Russia's invasion of Ukraine will likely ratchet American food prices even higher, experts say
Russia's invasion of Ukraine could push U.S. food prices even higher, as the region is one of the world's largest producers of wheat and some vegetable oils. And the disruptions could drag on for months or even years, as crop production in the area could be halted and take a long time to restart.
This new inflation shock comes at a time when global markets remain extremely strained because of pandemic-related disruptions. The price changes impacted commodity prices in recent days and could flow through to higher costs at grocery stores and restaurants soon.
Grocery manufacturers are concerned that, while the vast majority of ingredients and materials for American products are sourced domestically, the economic effects of Russia's invasion of Ukraine will be global, according to Katie Denis, vice president of communications and research for the industry organization Consumer Brands Association.
"We're already seeing energy prices rise and commodities futures for wheat and corn spike. That's going to prompt concern when costs to make and ship goods continue to set records and consumer demand continues to be above levels not seen since March 2020," she said. "There is no slack in the system, making weathering disruption significantly more difficult."
American Bakers Association President Robb MacKie said consumers will start seeing rising prices in anything that has grain in it - wheat, corn, oats, barley, rye - because the grain markets "are all tied to each other." That could mean higher prices on breads, beer, cereal and animal feed, among other things, impacting billions of dollars worth of products.
"In a situation where the whole supply chain is already stressed, if [the conflict] goes on more than a couple weeks, you will start to see an impact in food prices," he predicted.
Key food commodity prices hit their highest point in nearly a decade on Friday. The Chicago Board of Trade March wheat contract, the global benchmark, rose to its highest point since 2012, with corn and soybean prices also soaring.
There are a number of factors pushing the prices up so quickly. Russia's attack has imperiled shipping in the Black Sea region, which is where much of the area's wheat shipments are exported. And the Russian attacks could disrupt the ability of Ukrainian farmers to plant and harvest crops in 2022.
This week's events "are proof that this will be a multiyear issue," said Michael Swanson, Wells Fargo's chief agricultural economist. "It's my assumption that Ukrainian crops won't get planted, or not anywhere near what they typically plant. And the Russian crops will be planted but will be embargoed in many markets. This is not something that will be resolved in weeks or months."
Ukraine is the world's fourth-largest exporter of both corn and wheat. It is also the world's largest exporter of sunflower seed oil, an important component of the world's vegetable oil supply. Together, Russia and Ukraine supply 29% of all wheat exports and 75% of global exports of sunflower oil, said Kelly Goughary, senior research analyst Gro-Intelligence, an agriculture data platform.
Black Sea sunflower oil futures are up 11% so far this year - amid a worldwide shortage of vegetable oils. Goughary said a loss of Ukrainian and Russian sunflower oil will drive up the prices for soybean oil, palm oil and other vegetable oils, at a time when the U.S. is pushing to use vegetable oils in cleaner-burning biofuels.
"There will be a disruption; there is already a blockade on Black Sea ports," she said. "In the near term this should have an impact on European Union wheat shipments, then it will have an impact on the U.S."
Russia is a key global player in natural gas, a major input to fertilizer production. Higher gas prices, and supply cuts, will further drive fertilizer prices higher. Russia is one of the biggest exporters of the three major groups of fertilizers (nitrogen, phosphorus and potassium). Physical supply cuts could further inflate fertilizer prices.
Because of the relationship between energy and agricultural prices, the conflict will impact agriculture and food supplies across the globe and contribute to farmers' decisions about what, and how much, to grow.
"This is headed for a supply crunch that will be hard to resolve," said Todd Hultman, lead grain market analyst for agricultural data service DTN. Corn is an especially fertilizer-intensive crop. Higher fertilizer prices mean that American corn farmers, who largely grow the crop to feed animals, will have a hard time being profitable.
"This year with those new high fertilizer prices I'm looking at an additional cost of $200 per acre for growing corn," he said. "In 2021 it was roughly $700 to grow an acre, this year a ballpark is $900 per acre. This will be additional cost for the row crop farmers as well as the ranchers, feed lots and dairy farmers."
Those higher costs will, in turn, be passed along to restaurants, retailers and, ultimately, consumers.
Hultman said higher animal feed costs also have the potential impact of pinching the beef and pork supply, at a time when demand remains high and supply has already dropped because of issues like drought last summer, an increase in viral pig diseases like porcine reproductive and respiratory syndrome, and even the bottlenecks at meat-processing facilities at the beginning of the pandemic that left some cattle and pig farmers without a place to have their animals slaughtered. The bottleneck caused the big meat companies to pay less per animal to ranchers, which in turn caused many of them to shrink their herds.
A chief concern for many economists right now is that a lengthy conflict between Russia and Ukraine would serve to change trade flows, said Kyle Holland, a pricing analyst covering oil seeds and grains at Mintec, which analyzes food commodity price data.
"If you can't buy from Ukraine and Russia, where do you turn to for supply? We don't really know the answer," he said. "If Russia blocks the ports and there are sanctions on Russia's most commonly exported goods, it could, for instance, create a situation where Russian wheat is unimportable. Then where do people expect to import from? The fears are being stoked and we're stabbing in the dark a little bit because of the speed at which this has happened."
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