The Interlinkages of Food and Energy Security

Guy: It is well-known that global supply chains were disrupted by the pandemic and now the Russian Ukraine war along with the corresponding sanctions, has magnified issues. Certainly, soaring commodity prices reflect shortages caused by demand surpassing limited supplies. Could you help us put it all into perspective?

Michael: It is a very dynamic and important situation. It is probably best if I start with some background to put the situation in context.

• Russia and Ukraine account for 12% of total calories consumed across the worldⁱ. They are the largest and fifth largest wheat exporters in the world – together accounting for about 30% of the world’s wheat exports, 19% of the world’s Barley, 17% of global corn exports, 52% for global sunflower oil, and 33% of global cereal exportsⁱⁱ. Wheat is a staple food product for over 35% of the world’s populationⁱⁱⁱ.
• It is interesting to note that the UN World Food Program purchased more than half of its wheat from Ukraine last year^iv.
  
• The US is the fourth largest wheat producer globally, but is the second largest wheat exporter, second only to Russia. This suggests that the conflict seems likely to spur higher domestic prices and production, as trade frictions push demand away from the top exporting market. Depending on the duration of the conflict and the persistence of the frictions, we could see farming in the U.S. pushing back toward the crop, which is in contrast to the over 40 years of declines in planted acres and production since peaking in 1981.
  
• Let me just add that the world was dealing with pockets of food insecurity before the pandemic even hit. Covid clearly made it worse, and the Russia-Ukraine war has now driven it to crisis levels in many parts of the world.
  

Guy: And fertilizer supplies now plays a part as well, right?

Michael:

• Absolutely. Russia is the world’s largest exporter of fertilizers, accounting for 23% of ammonia exports, 14% of urea exports, 10% of processed phosphate exports, and 21% of potash exports, according to data from The Fertilizer Institute. The primary destinations of fertilizers from Russia are Brazil (21%), China (10%), the US (9%), and India (4%).
•  Dozens of countries rely on Russia for over 50% of their fertilizer supplies^v. Russia, Ukraine and Belarus are all major producers of natural gas which is the chemical necessary to produce fertilizers for crops. Natural gas prices have risen significantly in the past few months^vi. I point this out to emphasize how soaring energy prices, and crop yields are interlinked….as are higher transportation costs.

Guy: How reliant is the US?

Michael: 

• The US is not overly reliant on Russia for its key fertilizers. The only fertilizer sourced primarily through imports in the US is Potash, and we secure around 83% of our Potash from Canada, and only 6% from Russia. While production prices may rise somewhat due to higher global fertilizer costs, the US farming sector seems positioned pretty well.
  

Guy: So, if we, here in the US, seem to be positioned, who is more likely to be impacted?

Michael:

• Low-income countries and individuals are most impacted. They were already feeling the pain due to pandemic-induced supply chain issues combined with eroded spending power due to inflation.
  
• African countries imported nearly $7 billion worth of Russia and Ukrainian agricultural products in 2021^vii.
  
• Middle east countries are also large importers. Countries like Egypt, Kenya, Turkey, Bangladesh, Ghana, Nigeria, and Indonesia - to name a few - all import 50 to 75% of their cereal products^viii. Many of them will have to reassess in terms of future available and sanctions.
  
• In addition, droughts have also led to poor wheat harvests in North American and poor soybean and corn yields in South America.
  
• Corn and grain additives are essential for feeding livestock and make up about half of their input cost^ix
  

In recent years, Ukraine supplied the EU with over 50% of its grains for animal feed^x. In Spain, for example, it imported grains feed over 55 million pigs^xi. Again, you can see how the entire food and energy ecosystems are intertwined.

Guy: Everyone is certainly feeling the impact from significant increases of food and energy prices which as you stated have had an out-sized impact on the disposable income of low-income individuals. I’d like to now talk about more than just higher prices and focus on the potential political, and social, consequences that could arise from food and energy instability.

Michael: No doubt, there are interesting ramifications to consider. Global trade used to be about low-cost production and economic growth. Going forward trade decisions will be driven more by politics led by national security issues. Supply chains of critical products like food and energy are at the top of the list of key issues in this regard. By being less reliant on international markets government can increase their degrees of freedom and national security. Self-sufficiency is being placed above efficiency or at least being elevated to the same level of consideration.

Seismic shifts are taking place. Globalization is retrenching. The result is that it could mean higher prices will be with us for years to come. And with this in mind, countries will need to find creative or innovative ways to lower prices by increasing domestic supplies. Most governments know that few good outcomes come from an agitated populace.

Guy: From a relative, absolute, and Geo-political point of the view the U.S. seems well-positioned.

Michael: That is probably an understatement. The US is quite lucky and in a better place than most countries. The U.S. typically has a well-balanced mix of soil, sun and rain. According to the USDA, exports of farm and food products to the world totaled $177 billion in 2021. This was 18% larger than the year before and 14.6% larger than 2014 which had the record for largest annual total^xii. These improvements in output and productivity could not be coming at a better time for us and the rest of the world.

Guy: According to the UN High Commission of Refugees, the Ukraine exodus is fastest-growing refugee crisis in Europe since WWII, topping 2 million in the first 2 weeks f the conflict^xiii. I would think that food shortages or famine could lead to many more lives being uprooted around the world, which could then exacerbate supply pressures and cause shortages in other locations?

Michael: That is exactly right. There are enormous second order effects from the Ukraine conflict. After religious disputes, historical food insecurity, is the leading cause of conflict, social unrest and uprooting of families. The expanding wealth inequality gap witnessed during the past decade has made this situation more combustible. History has shown us that when people can’t afford basic needs like food, then people begin to feel as if their government is failing them – and that in turn can lead to voter backlash or even violent uprisings.

Ultimately though, many of these Ukrainian refugees seem likely to be making their way into countries who have well established trading relationships with a diverse set of countries. They are more typically moving into countries that seem less likely to be pushed into a dire famine situation, but the increased consumption could, again, cause second order effects in some of the smaller and less developed economies around the world.

Guy: What can or should be done?

Michael: Earlier we discussed how the pandemic and sanctions have impacted supply chains and global trade. Governments and corporations have been forced to learn the importance of critical supplies.

• Things like Just-In-Time inventories may no longer be the optimal strategy.
• All countries have learned the significance of being energy and food self-sufficient if they are in the position to do so. If not, they need reliable partners and a back-up plan.
  
• Geographic proximities are now also of greater importance.
  
• Some countries can help provide subsidies to those in need when prices pinch, but not all countries are in a fiscal position to do so. The countries who can export excess production are in a particularly advantageous position.
  

Guy: Shorter run needs are fairly obvious. What needs to happen in the long-run?

Michael:

• In the mid to long run, countries will need to evaluate any, and all, policies that limit food and energy production. It is essential that countries look for alternative suppliers to absorb the shock of shortages, and to diversify their domestic food production to ensure people’s access to healthy diets. Supply chains will need to reconsider efficiency, such as cost per pound of calorie,as the sole aim of the food value chain and move more toward understanding the slack in the system even if it means additional costs.
  
• Governments will need to work together to support vulnerable groups including internally displaced people. International organizations must reach people in need. Collaboration recently has been excellent so far, and it must stay that way.
  
• When vast numbers of people are being displaced and pushed into poverty and hunger due to conflict, it is essential to provide timely and well-targeted social protection programs for them. It is not only the right thing to do, but it is necessary in order to prevent a larger humanitarian disaster.
  

Guy: That all seems like great advice, to me. And, is a great place to stop. Thank Michael, for sharing your insights.

Michael: Thank you.

Endnotes
ⁱ The Economist Magazine and OECD
ⁱⁱ USDA
ⁱⁱⁱ ibid
^iv United Nations
^v According to the U.S.EIA
^vi ibid
^vii OECD
^viii ibid
^ix USDA
^x OECD
^xi ibid
^xii USDA
^xiii UNHCR

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