Regional food security at risk from conflict in Ukraine

Edward Bell - Senior Director, Market Economics
Published Date: 19 April 2022

 

Russia’s invasion of Ukraine sparked a rally across commodity markets, most evident by the surge in oil and energy prices since late February. But agricultural commodity prices have also jumped higher given the importance of both Russia and Ukraine to key export markets. The Middle East and North Africa region is particularly exposed to the war via higher agricultural commodity costs given the relative shortage of arable land in MENA and its dependency on the flows of commodities from both Russia and Ukraine.

The Middle East and North Africa has the lowest amount of arable land compared with other major global regions, covering less than 5% of the total regional land area. Across the region there is some wide variation with Syria possessing the largest amount of arable land relative to its total land area at around 25% while Egypt has less than 3% and across much of the GCC the level falls to 2% or even lower.

Arable land / total land area

Source: World Bank, Emirates NBD Research

By necessity then and to feed populations growing at a faster pace than many regional peer economies, the Middle East and North Africa is highly reliant on imports of food commodities, particularly for basic goods like wheat, rice and coarse grains (including corn, barley and other feed grains). More than 50% of the Middle East’s wheat consumption needs are met by imports while in North Africa the share is closer to 60%.

Imports / total consumption

Source: USDA, Emirates NBD Research

With such a high dependency on imports of basic agricultural commodities, any prolonged disruption can feed through into considerable economic and social pressures, particularly via higher food price inflation. A prolonged conflict in Ukraine and international trading firms avoiding transactions with Russian exporters will contribute to acute price pressures across the region.

Both Russia and Ukraine are major suppliers of agricultural commodities to import markets. Together they accounted for an average of 29% of total global wheat exports from the 2017-21 marketing years and 18% of total coarse grain exports, with particularly large shares in barley and rye. Outside of grains, both countries are the largest producers of sunflowerseed as well as the associated seed meal and oil. While the war progresses, Ukraine has limited options to divert agricultural exports from normal seaborne routes with bottlenecks on rail capacity to European markets, let alone internal disruption as the conflict remains fraught.

Russia and Ukraine agriculture exports share of global total

Source: USDA, Emirates NBD Research

Importers in the Middle East and North Africa are particularly reliant on flows of exports from both Russia and Ukraine. Just taking wheat imports as a baseline, both countries are among the single largest source origins for imports and in some case account for a large majority of total imports. The UAE sourced around 63% of its total wheat imports from Russia and Ukraine while in Egypt the share is closer to 80%. Saudi Arabia is a notable outlier in terms of its relative under-reliance on either country, sourcing much of its wheat imports from European Union exporters and Australia.

Russia and Ukraine as share of regional wheat imports

Source: USDA, Emirates NBD Research

Carry-over inventories of wheat were at relatively normal levels ahead of the conflict and already shipments are increasing from major producers in South America (Brazil and Argentina) to regional importers. A general benefit for food inflation across the region is that rice production is still set to expand this year, helping Middle East economies in particular relative to North Africa given higher regional consumption. However, a prolonged conflict that destroys or interrupts Ukraine’s export infrastructure and sanctions on the export of Russian agricultural commodities will pose meaningful medium-term risks for prices and regional security of supply.

The conflict in Ukraine is also passing through to agricultural markets via higher fertilizer costs. Russia is a major producer of fertilizers—potash, phosphates and nitrogen—and has a large share of global export markets. While fertilizers are not a major direct input cost for the region’s food costs given the shortage of arable land, higher agricultural chemical prices will pass through to other exporters and feed back into the Middle East and North Africa region.

Green Markets fertilizer price index

Source: Bloomberg, Emirates NBD Research