As Abraham Maslow so eloquently noted, physiological needs like food, shelter, water, and rest are the first step of survival.
It logically follows that economic expansion can’t begin until people not only have enough to live, eat, drink, and rest, but also create enough excess to store or sell.
For example: if you are worried about your next meal, will you focus on foraging for food or sitting at a library to study to become a doctor or engineer?
Of course, you can’t self-actualize without securing food and shelter first.
And this is the crux of the issue: if you can’t secure your food, your economy heads back to the Stone Age.
Food insecurity has become a staggering problem around the world, with Africa and Asia seeing a steady rise in unmet basic needs.
The below chart is from 2019, so when we factor in prices back to the 2014 highs, the pain is worse.
The year 2014 was when global food insecurity really started.
And now that prices have pushed back to decade highs, alongside a global pandemic impacting salaries and subsidies and a war that will result in shortages.
I hate to say it, but the pain is just starting…
A Global Food Shortage
The world faces a global food shortage that rivals the 1930s Dust Bowl. And the War in Ukraine has only made this crisis worse.
From the World Bank:
Even before COVID-19 reduced incomes and disrupted supply chains, chronic and acute hunger were on the rise due to various factors, including conflict, socio-economic conditions, natural hazards, climate change and pests. The impact of the war in Ukraine adds risk to global food security, with food prices likely to remain high for the foreseeable future and expected to push millions of additional people into acute food insecurity.
Consider this: The Agricultural Price Index is up 41% since January 2021. The chart below shows how much prices have risen in the past two decades.
Food prices have officially taken out the previous 2011 high, with more pressure coming as the planting in Ukraine is non-existent and Russia withholds exports.
The rate of change of food prices has slowed, but they still hit new highs… with more to come.
The market in general is different today versus previous spikes.
And we also must face Mother Nature, who’s one unhappy lady.
As weather patterns shift, droughts and floods are cutting this year’s already meager yield, building on weak harvests since the end of 2019.
This drives up the price of food and incentivizes farmers to do whatever is possible to increase yield.
And that usually means putting down more fertilizer, but…
The Sh*t That Really Matters
Another key piece making the food situation worse is the growing shortfall and rising price of fertilizer.
Again, the Russia-Ukraine War is a big reason why.
Russia and Belarus account for a huge percentage of the world’s available fertilizers, and they won’t be exporting anything soon.
So, not only are we short food in the world, but we also don’t have the fertilizer available to try to increase crop yields.
Creating fertilizer is an energy intensive process. As energy prices (such as natural gas and diesel) explode higher, facilities have two choices: either pass on the cost to customers or cut utilization rates.
In Europe, fertilizer production has been curtailed because of the price hike, as well as to preserve natural gas, thanks to the Russian sanctions.
The war removes almost 37% of potash from the global market.
Potash is the common name given to a group of minerals and chemicals that contain potassium (chemical symbol K), which is a basic nutrient for plants and an important ingredient in fertilizer.
This means much of the nutrients used for growing our food are no longer on the market.
Analysts has stated that even if Russia leaves Ukraine today it would take 2-3 years before getting volumes back to pre-invasion levels.
This will keep agricultural prices high for the foreseeable future.
The shortage is why world fertilizer prices remain at near record levels, providing a strong revenue backdrop heading into peak application season.
The world is rightly concerned about the availability of fertilizer, which is causing some countries to horde their domestic supplies and others to source product ahead of schedule.
This will keep prices high well into 2023.
Again, from the World Bank:
Over the coming months, a major challenge will be access to fertilizers which may impact food production across many crops in different regions. Fertilizer prices surged in March, up nearly 20% since January 2022 and almost three times higher compared to a year ago. Russia and Belarus are major fertilizer exporters, accounting for 38% of potassic fertilizers, 17% of compound fertilizers, and 15% of nitrogenous fertilizers.
It’s unlikely the U.S. and other areas will be able to make up for the losses in fertilizer production or food, given the droughts in Latin America and input costs, such as fertilizers, seed, and diesel.
This will keep crop prices elevated especially as China absorbs more cargo and other countries are left scrambling.
Hitting Brazil And Europe In The Chops
Brazil is running significantly short of fertilizer as more cargo is trapped in Russia without a way to get it to market.
As Brazil sources a large percentage of their fertilizer from Russia, these statements are concerning:
Russia is urging the country’s fertilizer producers to halt exports in a move that could send soaring global fertilizer prices even higher
Russia’s Ministry of Industry and Trade recommended domestic fertilizer producers cut volumes to farmers due to delivery issues with foreign logistics companies, according to a Friday statement.
Russia, which has been facing increasing international sanctions since invading Ukraine, is a major low-cost exporter of every type of crop nutrient.
This is smacking both Brazil and Europe in the chops because Russia provides both a significant amount of fertilizer product.
Russia can’t supply farmers in Europe and elsewhere with contracted volumes of fertilizers because a number of foreign logistics companies are sabotaging deliveries, Russia’s Industry and Trade Ministry said Friday in a statement. In future, Russia may not want to supply them, either.
Given the circumstances, the ministry recommends a halt to fertilizer exports.
Russian farmers will receive volumes of fertilizers they need.
The uncertainty around new sanctions has also put buyers on the sidelines until there is more clarity, which hits all commodities originating from Russia.
Russia trades a signficant amount with Europe. Raw materials and energy flow into the EU, while the EU sends finished products back to Russia.
The U.S. exposure to Russia is smaller, but still significant in the areas we import, such as IE oil and diesel.
But there is another problem on the horizoin…
The Amber Waves of Grain, Above the Fruited Plain
Grains are just the first in a long step of processes before it reaches you at the restaurant or grocery store.
Each part of the supply chain has its own costs and margins to manage, with a large part driven by labor shortfalls and logistical strain.
Thanks to our amber waves of grain, God bless them, the United States of America can feed itself.
But the rest of the world is short of food – and getting shorter – as many growing regions experience droughts and falling yields.
All the while, the global population is growing, with Chinese demand surging to record levels.
For that reason, China is the world's largest agricultural importer.
Last year, China imported a record 28 million metric tons of Ukrainian corn. That’s more than double previous year's 11 million.
Think about that…
Assuming 1 metric ton = 2204.62 lbs, China imported 24 TRILLION pounds of corn from the Ukraine in 2020.
Add on an extra 17 million metric tons, and that is 62 TRILLION pounds of corn imported from the Ukraine in 2021!
How is that amount made up with the lack of exports now coming out of Ukraine?
The answer is… it isn’t… and the Chinese people will suffer for it.
The Russia-Ukraine war exacerbates the risk for food inflation and supply disruption.
This is another key reason we have seen China open its markets to Russian wheat and other grains.
It helps offset the loss of Latin American and Ukrainian produce.
Also, emerging markets have already seen a bigger food price surge than they experienced during the Arab Spring or the Peasant Uprising.
This will put more pressure on governments to subsidize food costs to maintain some semblance of normalcy.
The World Bank has been issuing near-term loans and grants to help countries to pay farmers, finance fertilizer and food purchases, and make other yield-enhancing investments.
When we break this down into “real terms” when evaluating food prices, we are right back to levels not seen since 1974.
Food prices are going to be pinned to the highs, as fertilizer prices surge to a new record.
Everything from diesel to fertilizer are hitting new records that will keep farming costs sky high.
These high costs will be passed on to the consumer.
Food shortages don't happen suddenly: it takes time to work through storage and state reserves.
The shortages started out slowly at the end of 2019, but accelerated in 2020/2021 with droughts, floods, pests, and logistics.
As I mentioned, the Russia-Ukraine war merely tops a situation that started several years ago.
The issues have been compounding since the end of 2019. Now we’re in a terrible position with yet another projected terrible year of crops.
We have already highlighted what the Russia-Ukraine war means for emerging markets, but here is just another reminder for what it means for Africa.
India Also Walks a Fine Lin
The below is another example of why India and China will remain neutral with Russia.
They simply can’t risk losing Russian commodities.
Russia also exports military equipment to a wide range of countries with India relying on them significantly for equipment and training.
After China attacked India in Ladakh, Russia was quick (and the first country) to support India and accelerated the delivery of key equipment including the S-400 and other military equipment.
India relies on Russia extensively, and we believe they will remain neutral in the current conflict.
India also must walk a fine line because they are also part of the QUAD along with the U.S., Australia, and Japan.
So, they can’t go too far towards the Russia camp, but instead remain neutral and purchase cheap crude from the country and maintain a steady flow of food and military equipment.
