There are a lot of posts on Twitter postulating a food shortage due to the Russo-Ukranian War. The reasoning goes that, on top of existing supply chain disruptions, Russia and Ukraine were big wheat exporters, and Russia is the world’s biggest fertilizer exporter.
Those are concerns, and I think there’s a real good chance of food shortages…in Russia. That’s the sort of thing that happens when you unplug yourself from the world economy. And Europe might have some disruption, given that they’re net food importers.
But I doubt we’re going to have that problem in the U.S. of A. First, our supply chain problems were started easing when vaccine mandates started getting lifted due to the dread midterm variant. Second, America makes lot of fertilizer ourselves, and Russia isn’t the exclusive source of nitrogen, phosphorus or potassium. (Though a Canadian rail strike might impact the last.) Third, capitalism has a great way of supplying substitute goods if left to its own devices.
More analysis along those lines.
On February 14, the average price of the four commodities was 15.1c per 1000 calories. By March 8, it had risen to 17.4c, an increase of 15.2%. Using the Roberts and Schlenker factor of 7, this implies a 2.2% decrease in available supply of calories. Removing 55 million metric tons of wheat and 30 million metric tons of corn entails a 2.7% reduction in available supply of calories from the big four commodities. (Here’s an Excel file containing these computations.)
So, it seems the markets are banking the world losing about three quarters of Ukrainian and Russian grain exports (2.2/2.7). Given the large increase in winter wheat prices relative to the other commodities, most of the loss is from wheat.
Traders expect this shock to last only a year. Winter wheat futures prices for delivery after July 2023 barely increased after the invasion. The same is true for corn. The spring wheat market was already tight because of last year’s drought and traders expect it to remain tight beyond 2023.
How common are market shocks of this magnitude? Russian and Ukrainian wheat exports were 7.3% of global production in 2020. Wheat production declined 6.3% in 2010, in part due to a drought that reduce Russian production by 20 million metric tons. Similarly large declines also occurred in 1991, 1994, 2003, and 2018.
From the analysis above, the observed price increases are consistent with a 2.2% decrease in available supply of calories from corn, rice, soybeans, and wheat. Similar declines occurred in 2018, in part due to drought in Argentina and lower wheat acreage in Russia, and in 2012, in part due to drought in the US.
The increase in wheat prices will not cause massive increases in the price of American bread. Most of the price of food is determined by the cost of processing, packaging and marketing. The USDA estimates that farm gate sales of food commodities made up 14% of the retail value of food in 2019. If farm prices increase by 50%, then we would expect food in the grocery store to increase by 7%.
(Hat tip: Scott Adams.)
As long as the Biden Administration doesn’t do something criminally stupid (like imposing wage and price controls to fight inflation, or a mandate that 50% of truck drivers be women), the American economy should adapt to prevent any significant food shortages due to the Russo-Ukrainian War.
Of course, government has no shortage of other ways to wreck the economy and make food scarce, and hyperinflation is one of the best…
Tags: agriculture, Economics, food, Russo-Ukrainian War, supply chain, trade
You did bread. Now do meat.
Varies year by year, but generally Brazil is the biggest meat exporting country in the world, followed by the USA, Australia and India.
See, I was hopeful until you got to this sentence. Dammit!
Now would be a good time to scrap ethanol mandates for motor fuel. If food calories are said to be scarce and expensive, why waste corn production in vehicles?
Remind me again, hasn’t China been buying up our ag companies, like Smithfield? What makes you think that food will stay here?
Truck drivers. You might want to look at some of the regulations that just went into effect. It is now mandatory to attend an approved truck driving school in order to acquire a CDL. The schooling industry pushed hard for this and it’s making the driver shortage even worse. 50% women requirement? Don’t be sure that can’t happen.
I am not as optimistic as you are. The worldwide food production model is under stress. As well, a ‘good year’ in the USA, meaning principally the Corn Belt is a rather thin hope to place one’s bet on. Is there a compounding effect as various countries, not just in the conflict zone, curtail exports of foodstuffs and commodities to protect their population’s diet? The food shortage may not show up in the richer countries, especially areas with temperate climate zones. However the marginal economies are at greater risk for a variety of reasons. China has been ‘buying up’ Africa’s food production (and donkeys). They aren’t inclined to share. The biggest risk for Canada and the USA is the absolute scary leadership we have, political, bureaucratic and social. Whether it is done through maleficence or incompetence, the end result is the same.
1. Russia not exporting fertilizer will hit European farmers (and others) more than the US. But it will impact Europeans. So they will import more from somewhere.
2. Costs will go up, which means you and I will complain, while people in poor parts of the world will go hungry and if the shortages are bad enough, starve.
3. There is no substitute for nitrogen-based fertilizer in modern farming.
4. And the cost of diesel will also impact some. The farmers in my extended family have locked in diesel prices for planting. I don’t know that everyone has done that, but maybe it is standard procedure. I don’t know what the plans are for harvest. And farmers know that just because it costs X to produce an acre of wheat, or corn, or whatever, doesn’t mean that you get any return on that investment in the fall
Fertilizer up by 300%. No problems there. Gas up by over 100%, Again no problems. Doesn’t everyone love $7 lb ground beef and 3.50 McDonalds french fries!