The global price of wheat has reached all-time highs. The Food and Agriculture Organization’s Food Price index has risen to levels last seen in the 1970s’ oil crisis. Agricultural futures markets are suggesting that prices may increase further still.
While food costs were already projected to remain high this year due to a combination of physical climate impacts and the increased input costs of energy and fertilisers, the conflict in Ukraine looks set to result in further inflationary pressure.
Sanctions-hit Russia and battleground Ukraine account for 12% of all calories – cereals and oilseeds – traded in the world, along with 30% of global wheat and 25% of barley. Ukraine alone produces around half the world’s sunflower oil.
How will this affect the value chain?
On top of food price increase, the cost of conventional fertilisers, for example, is now around three times the 10-year historical average.
Russia is the largest exporter of nitrogen for fertiliser. Together with Belarus, it is responsible for 40% of the EU’s imports of potash. Russia is also a large supplier of gas to fertiliser producers.
Gas supply disruptions are affecting the production of ammonia in Europe. Given that a typical European farm spends 5% of its costs on fertilisers, 8% on energy and 25% on feedstuffs, compound price increases could see inflation rise significantly.
Longer-term, alternative – and cleaner – pathways to fertiliser production such as water electrolysis will become more important. This will require investment. Costs and the long lead-time for new methods of production raise the question of fertiliser availability in 2023.
These factors are feeding into certain food producers forecasting 10-15% input cost inflation. The calls from countries such as in Spain and Germany to reduce meat consumption to combat climate change may be buoyed by these increasing prices.
In response to the situation, food service firms have the leverage to rethink their food procurement. This could also have a significant positive impact. For instance, a caterer ordering tens of thousands of tonnes of fruit and vegetables per year could push the food supply chain in a more sustainable direction, encouraging suppliers to shift to foods of the future such as locally produced chickpeas and lentils.
Knock-on consequences for sustainability
While food retailers may be able to mitigate rising prices in developed countries, this may be more difficult in lower-income countries. Here, this could lead to social unrest – particularly as lower-income households spend a larger proportion of their budget on food than wealthier ones.
More broadly, the IMF notes the food and fuel price shock from the conflict threatens sub-Saharan Africa’s economic outlook. It could lead to hunger and famine.
There have been calls to step in and fill the food production gap. However, such action could have knock-on effects in terms of biodiversity loss and climate change.
EU agricultural ministers have been calling for Europe to increase agricultural volumes to help feed North Africa and boost output and yields. In France, there have been calls to suspend the 4% of agricultural land set aside under the EU’s Farm to Fork Strategy. However, such intentions clash with the aims of Farm to Fork, which focuses on putting sustainability at the heart of the European food system.
On the other side of the Atlantic, Brazil’s meat lobby ABPA has said it is ready to cover gaps and support the food security of nations affected by supply problems. This could result in more deforestation on top of already record high levels.
Meanwhile, Brazil’s President Jair Bolsonaro has called for mining restrictions in indigenous territories in the Amazon to be lifted to help alleviate supply disruptions of potash. Brazil imports over 80% of its fertilisers, with 20% coming from Russia.
While it seems an obvious temptation for such actors to fill the production gap, such efforts could ultimately result in a greater overshoot of planetary limits. This will in turn affect climate change. Its effects are already adding to food pressures. In Morocco, a severe drought has reduced wheat and barley production by 70%. India’s recent heatwave is expected to dent its ambitions to increase its wheat exports.
A sustainable response
We believe investors and asset owners such as ourselves should engage with producers, retailers and other players in the food value to aid the move to ‘planetary health’ diets and address the close relationship between food and energy use.
They can contribute to a transformation of the food system by, for example, shifting the allocation of capital towards activities that need to be accelerated such as manure recycling, regenerative agriculture and precision farming techniques.
Policymakers could encourage farmers to transition to smaller herds and an integrated crop and livestock system. This could be part of a wider shift to growing more crops for direct human consumption rather than supporting meat production.
On the energy front, agricultural waste and residues can help the EU achieve energy self-sufficiency, while valorising products that carry an environmental risk in terms of nutrient leakage.
 Source: WSJ; March 2022
 Source: FAO; April 2022
 See ‘Agricultural Commodity Markets Reaction to the Ukraine-Russia Conflict’; March 2022
 Source: Bloomberg, BNP Paribas Exane Estimate
 Source: FAO, BNP Paribas Exane Estimate.
Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience.
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients.
Any views expressed here do not in any way constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.