[Updates below] Russia’s invasion of Ukraine has substantially increased friction in physical movement of key commodities (such as wheat and sunflower oil) out of the war zone. Sanctions on Russia have also increased friction involved in buying Russian products, especially fossil fuels and fertilizer. In each case demand remains high.
At least right now, I perceive Russia’s energy flow is being complicated, delayed, and redirected by financial sanctions (more), but flow is continuing to find its way from Russian suppliers to those with demand.
If anything, global demand for Ukraine’s food flows is even greater than that for Russian oil. But physical constraints caused by war — especially the blockade of Black Sea ports — are much tougher to overcome than paperwork problems in conducting foreign exchange transactions.
Both food and energy are more expensive than before the invasion. This is motivating the energy market to reduce friction, optimize flows, and maximize its financial returns. There is less evidence — so far — that global food flows will be able to effectively adapt to fulfill demand. Extracting primeval deposits below ground can be tough, successfully harvesting perishable crops above ground involves even more uncontrollable risk.
McKinsey has produced a podcast (with transcript) that helpfully highlights the stepwise character of the emerging food crisis. Here’s an excerpt:
Lucia Rahilly: We seem to be talking about a convergence of relatively substantive disruptions. The media has been reporting on the potential for a global food emergency and an increase in global hunger. How concerned should we be?
Nicolas Denis: We should definitely be concerned. But the extent of that concern should be assessed in the coming weeks and months. What really matters is which of these milestones in the different breadbaskets—from preparing the fields to planting to harvesting—will be hit and which ones will be missed. We should also turn our attention not just to what is under the spotlight of the media today but to some of the secondary impact we could see.
Now is planting season in Ukraine, a critical source of wheat (and more) for the Middle East and North Africa. Brazil and Argentina depend on Russian fertilizer flows. The South American planting season begins in July-August, fertilizer is often applied first. Drought in US plains states have depressed yields. This morning wheat and corn futures are near record highs. There have already been food-related protests in Peru, Pakistan, and Sri Lanka. Concern and grumbling is much more widespread. Each milestone is worth marking. Effective adaptation to these evolving conditions will require creativity, collaboration, and considerable courage.
April 23 Updates: Major British grocers are limiting consumer purchases of cooking oil. According to the BBC, “Tesco is allowing three items per customer. Waitrose and Morrisons have limited shoppers to two items each. The majority of the UK’s sunflower oil comes from Ukraine and disruption to exports has led to some shortages and an increased demand for alternatives.” According to Bloomberg: “Two months after Russia’s invasion of Ukraine upended global agricultural trade, Indonesia is set to ban exports of cooking oil in the wake of a local shortage and soaring prices, adding to a raft of crop protectionism around the world. The country accounts for more than a third of global vegetable-oil exports, with China and India, the two most populous countries, among its top buyers.”
May Day Update: Bloomberg reports, “For the first time ever, farmers the world over — all at the same time — are testing the limits of how little chemical fertilizer they can apply without devastating their yields come harvest time. Early predictions are bleak…”
May 14 Update: Bloomberg offers a round-up of stories on wheat supplies and related prices, including, “Bread and noodle prices are already being pushed up as war cripples Ukraine’s wheat exports, and now droughts, floods and heatwaves threaten crops in most major producers. Warm and dry weather is becoming a worry in Europe, while US fields are parched. Ground that’s either too wet or too dry is thwarting Canadian plantings and China has contended with unusual autumn floods.”