In Mid-March, I posted Everything is Connected which focused on the fact that Ukraine produces one-half of the world’s neon supply which is a vital component in the production of computer chips. Should production of neon be interrupted by a prolonged conflict, the world’s supply of automobiles, appliances, consumer electronics, and many other goods could be sharply curtailed.
However, the war has other potential consequences that are even of greater concern, and it may already be too late to avoid some of them. First, Ukraine and Russia are major suppliers of food to the world producing roughly 30% of world wheat consumption, 17% of corn, 32% of barley, and 75% of sunflower oil. In fact, 26 countries around the world get more than one-half of their wheat supply from these two producers. Some 13.5 million tons of wheat and 16 million tons of corn from last year’s harvest are trapped because of either sanctions or damage to port facilities, grain elevators, and so on. It is not at all clear whether or when these vital resources will be released. An even greater concern is that the war is taking place during the prime planting season which may dramatically reduce this year’s production. Some of the potential shortfall could be made up by other countries, but there are plenty of risks such as droughts and other weather events, shipping interruptions, or political events. As just one example, floods in China are expected to result in one of the worst wheat harvests in its history leading to more internal consumption and decreased exports. In recognition of this turmoil, the prices of corn and wheat have increased by 21% and 43%, respectively, since February.
An additional and related concern is the fact that Russia is the world’s largest producer of fertilizer accounting for 23% of ammonia, 14% of urea, 10% of phosphate, and 21% of potash exports. Because of sizeable internal production, the U.S. is less vulnerable than many other countries such as Brazil which imports 85% of its fertilizer consumption. However, the interconnected nature of world markets means that U.S. farmers have already felt the pain in that prices are 40% to 175% higher than one year ago depending on the actual fertilizer.
What will all of this mean for the world? At a minimum, there will likely be continued upward pressure on U.S. inflation given that food represents 14% of the Consumer Price Index. Even prior to the conflict, U.S. food prices were up 7.9% year-over-year. The direr scenario is one in which there will be a severe global food crisis that particularly impacts those who perennially face food insecurity. The UN’s World Food Programme expects to feed as many as 140 million people this year but it too has been impacted by rising prices resulting in a funding shortfall.
The key point is that there really no such thing as a regional conflict in a world that is incredibly interconnected and we should all pray that this crisis is resolved quickly.