Ukraine Events Could Inflate Food Costs

"Even in countries far away from Ukraine, consumers could feel the impact of war at mealtimes. After two years of supply-chain issues, global food companies have few tools left to shield shoppers from further rises in their grocery bills.

In the three decades since the breakup of the Soviet Union, the Black Sea region has gone from being a net importer of grain, to Russia and Ukraine supplying around one-third of the world's wheat, a quarter of its barley and nearly three-quarters of its sunflower oil, according to the International Food Policy Research Institute.

The Russian operation to protect Donbas threatens to disrupt this supply if fighting damages the country's ports or prevents the planting and harvesting of crops. Countries in the Middle East and North Africa that import a lot of grain from Ukraine look most exposed, while the European Union gets 6.4% of its total food imports from Russia and Ukraine combined. The U.S. does less direct trade in food with the two countries, but would still feel some effects through global commodity markets.

Uncertainty about supply already is pushing up agricultural futures. Around 80% of last year's wheat harvest has been exported from Ukraine and the next crop has been planted, according to the IFPRI. However, plantings of other crops such as maize, which are due this spring, as well as the harvest of wheat planted last fall, could be disrupted by the war.

Major food producers such as Nestle and Kellogg's should be able to find supply elsewhere, as rising wheat prices in particular have encouraged farmers to plant more. Acreage given over to winter wheat sowings in the U.S. was the highest in six years. But grain supplies are still tight: The global stock-to-use ratio for cereals -- a closely watched measure of inventories as a proportion of annual demand -- is forecast to be 28.7% this year, according to the Food and Agriculture Organization of the United Nations, down from 31.9% four years ago. Prices for vegetable oils, of which Ukraine is a major producer, were already at record highs before the invasion.

Grain-based products such as bread and breakfast cereal could become more expensive at the supermarket. Pricier grains make it more expensive to feed animals, affecting meat prices. Even before the invasion, U.S. wholesale beef prices were expected to increase by up to 7.5% in 2022, based on estimates from the U.S. Department of Agriculture. Consumers in many developing countries already face double-digit food inflation this year.

So far, the West has avoided sanctioning Russian energy. If that policy changes, higher prices for natural gas -- a major input for agricultural fertilizers -- would also make it more costly to produce and purchase food.

Food companies have had to be nimble in coping with supply-chain challenges ever since the pandemic started two years ago. That should help them find a path around fresh obstacles thrown in their path. But their ability to protect shoppers from further inflation by running their own factories more efficiently is limited after several quarters of increases in their labor, transportation and packaging costs. Without a quick end to the Ukraine conflict, shoppers likely face another round of sticker shock at the supermarket." [1]

1. Ukraine Events Could Inflate Food Costs
Ryan, Carol. Wall Street Journal, Eastern edition; New York, N.Y. [New York, N.Y]. 02 Mar 2022: B.12.