Impacts on Domestic Agriculture from Half a World Away
As the world watched in real-time, Russia launched an attack on neighboring Ukraine in the early morning hours of February 24. The economic impact of this conflict will no doubt be global. The already fragile food, agriculture and fossil fuel supply chains across the world are about to be impacted by another major global event will affect their strength.
Russia supplies approximately 40% of Europe’s natural gas needs. As of 2021, it was the second-largest oil producer at 10.1 million barrels per day, only behind the U.S. Despite many countries in Europe making efforts to shutter nuclear and coal electrical generation, the dependence on natural gas grows each day. Russian-based Gazprom’s Nord Stream 2 gas pipeline would heat 26 million German homes. It is not yet online, and some doubt whether the project will ever be completed and operational.
To cast a deeper perspective on what energy means to Russia, oil and gas accounted for 60% of Russia’s exports in 2019. We know that inflation has been persistent and that nations have so far avoided placing sanctions on Russia and their fossil fuel exports.
The fear is that rising energy prices would have a twofold benefit to Russia. First, higher prices at the pump and elsewhere would take a larger bite of economic spending. Second, higher prices would bring extra revenue to Russian coffers. The goal of economic sanctions is not to enrich Russia. Furthermore, even if sanctions were in place, it’s possible Russia could find additional demand, mainly in China who has so far stayed mostly silent on the actions of its neighbor. We seem to have a fragile balance of producing just enough energy to meet demand. As more renewable energy comes online, the dependence on those that produce wanes, but the world is not there yet.
Another impact of the current conflict is Ukraine’s ability to grow crops. While the country is probably not seen as an economic impactor on demand, the size and location of Ukraine and its production are notable. Ukraine is the second largest country in Europe after Russia and has been referred to as the “breadbasket of Europe.” Their agricultural output accounts for 12% of global wheat exports, 16% of corn exports (third largest producer and fourth largest exporter) and 18% of barley exports (second largest producer and fourth largest exporter). According to Professor Chris Elliott, Director of the Institute for Global Food Safety, Ukraine is the world’s leading exporter of sunflower oil and ranks first in European arable land area. That land base is able to meet the food needs of 600 million people. In addition to grains, they are also the fourth largest potato producer.
As it relates to agriculture, Russia has a large impact on fertilizer production. Should sanctions affect their ability to export, this could have an additional impact on rising costs in the commodity sector. Think about these statistics: Russia is the top exporter (with market share) of ammonium nitrate (49%), ammonia (30%), urea (18%); third in MOP (27%) and sulfur (9%); and fourth in DAP/MAP exports (14%). Those products are spread throughout a lot of the growing areas including China, the U.S., South America and Europe. Disruptions could have major impacts on both availability and pricing. Given the run up we have seen, along with the possibility of product shortages, it’s a delicate situation. If there’s a rise in crop input prices, guess where we’ll see it next – at the store when we’re buying things like milk, eggs, pork and beef. It’s a small piece of the overall food supply chain, but clearly can have an impact.
Supply Chain Disruption
The global impacts of this conflict revolve around the fragility of the entire supply chain. At some point we have to recognize our “just in time” supply equals demand situation. In a lot of cases we are at a deficit. Think about transportation, for example. There are not enough drivers to deliver goods people want. In other words, I can make and sell more, but I don’t have enough people to make it, and if I did, I don’t have enough people to move it. One thing markets are very good at is rebalancing. The pendulum will swing, and hopefully not too far. A quick resolution to this very unfortunate situation will provide more clarity and give focus to the issues all were facing before Russia’s moves.
As seen in Cheese Market News.