Supply shock ripples across agricultural commodities
ARTICLE | May 17, 2022
Authored by RSM Canada
As Russia's invasion of Ukraine continues to take a mounting human and economic toll, it also has the potential to threaten the food supply for millions of people who depend on agricultural commodities from those two countries.
Russian and Ukrainian grain exports have been severely curtailed, leaving many countries scrambling to find other sources.
And that's no small task. Together, the two countries account for a quarter of global exports of wheat, a fifth of corn, just under 10 per cent of oats and 30 per cent of barley. They are also among the top exporters of cooking oils.
The longer the war drags on and exports are interrupted, the more the food security of nations dependent on those products becomes threatened. Already, prices of everything from grains to fertilizer to livestock have surged. Food shortages have the potential to cause social unrest across the Middle East and North African countries.
There is a silver lining, though: Canada, as well as the United States, produces many of the same agricultural products that are suddenly in short supply, and could be in a position to replace some of the lost exports on the global market.
The breadbasket of Europe
Getting there, though, will be difficult. Ukraine plays a crucial role in food production in Europe as well as globally. Nicknamed the breadbasket of Europe, it has been a leading exporter of grains and agricultural commodities.
But that status is now threatened. As farmers face increasing obstacles to maintaining their production, they also face disruptions to the supply chain like port closures and damaged transportation infrastructure. The Russian army is destroying fields and farm equipment in Ukraine to provoke a global food crisis. That will only make it more difficult to keep the exports flowing not only this year but in 2023.
Russia, too, is an important exporter of agricultural commodities, but sweeping economic sanctions threaten to cut off those supplies. And it's not just the sanctions that are putting pressure on Russian exports. Russia itself, which faces surging food prices for its residents, is temporarily banning wheat exports to other countries in the region to keep domestic food prices low.
The case of potash
To get a sense of just how far-reaching the impact of those limits on agricultural exports can be, consider the unglamorous commodity called potash, an important fertilizer. Russia and Belarus, a Russian ally, are both major exporters of the commodity. Without an adequate supply, agricultural production can take a major hit with lower yields, especially in Europe, which produces no potash and is fully reliant on external sources.
When supplies of potash fall short, it shows up in prices consumers pay at the grocery store.
Looking to North America
But there are alternatives. Canada and the United States produce and export many of the same agricultural commodities or close substitutes as those from Russia, Ukraine and Belarus.
Canada, for example, is home to the largest potash mine in the world. And the United States makes up 30 per cent of global corn exports, while Canada makes up more than half of global oat exports.
Similarly, Canada is the largest exporter of canola oil, and the United States and Canada are both large exporters of soybean oil, which is a substitute for sunflower oil.
North American agricultural commodity producers stand to benefit from higher prices given high demand and strained supply abroad. Already, European companies are looking to secure potash contracts in Canada.
But even if North American producers can bridge some of the gap, livestock farmers and food manufacturers will face higher prices.
Consumers, in turn, will pay more. Food inflation will soar above last year's levels, with middle- to low-income households being hurt the most as their tight budgets are squeezed.
North America's role
Even as many countries around the world will face food shortages, North American consumers do not have this risk. Both Canada and the United States, which produce more food than their populations consume, are net food exporters.
That's not the case in the Middle East, North Africa and South Asia, which must import food to meet their domestic needs and rely heavily on supply from Russia and Ukraine.
Without adequate grains and cooking oils, millions who are already at risk will go hungry as the crisis persists.
That's where the Canadian and American agricultural commodity producers can step in. If they can increase production and exports, especially of grains, cooking oils and potash, they will help alleviate global food insecurity.
Achieving this increase in production will require a significant commitment. North American commodities could be more expensive for foreign markets because of higher labour costs, and production costs are still rising along with energy prices. There are also logistical challenges associated with altering the flows of trade, further complicating the already-strained global supply chain.
In addition, climate change presents another challenge. Grain production in Canada hit record lows last year because of extreme weather events, lowering exports to the global markets, and that trend is expected to continue. The Intergovernmental Panel on Climate Change has warned that climate change is harming global food supplies faster than nations and producers can adapt, threatening the era of consistently high crop yields.
Russia's invasion of Ukraine risks destabilizing global food markets by disrupting production and trade flows. For consumers and businesses in food production and manufacturing, high food inflation adds to the plethora of challenges, including energy prices.
But agricultural commodity producers in North America could play a key role in alleviating global food insecurity by increasing exports while at the same time netting economic gains.
Businesses need to look ahead and prepare accordingly, whether by increasing production or securing future contracts, as global food supplies are disrupted into next year.
Contact your trusted Stark & Marsh Advisor or an office close to you.
This article was written by Tu Nguyen and originally appeared on 2022-05-17 RSM Canada, and is available online at https://rsmcanada.com/insights/economics/supply-shock-ripples-across-agricultural-commodities.html.
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