Of all the disruptions caused by the Russian invasion of Ukraine—energy shortages, supply chain delays and political tensions—none may be worse than what many are calling a widespread food insecurity crisis.
Limited food supply and higher prices can create political unrest, said Matt Stephani, president of Cavanal Hill Investment Management, Inc.
"If people can't feed their families, they're not happy with their government," he said. "That's happening now in parts of the world, and it's likely we'll see more political unrest throughout 2023. It's a risk we're watching."
Today, more than 345 million people are suffering from or at risk of acute food insecurity, more than double the number from 2019, according to the United Nations World Food Program.
"We're dealing now with a massive food insecurity crisis," U.S. Secretary of State Anthony J. Blinken said during a recent political summit. "It's the product of a lot of things, as we all know, including Russia's aggression against Ukraine."
The war has disrupted corn and wheat harvests, leading to shortages and higher food prices at the supermarket.
"Russia and Ukraine are both substantial exporters of wheat and corn," explained Stephani, whose team monitors global economic unrest and its impact on the markets. "So, to the extent that Russian or Ukrainian corn and wheat does not reach the countries that rely on it from an import standpoint, then you have a shortage that will be challenging."
Beyond the immediate shortages, the war means that farmers have planted less winter wheat than normal, leading to a diminished harvest this summer, he said.
"Ukraine is the 'breadbasket' of the former Soviet provinces, which means it is a critical and vital land area with rich soils for foods," said Dennis Kissler, senior vice president of trading for BOK Financial®, who monitors forces impacting global energy markets. "The invasion has also caused delays in transportation and shipping out of the Black Sea area, leading to a tighter world supply of grain."
Kissler added that less grain supply translates to higher grain prices, which are carried forward to the world's supermarkets.
Natural gas rationing
Natural gas supply to western Europe has been constrained due to Russia cutting back on deliveries to the region in retaliation for sanctions imposed by the West. Western Europe has been rationing natural gas for heat this winter, which means less gas is available to make fertilizer.
"One of the most intense users of natural gas in Europe is their chemicals industry, including fertilizer," Stephani said. "Many fertilizer plants in Europe suspended operations as a result of higher natural gas prices and in effort to avoid a human catastrophe in the winter, especially in the north. Production of fertilizer is down substantially."
Warmer temperatures at the beginning of winter have eased those fears somewhat, but tighter supply could mean smaller crop yields in much of Europe—leading to higher food prices.
"Because Russia has been the major supplier for natural gas to most of Europe (via two major pipelines through Ukraine), when the war escalated, natural gas supplies were greatly reduced to Ukraine and Europe," said Kissler. "The reduced supply gave a perception of a shortage, which started an export frenzy of natural gas from the U.S. and other countries."
"We're seeing most of the EU exiting reliance on Russian-supplied fuels," said Kissler. "This creates an opportunity in the U.S. and other countries to export natural gas as well as crude and other fuels to Europe."
Kissler expects the war between Russia and Ukraine to drag on.
"Russia is still selling most goods to China and India, which are taking advantage of the lower energy prices that have been placed on Russia through sanctions," said Kissler. "Therefore, as long as Russia has energy income, they will continue the war. A relaxation or de-escalation of the war should mean cheaper prices for most consumers."
And while food inflation has backed off over the last few months, Stephani said there is still potential for another bout of high prices for food.
Political instability is negative for global growth, Stephani added. "As investors, we are focusing not only on financial risks, but also on other factors such as this that may reduce global growth or reignite global inflation—both would impact corporate earnings and equity price valuations."
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