Unpacking food inflation: supply-chain disruptions and energy prices

A year ago few would have predicted the unprecedented rise in food prices the world is now seeing. As of May 2022 the FAO Food Price Index was 22.8% above its value in May 2021.¹ Covid-related supply-chain disruptions, increased energy prices and climate change have contributed to rising inflation. But with the war in Ukraine the world is seeing a more drastic increase in the price of food. This is due to a new wave of disruptions in supply chains and the war’s implications for the global oil and gas market.

Importantly, the high cost of staple foods has meant that 1.6bn people may not have enough to eat, and nearly 250m of them are on the brink of famine.² This makes it imperative to understand the drivers of food price inflation so that appropriate corrective action can be taken.

Supply-chain disruptions

Together, Russia and Ukraine supply 12% of globally traded calories. Regarded as the breadbaskets of the world, they supply 28% of globally traded wheat, 29% of barley, 15% of maize and 75% of sunflower oil.³ However, exports of these goods have suffered a severe decline: in Ukraine because of Russia’s invasion and in Russia as a result of global sanctions.

In response to Russia’s invasion Ukraine has mined its waters to deter any assault, while Russia is blockading the port of Odessa. Combined, these measures prevent supplies from leaving the country. Around 80-100 ships were unable to leave Ukrainian waters between February and April because of mines and military blockades.

Before the war Ukraine exported 6m tonnes of grain and oilseed a month, but by March 2022 these exports had fallen to 200,000 tonnes. Attempts to divert Ukraine’s food exports from sea to rail have met with limited success, given that as much as 70% of Ukraine’s exports used to go by sea, with the Odessa region’s ports handling 75% of this. The outcome is a drastic increase in food prices due to a fall in supply.

The knock-on impact of a sharp rise in food prices has been a wave of protectionist policies. Since the start of the war 23 countries have imposed severe restrictions on food exports that cover 10% of globally traded calories. Research shows that during the 2007-08 global financial crisis export restrictions may have added as much as 30% to wheat prices.⁴ They also distort incentives for farmers to invest in expanding productive capacity, which is necessary to increase supply and bring down both local and global food prices. Ultimately, there is a multiplier effect on the reduction of food supply globally, driving up prices even further.

Supply-chain disruptions of fertiliser, in particular, are also impacting costs. The US has not sanctioned Russian fertiliser exports, and the EU is allowing imports of specific quantities of them. However, the uncertainty around sanctions due to the rapidly changing environment is deterring banks and traders from helping to export such goods, adding yet another reason for the increase in global food prices.

Energy increases

The energy price increase over the past two years has been the steepest since the 1973 oil crisis.⁵ Energy prices are expected to continue rising in 2022 by more than 50%. The price of crude oil is expected to average US$100/barrel in 2022, its highest level since 2013 and an increase of 40% from 2021. A lot of the price increase is driven by the sanctions imposed on Russia because of the war in Ukraine.

Energy prices impact the food industry in two main ways: first, the direct cost of energy required for production and distribution, and second, the indirect impact through the cost of fertiliser (which relies on natural gas as an input).

The food industry is heavily reliant on fossil fuels for production and distribution. The sector accounts for 26% of global greenhouse gas (GHG) emissions (a proxy indicator for fossil fuel consumption by the industry), so a rise in energy prices will have a drastic effect on the price of food. Even locally produced food and primary agricultural goods do not escape the impact of higher energy prices. Supply chains (food processing, transport, packaging and retail) only account for 18% of food emissions, whereas crop production and livestock and fisheries account for 27% and 31% of food emissions, respectively.⁶ Even if countries started producing more staple food groups, the high energy costs would still ensure that food prices are much higher than they were a year ago.

Beyond production and distribution the higher costs of fertiliser, a key input for agricultural production, have led to higher food prices. The price increases in fertiliser seen over the past few months have been the largest since 2008.

Who loses out?

Ultimately both supply-chain disruptions and energy price increases are affecting the price of food. However, some countries stand to lose more than others. Those that rely on agricultural exports from Ukraine and Russia to feed their populations or on fertiliser and energy from Russia to produce their food are most at risk. These include countries in Central Asia (including India, Pakistan and Bangladesh) and North Africa (including Algeria, Egypt and Libya), which rely on imports of ingredients such as wheat and vegetable oils. European countries which import Russian fertiliser and energy are also more affected than those that source these commodities from elsewhere.

There are many initiatives that governments and countries can take to help ease the pain of price spikes of essential agricultural commodities. Removing export controls would be a first step. Ensuring that farmers are focusing on food production rather than biofuel production as a way around the increased energy costs would also help. The US and the EU could also instil confidence in traders that the rules around grain and fertiliser exports from Russia will not be rapidly altered, allowing for increased exports. All such moves require global and national policymakers to come together to ease the burden on countries and consumers around the world, particularly the most vulnerable among them.