5 min read 18 Aug 22
The disruption to food supply caused by the conflict in Ukraine has highlighted the dependency many countries have on food imports. As these countries seek to protect their economies from future disruptions, we anticipate an increase in inward investment to modernise domestic agricultural infrastructure. Given this expectation we are seeking to build exposure to food infrastructure in the funds as we help countries build out this crucial infrastructure.
Russia’s invasion of Ukraine has brought untold levels of human misery to those directly involved in the war. However it is Ukraine’s role as the bread basket of Europe that for many brings the conflict closer to home.
Before the invasion began Ukraine’s nutrient rich soils produced the worlds’ largest supply of sunflower and sunflower oil. Combined with Russia, Ukraine provides half the world’s sunflower products and a quarter of the worlds wheat. The two countries are also major producers of barley and maize. Meanwhile, Russia is one of the world’s biggest producers of fertilisers, which are essential to modern farming.
Fertilisers are concentrated forms of the three nutrients that are essential to growing all crops: Nitrogen, Phosphorus and Potassium. Modern crop yields are only possible through their use. A point cruelly illustrated by Sri Lanka’s decision to transition its country’s farmers to organic agriculture. Following an election promise in April 2020, Sri Lanka banned the import and the use of all synthetic fertilisers and pesticides. Both its tea and rice crops have since been decimated and the previously self-sufficient nation has been forced to import rice amid soaring prices.
A world with less fertiliser will need to get used to lower yields. Unfortunately, over the past year this is what has happened. The fertiliser forms of all three elements have seen huge price increases due to supply shocks and in the case of nitrogen based fertilisers, soaring energy costs. Nitrogen fertilisers are particularly sensitive to energy costs because natural gas accounts for 70%-80% of the production costs of ammonia – the compound upon which all nitrogen based fertilisers are based. As natural gas prices peaked and margins eroded, fertiliser manufacturers in Europe scaled back their production capacity and even mothballed some plants entirely.
Meanwhile, in response to the economic sanctions imposed on it by the West, Russia has halted fertiliser exports. Before the conflict, Russia provided around a quarter of Europe’s fertiliser imports. Nearly 40% of the global supply of Potash (agricultural source of potassium) originates from Russia and Belarus. The export bans and sanctions on both countries have caused prices to surge and volumes to plunge. As a consequence, Belarus is currently selling just 5% of normal volumes.
As supply pressures have increased there has been an understandable if unwelcome increase in protectionism. Chinese authorities moved to ban major Chinese fertiliser producers from exporting fertiliser in July 2021 prompting global fertiliser prices to push higher still.
Farmers around the world, who are already contending with high fuel costs, now face a difficult choice: reduce the amount of fertiliser used per hectare, or reduce the number of hectares planted. Both of these options will result in reduced yields.
Extreme weather events have also had a negative impact on yields over the past 12-months and this had led to an increase in protectionist policies.
In India, an unusually early and intense heatwave throughout March 2022 hit wheat yields. As a result just weeks after proclaiming that Indian farmers could feed the world, the government imposed a ban on wheat exports.
In the US, the United States Department of Agriculture has predicted an 8% fall in winter wheat yields due to drought in the southern states of Kansas, Oklahoma and Texas. Winter wheat makes up 75% of total US production. The agency now expects US wheat 2022/23 ending stocks to be the lowest in 9 years.
China, the world’s largest wheat producer, had already warned that heavy autumn rains and flooding had delayed planting of around a third of the total crop last year. The agriculture minister said that the winter wheat harvest could be the “worst in history”. There are now concerns that recent lockdowns resulting from a strict zero-Covid policy has disrupted the distribution of seeds and fertiliser, as well as substantially restricting movements of migrant labour. This could have a meaningful impact on the important spring planting season.
Food accounts for a much higher proportion of household spending in emerging economies than it does in the developed world and many of these countries also tend to be net food importers.
One example is Egypt, the world’s largest importer of wheat. As a crucial part of the Egyptian diet wheat is subsidised by the government. However, the country has increasingly become dependent on Russia and Ukraine for wheat imports leading to the current concentration risk, which is proving so costly.
It is not just Egypt, countries across Africa, the Middle East and Asia are heavily dependent on food imports from Russia and Ukraine.
Whilst global grain reserves are high, and the G7 group of countries have recently agreed to sign a joint declaration to keep food markets open in order to stabilise international food markets, the elevated prices and fertiliser shortages are likely to continue to impact food production and harvests through 2022 and 2023. Longer-term climate change is predicted to increase the incidences of extreme weather, which could have a detrimental impact on future crop yields. Faced with these challenges it seems to us prudent for countries to increase their domestic agriculture infrastructure.
As a result, we are tilting the portfolios to focus on the quality of inflation and in particular have some additional exposure to food infrastructure. More details will be available in future notes.
The views and opinions expressed in this should not be taken as a recommendation, advice, or forecast.