Gambia: How Is the War in Ukraine Affecting Global Food Prices?

29 September 2022
opinion

Russia's invasion of Ukraine is raising food prices across the world. Developing and emerging economies are being hit hardest due to their reliance on the region for fuel and grain imports.

Price hikes in these countries could spur further political turbulence and even violence.

Ukraine is the world's largest producer of sunflower oil. Combined with Russia, it is responsible for more than half of global exports of vegetable oils. The region also exports over a third (36%) of the world's wheat.

The war in Ukraine, as well as sanctions against Russia, has resulted in a massive decline in the supply of major staple foods. This has led to a rise in food prices globally.

Which countries are bearing the brunt of the crisis?

Many developing and emerging market countries rely on food imported from Ukraine and Russia - known as 'the breadbasket of Europe' - to augment local food production. For example, the top three importers of Russian wheat in 2018 were Turkey, Vietnam and Indonesia. Similarly Indonesia, the Philippines and Morocco imported the largest share of Ukrainian wheat that year. Instability caused by the war will therefore negatively affect food supply in these importing nations.

Food shortages precipitated by the war are hurting food prices everywhere, with the hardest hit being developing economies where the world's poorest live. The United Nations' Food and Agriculture Organization (FAO) reports that the global Food Price Index (FPI) averaged 159.3 points in March 2022, up 17.9 points (12.6%) from February. This is the highest level since its inception in 1990. The latest increase reflects new all-time highs for vegetable oils (248.6 points) and cereals (170.1 points), highlighting the direct negative effect of the conflict.

Focusing on country-level statistics, the largest leap in food price inflation between February and March 2022 has been in developing/emerging regions such as sub-Saharan Africa. Several of these countries have experienced higher food price inflation than the global average (12.6%) over this period. For example, Lebanon (396%), Zimbabwe (75%) and Turkey (70%) experienced the highest rate of food price inflation between February and March.

Households in these countries devote a greater proportion of their total expenditure to the provision of food (see Figure 2). Specifically, the World Bank estimates that poor households in sub-Saharan Africa spend approximately 75% of their income on food. This compares with 10.8% for the average UK household in 2019/20.

Consequently, rising food prices reduce the real incomes of households, pushing more people into the food poverty trap - a situation where more individuals and households are unable to afford adequate and nutritious diet.

Sanctions on Russian oil companies and the planned bans on Russian energy exports have triggered further increases in energy prices in the international market. While the European Union (EU) is the largest collective buyer of Russian oil - buying 42% of Russia's oil output in 2021 - the constituent countries have managed to diversify their economic base and begun importing more oil from elsewhere.

In contrast, many developing/emerging markets run a 'monocultural economy' -meaning they are highly reliant on single basic resources such as oil. For example, while oil accounts for 40% of Nigerian GDP, 70% of its budget revenues, and 95% of foreign exchange earnings, Nigeria remains the only member of the Organization of Petroleum Exporting Countries (OPEC) that imports 95% of refined petrol for domestic use.

Consequently, movements in the international oil market affect local fuel prices in these markets. Eventually, the burden of higher costs of production, storage and transport is passed on to the consumers in the form of higher food prices.

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