Food is a key product in international trade. Global trade in agricultural products improves food security, affects prices, and directly influences many agricultural input-dependent industries. Higher supplies of agricultural and food products keep prices low and stable, which is important for low-income economies. Therefore, the political stability of the global economy depends on food trade. These facts increase the importance of agricultural products and food-producing countries.
Economic and political shocks have a significant impact on the global food market. Their consequences include inflation, changes in trade policy such as export restrictions, and disruption of production and transportation chains. Export restrictions lead to food shortages, which put many food import-dependent countries at risk. The war in Ukraine shows that food can be used as a geopolitical tool. Besides geopolitical shocks and economic crises, the global agricultural market and food trade are being affected by several factors such as the growing global population, higher demand from developing countries such as China, new agricultural technologies, and climate change.
Despite the importance of agricultural trade, the sector was almost not affected by global trade liberalization. Many countries, in particular, developed ones, did not reduce their protectionism policies, while trade barriers in middle-income countries also seem to be rising. Developed countries dominate the global agricultural market, but the share of developing countries is rising. Trade in food products between industrial countries takes place within trading blocs such as the European Union (EU). At the same time, it is worth noting that more countries have become net food importers, and most of the large net-food-importing developing countries are either oil exporters or highly industrialized nations [Ng and Aksoy, 2010].
The global financial crisis was one of the major shocks, which caused higher food prices. In 2007, the average increase in real food prices across the 124 countries rose to 2.2%, while in 2008 it doubled to 4.4% for all countries. These price increases were higher in developing countries and pushed an estimated 155 million people into extreme poverty. In 2020, real food price increases averaged 2.2% across 180 countries, making it the largest gain since the crisis of 2008. It is worth noting that food prices started to increase even before the Russian invasion of Ukraine as in the first 2-3 months of 2022 about 15% of all countries reported price increases of more than 4%. The surge in food prices had a substantial negative impact on developing economies, particularly in Sub-Saharan Africa and Emerging Europe and Central Asia, as food accounts for about 30-45% percent of expenditures, or 2-3 times the share in high-income advanced countries [Graf von Luckner et al., 2022]. Figure 1 shows the dynamics of food price inflation for the world. While in January 2021 the indicator equaled 5.6%, in September 2021 it exceeded 23%.
Figure 1. Food price inflation for the world, %
Source: The Author’s compilation based on the FAOSTAT (2022) data.
As it was mentioned above, food prices increased before the Ukrainian crisis. In particular, the food price inflation in December 2021 reached 11%, in January 2022 it amounted to 11.9%, and in February – 12.7%. Therefore, the war in Ukraine accelerated the increase in food prices.
Russia and Ukraine play an extremely important role in the global agricultural and food market. In 2020, Russia and Ukraine correspondingly supplied 18.8% and 9.1% of wheat, 13.1% and 13.3% of barley, 20.5% and 44% of the sunflower oil traded globally. About 50 countries import over 30% of their wheat from Ukraine and Russia, while 15 of them import over 70% from these suppliers. For instance, Egypt depends on both counties for 86% of its wheat imports, while Lebanon’s indicator amounts to 96%. These import-dependent countries are mainly from the Middle East and North Africa region, some of them are at war (Yemen), while others (Lebanon, Egypt, Tunisia) experience economic crises [Hellegers, 2022].
Due to disruptions caused by the war, the probability of civil and armed conflicts in Africa increased substantially. Higher food prices will have a different effect on producing and food-dependent (consuming) areas. According to predictions, higher commodity prices will reduce conflict in areas that produce the given commodity, while higher staple food prices can increase conflict as food occupies a large share of household expenditure in Africa (around 40%). Thus, rising prices may induce marginal workers to avoid participating in armed groups in areas where crops are produced. However, they may also induce them to join armed groups in areas where crops are consumed. According to estimates based on producer and consumer price indices, the weighted average effect of the Russian invasion is an increase in inter-group conflict in Africa of 5.3%. Moreover, higher prices will lead to smaller-scale riots, demonstrations, and/or civilian violence in both food-producing and food-consuming areas [McGuirk and Burke, 2022].
Reuters (2022) documents a long list of protests caused by price hikes because of the Russia-Ukraine war and drought fuelled by climate change. Protests occurred in Argentina, Chile, Cyprus, Greece, Guinea, Indonesia, Iran, Kenya, Lebanon, Palestinian Territories, Peru, Sri Lanka, Sudan, and Tunisia. Protesters were against surging food and fuel prices, food prices contain, export controls, and subsidy cuts, while students demanded higher food stipends. It is worth noting that the Iranian government’s decision on lifting subsidies led to 300% price increases for a variety of flour-based staples. According to Al Jazeera (2022), protesters in Tunisia chanted “we can’t support crazy price hikes” and “where is the sugar?” Supermarkets experienced empty shelves, and dozens of customers scrambled for a kilogram of sugar at markets. Many Tunisians have reported spending hours searching for sugar, milk, butter, cooking oil, and rice.
The Conversation (2022) reports that protests related to surging food prices took place in Iraq. According to Iraqi officials, the Russian invasion of Ukraine caused higher prices and significantly increased the cost of the region’s food. It is important to note that Iraqi traders benefited from the situation to earn extra profits. The government of Iraq put measures to tackle shortages, distributing food to those in most need, and temporarily suspending customs charges on consumer goods, construction materials, and international food products. Imports from Russia and Ukraine decreased substantially. Moreover, neighboring Iran and Türkiye restricted food exports to Iraq to prioritize their national stocks, which worsened the situation in the country.
‘Grain Deal’ has been one of the most important agreements, which contributed to the stabilization of the global food market and helped low-income and food import-dependent countries. Since the summer, the deal, brokered by Türkiye in July 2022, has helped Ukraine free nearly 11 million tons of foodstuffs such as wheat, corn, and sunflower oil. Europe has not been directly involved in the Black Sea deal. Russia, in turn, has criticized the agreement, saying that its exports of food and fertilizers have been choked, demanding the lifting of sanctions, while western officials maintain that Russia’s food and fertilizers have not been sanctioned [Politico, 2022]. In November 2022, after Russia withdrew from the deal, President of Türkiye Recep Tayyip Erdogan directed his efforts and succeeded in returning Russia to the agreement. The Russian president promised that Russia would not prevent the export of Ukrainian grain to Türkiye. It is important to mention that it was also in Russia’s interests to agree to the deal as it allows exports of Russia’s own grain and fertilizer, which was not officially billed as part of the deal but was agreed with the United States and the EU. One of the main points of Russia’s dissatisfaction with the deal is that Ukrainian grain was mainly sent to Europe, rather than the poorer countries where it was needed more [Prokopenko, 2022].
Policymakers implemented different measures to mitigate the consequences of food price hikes. Mainly, their policy addressed the needs of low-income households and was energy-related as energy prices have a substantial impact on food price changes. Policy measures included fuel subsidies, tax cuts, a windfall tax on energy firms, use of energy reserves, price controls, state aid, and restrictions on energy use and exports. The most common measures are fuel subsidies per unit consumed. By late July 2022, governments introduced these measures in 64% of emerging market economies and the majority of advanced comparator economies. Price controls on food and energy are also common in Emerging Europe and Central Asia. However, policy responses in the region have been less effective than in advanced economies, being less inclusive and less green [Plekhanov et. al., 2022].
Between the Russian invasion of Ukraine and 7 April 2022, governments imposed or announced 67 new trade policies or 87 including subsidies, of which 38 were new export bans and export-licensing requirements. Twenty countries increased export controls, including Russia, Serbia, and Hungary. Export restrictions contribute substantially to the further increase in food prices. This policy diverts supplies from the world market, leads to an increase in world prices and makes other governments retaliate by imposing new export restrictions, causing a further surge in prices. According to estimates, bans on wheat exports imposed by Russia and smaller exporters are responsible for a 7 percentage point increase in world wheat prices. Kazakhstan also announced an imposition of a quota on wheat exports. These measures can cut the country’s exports by 80% relative to 2019 and cause an increase in the world price of wheat by one additional percentage point [Ruta et al., 2022].
Other measures to contract geopolitical risks in the global food system include investing in renewable energy, intensifying efforts to recycle nutrients, and increasing productivity in developing countries. Global and regional differences in productivity remain high. Weather, optimized use of inputs such as seeds and fertilizers, and farming techniques determine harvests and yields. Hence, in developing countries, it is important to focus on using the right decision-making tools and having access to knowledge and quality inputs [Holsether, 2022].
Despite the significant agricultural potential, countries of Central Asia remain net food importers. Kazakhstan is on the list of key wheat suppliers on the global market and mainly exports its wheat to the rest of Central Asian countries. Due to high dependence on imports and the inability to provide the regional market with a sufficient amount of agricultural and food products, the food price inflation in Central Asia reached high levels. Figure 2 shows that food prices increased substantially in Kazakhstan with inflation reaching 22%.
Figure 2. Food price inflation in Central Asia, 2022
Source: The Author’s compilation based on the FAOSTAT (2022) data.
Tajikistan has the lowest food price inflation, which equaled 10%. Hence, given the above-mentioned global experience and political processes in Central Asia itself, increasing food prices and shortages can be considered one of the main economic and political risks for the region. Therefore, the regional authorities need to solve a twofold task. Firstly, it is important to address the current crisis in the region. Secondly, Central Asian states should use this global crisis as an opportunity for economic diversification. To do so, the region needs to develop a short-term plan to tackle the food crisis and a long-term agricultural reforms strategy. In the short-term, the regional countries may use trade policy, in particular import liberalization for food products. These measures will increase the regional supply and put pressure on food prices, contributing to price stabilization. Reforms in agriculture, in turn, will require both political will and economic/financial capacity. Here, the governments need to focus on increasing productivity, importing/developing agricultural technologies, and investing in human capital and infrastructure. Recent evidence shows that the food trade gained importance and became a geopolitical tool. Therefore, agricultural reforms in Central Asia may result in higher production and export volumes, which will bring the region geopolitical importance and contribute to its food and political security.
References:
Al Jazeera (2022). Protests in Tunisia’s capital amid inflation, food shortages. Retrieved from https://www.aljazeera.com/news/2022/9/26/protests-in-tunisias-capital-amid-inflation-food-shortages. Accessed on 08.12.2022.
FAOSTAT (2022). Consumer Price Indices. Retrieved from https://www.fao.org/faostat/en/#data/CP. Accessed on 28.12.2022.
Graf Von Luckner, Clemens, Holston, Kathryn, and Carmen Reinhart (2022). Is another food crisis unfolding? Retrieved from https://blogs.worldbank.org/developmenttalk/another-food-crisis-unfolding. Accessed on 15.12.2022.
Hellegers, Petra (2022). Food security vulnerability due to trade dependencies on Russia and Ukraine. Food Security, 14: pp. 1503–1510.
Holsether, Svein Tore (2022). Three ways to reduce geopolitical risks in the global food system. Retrieved from https://www.weforum.org/agenda/2022/05/three-ways-to-reduce-geopolitical-risks-in-the-global-food-system/. Accessed on 10.11.2022.
McGuirk, Eoin, and Marshall Burke (2022). War in Ukraine, world food prices, and conflict in Africa. Retrieved from https://cepr.org/voxeu/columns/war-ukraine-world-food-prices-and-conflict-africa. Accessed on 10.11.2022.
Ng, Francis and Ataman Aksoy (2010). The evolution of agricultural trade flows. Retrieved from https://cepr.org/voxeu/columns/evolution-agricultural-trade-flows. Accessed on 15.12.2022.
Plekhanov, Alexander, Sassoon, Joseph, and Anna Carruthers (2022). Policy preferences and responses to high energy and food prices in emerging markets. Retrieved from https://cepr.org/voxeu/columns/policy-preferences-and-responses-high-energy-and-food-prices-emerging-markets. Accessed on 15.12.2022.
Politico (2022). Erdoğan confident Ukraine grain deal will continue. Retrieved from https://www.politico.eu/article/recep-tayyip-erdogan-emmanuel-macron-confident-ukraine-russia-grain-deal-continue-vladimir-putin/. Accessed on 05.12.2022.
Prokopenko, Alexandra (2022). Russia’s Return to Grain Deal Is a Sign of Turkey’s Growing Influence. Retrieved from https://carnegieendowment.org/politika/88349. Accessed on 05.12.2022.
Reuters (2022). Factbox: Surging food prices fuel protests across developing world. Retrieved from https://www.reuters.com/markets/commodities/surging-food-prices-fuel-protests-across-developing-world-2022-05-18/. Accessed on 10.12.2022.
Ruta, Michele, Evenett, Simon, Rocha, Nadia, and Alvaro Espitia (2022). Widespread food insecurity is not inevitable: avoid escalating food export curbs. Retrieved from https://cepr.org/voxeu/columns/widespread-food-insecurity-not-inevitable-avoid-escalating-food-export-curbs. Accessed on 15.11.2022.
The Conversation (2022). Iraq food protests against spiralling prices echo early stages of the Arab Spring. Retrieved from https://theconversation.com/iraq-food-protests-against-spiralling-prices-echo-early-stages-of-the-arab-spring-179145. Accessed on 15.12.2022.
Note: The views expressed in this blog are the author’s own and do not necessarily reflect the Institute’s editorial policy