or to send feedback, please call (02) 8250-8700 or email [email protected]
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