The Importance of Ukraine and the Russian Federation for Global Agricultural Markets and the Risks Associated with the War in Ukraine

The Russian Federation and Ukraine are among the most important producers of agricultural commodities in the world. In the cereal sector, their contribution to global production is especially significant for barley, wheat and maize. The two countries together, on average, accounted for 18% of global output of those crops between 2016/2017 and 2020/2021, with the Russian Federation accounting for 14% and Ukraine 4%. In the oilseed complex, their contribution to global production was particularly important for sunflower seed, with just over half of world output originating from the two countries during this period. Their average shares in global rapeseed and soybean production are more limited, with the Russian Federation making up 6% of the production and Ukraine 2%.

Market Structure, Trade Profiles and Recent Price Trends

Market Shares

• The Russian Federation and Ukraine are among the most important producers of agricultural commodities in the world. Both countries are net exporters of agricultural products and are leading suppliers of foodstuffs and fertilizers to global markets, where exportable supplies are often concentrated in a handful of countries. The high concentrations could increase the vulnerability of these markets to shocks and volatility.

• In 2021, Russian and Ukraine ranked among the top three global exporters of wheat, barley, maize, rapeseed and rapeseed oil, sunflower seed and sunflower oil. The Russian Federation also ranked as the world’s top exporter of nitrogen fertilizers, the second leading supplier of potassic fertilizers and the third largest exporter of phosphorous fertilizers.

Trade Profile

• A large number of food- and fertilizer-importing countries, many of which fall into the Least Developed Country (LDC) and Low-Income Food-Deficit Country (LIFDC) groups, rely on Ukrainian and Russian food supplies to meet their consumption needs. Many of these countries were already grappling with the negative effects of high international food and fertilizer prices prior to the war.

Risk Analysis: Assessing the Risk Emanating from the War in Ukraine

Trade Risks

• In Ukraine, the current war raises concerns over whether crops will be harvested. It has already led to the closures of ports and oilseed crushing operations, affecting products intended for the export markets. These are taking a toll on the country’s exports of grains and vegetable oils. Russian export prospects are also uncertain, given the economic and financial sanctions imposed on the country.

Price Risks

• The Food and Agriculture Organization’s (FAO) simulations assess the potential impacts of a sudden and steep reduction in grain and sunflower seed exports by the two countries. The simulations indicate that these shortfalls may only be partially compensated by alternative sources during the 2022/2023 marketing season. The capacity of many exporting countries to boost output and shipments may be limited by high production and input costs. The resulting global supply gap could raise international food and feed prices by between 8% and 22% above already elevated baseline levels.

• If the war keeps crude oil prices high and continues to limit the two countries’ exports beyond the 2022/2023 season, a considerable supply gap would remain in global grain and sunflower seed markets, even as other exporting countries expand their output in response to the higher output prices. This would keep global prices elevated well above baseline levels.

Logistical Risks

• In Ukraine, active fighting has damaged inland transport infrastructure and seaports, as well as storage and processing infrastructure. It has also led to the suspension of all commercial shipping operations across its ports. This raises significant concerns, given the limited means of alternative transportation, such as rail, river or road transport, to seaports and smaller processing facilities to compensate for suspended operations at modern oilseeds crushing facilities.

• The increase in insurance premium rates or the lack of war coverage in insurance contracts for vessels sailing into the Black Sea has exacerbated the already elevated costs of maritime transportation, increasing costs of food imports.

Production Risks

• Production prospects for 2022/2023 winter crops are favorable, but uncertain in both Ukraine and the Russian Federation. In the eastern part of Ukraine where fighting has subdued, farmers resumed activities on accessible areas and sowed spring crops like maize, barley and sunflower seeds, even though war remnants hindered agricultural activities. Disruptions to essential public services and localized shortages of inputs due to supply chain bottlenecks have also negatively affected agricultural operations. It is estimated that the areas where major spring crops are sown have declined by about 20% across the territory controlled by Ukraine.

• The winter wheat harvest is likely to start in early July in Ukraine. Because of the war, between 20% and 30% of the areas where winter crops are sown are likely to remain unharvested during the 2022/2023 season. The availability of fuel will determine how much of the areas can be harvested and the crop yields stored.

• The war is likely to affect the ability of Ukraine to control its animal disease burden, significantly increasing the risk of proliferation of animal diseases, notably African swine fever (ASF), within Ukraine and in neighboring countries.

• In the Russian Federation, no major disruption to crops in the ground are anticipated, but uncertainties exist over their capacity to export, although international sanctions exclude both food and fertilizers. Any loss of export markets could depress farmer incomes, negatively affecting future planting decisions.

• Economic sanctions imposed on the Russian Federation could disrupt its imports of agricultural inputs it is highly dependent on, especially pesticides and seeds. This could result in less planting, lower yields and lower qualities of crops in the future, exposing the Russian agricultural sector and global food supplies to risks for the next planting season.

Humanitarian Risks

• The war is set to increase humanitarian needs in Ukraine. It will deepen the needs of millions of people who were already displaced or required assistance due to the war in the eastern part of the country that has lasted more than eight years. By directly constraining agricultural production, limiting economic activity and raising prices, the war has further undercut the purchasing power of local populations, with consequent increases in food insecurity and malnutrition.

• Humanitarian needs in Ukraine’s neighboring countries where displaced populations are seeking refuge have also increased substantially.

• Projections for 2022 indicate that up to 181 million people in 41 countries could face food crisis or exacerbated levels of acute food insecurity. However, most of these analyses do not take into consideration the impacts of the war in Ukraine, and without rapid and sustained humanitarian action that strongly focuses on local food production, the global food security situation is likely to deteriorate substantially.

• If the war results in a prolonged reduction of food exports by Ukraine and the Russian Federation, it will exert additional pressure on international food prices, with detrimental effects on economically vulnerable countries. FAO’s simulations suggest that under such a scenario, the number of undernourished people globally could increase by between 8 and 13 million in 2022/2023, with the most pronounced increases taking place in Asia-Pacific, followed by sub-Saharan Africa and then the Near East and North Africa. If the war continues, the impacts will last well beyond 2022/2023.

• Finally, a third and more extreme scenario simulating the severe export shortfall from Ukraine and the Russian Federation in 2022 and 2023, and assuming no global production response because of lack affordability and access to fertilizers, suggests an increase in the number of undernourished by close to 19 million people in 2023.

Energy Risks

• The Russian Federation is a key player in the global energy market. The sharp increase in energy prices that has accompanied the war will affect agriculture, as it is a highly energy-intensive industry, especially in developed regions.

• Agriculture requires a large amount of energy directly through the use of fuel, gas and electricity, and indirectly through agri-chemicals such as fertilizers, pesticides and lubricants.

• With prices of fertilizers and other energy-intensive products rising because of the war, overall input prices are expected to rise considerably. The higher prices of these inputs will translate into higher production costs and eventually into higher food prices. They could also lead to lower use of inputs, lowering yields and harvests in the 2022/2023 season, risking further price hikes and threatening global food security in coming years.

• Higher energy prices also make agricultural feedstocks, especially maize, sugar and oilseeds/vegetable oils, more expensive for producing bioenergy. Given the large size of the energy market relative to the food market, this could push food prices up to their energy parity equivalents.

Exchange Rate, Growth and Debt Risks

• The Ukrainian hryvnia reached a record low against the U.S. dollar in early March 2022, with likely repercussions for Ukrainian agriculture, including a boost to its export competitiveness and curbs on its ability to import.

• War-induced damages to Ukraine’s productive capacity and infrastructure are expected to entail very high recovery and reconstruction costs, although their extent remains unclear at this stage.

• The economic sanctions imposed on the Russian Federation have also led to significant swings in the exchange rate of the Russian ruble. An initial sharp depreciation of the ruble against major currencies was followed by a notable upsurge, mounting up to 40% against the U.S. dollar since January, which has made Russian exports of agricultural commodities less competitive.

• The economic slowdown in the Russian Federation is expected to have detrimental effects on the countries in Central Asia through the reduction of remittance flows. For many of these countries, remittances constitutes a significant part of gross domestic product (GDP).

• The current war may also have global spillovers. The most vulnerable countries and populations are expected to be hit hard by slower economic growth and increased inflation at a time when the world is still attempting to recover from the economic downturn triggered by the COVID-19 pandemic.

• Agriculture is the backbone of the economies of many developing countries, the majority of which rely on the United States dollar for their borrowing needs. A lasting appreciation of the U.S. dollar in relation to other currencies would, therefore, have negative effects on these countries, including their agrifood sector. Moreover, the potential reduction of GDP growth in several parts of the world will affect global demand for agrifood products with adverse consequences for global food security.

Policy Recommendations and Proposals

• It is essential to support Ukraine and its vulnerable people. FAO is staying and delivering in Ukraine, and has reinforced its team on the ground. FAO has also completed nationwide needs assessments in Ukraine, targeting local-level administrations and commercial farmers, as well as an ongoing household survey in areas with a significant influx of internally displaced people.

• To prevent or limit the war’s harmful impact on the food and agricultural sectors, every effort should be made to keep international trade in food and fertilizers open. Supply chains should be kept fully operational, including by protecting standing crops, livestock, food processing infrastructure and all logistical systems.

• Countries that depend on food imports from Ukraine and the Russian Federation must find alternative export suppliers for their food needs to absorb war-induced shocks and remain resilient. They should also use existing food stocks and enhance the diversity of their domestic production bases.

• Recognizing that at least two-thirds of people experiencing acute food insecurity are rural populations who rely on agriculture-based livelihoods, humanitarian responses both within Ukraine and globally must prioritize actions boosting production of locally grown, nutritious food and making agriculture more resilient. The war’s impact on food security of vulnerable groups necessitates timely and well-targeted social protection interventions to alleviate hardship and foster a fast recovery.

• To assist the internally displaced, refugees and other groups directly affected by the war, Ukraine’s national social protection system should be expanded to register additional population groups with the Unified Social Information System.

• In countries hosting refugees, access to existing social protection systems and job opportunities should be eased by lifting legal access barriers and increasing the capacity of host countries’ social protection systems to absorb additional caseloads.

• Countries affected by disruptions from the war must carefully consider the potentially damaging effects of trade-related measures they adopt could have on international markets, especially over the long term. Particularly, export restrictions must be avoided. They exacerbate price volatility, limit the buffer capacity of global markets and have negative impacts over the medium term.