The war in Ukraine- II

As a result of the war and economic sanctions against Russia, the growth of the world economy should be lower by 1 percentage point; and inflation, be 2.5 percentage points above the OECD December scenario.

This projection estimated global economic growth of 4.5% in 2022 and 3.2% in 2023; and, given the context, world GDP should be around 3.5% this year. While, inflation may reach 6.75% compared to 4.25% in 2022 and 3% in 2023 respectively; however, the impact differs across regions of the globe. Despite the macroeconomic issue, it is vital to understand the impacts on some of the most representative commodities.

The price of wheat rose 50%. Ukraine and Russia are known as “the breadbasket” as they account for 30% of food commodities such as wheat or corn. Ukraine itself produces 16% and 12% of the world’s wheat and maize respectively; however, this will not prevent an increase in average food prices. Especially because Argentina, one of the world leaders in soy decided to put its exports on hold; however, it is important not to ignore that the trend had started before the war period.

And, Ukraine is also one of the top three exporters of potatoes, which together with corn and wheat are the basic ingredients of processed foods. It should also be noted that: i) Ukraine is one of the leaders in the production of organic food due to the highest concentration of arable land in the world; ii) the loss of crops and the inability to work the fields causes a decrease in food reserves; and, iii) Russian distribution monopolies in Ukraine focus on the fast-moving consumer goods category. This means that Russia will exploit such an economic advantage in response to sanctions imposed by the international community.

And it should not be forgotten that the process of rebuilding Ukrainian infrastructure, relocating migrants and, above all, resuming life will be a lengthy process; rather than the Russian reality, as economic sanctions have a much lower recovery cost. Therefore, it is to be expected that agricultural products will become more scarce and inflated.

This scenario does not jeopardize, at least for the time being, the food security of the European Union (EU), as it is a net exporter of cereals; however, in the medium term, it lacks a sustainable and resilient agricultural project (see the “Prado ao Prato e Biodiversidade” document) because: i) the increase in costs in the supply chain is and will be real; ii) fertilizer and feed prices will have an additional impact; as well as, iii) energy prices resulting from the EU’s energy dependence (see the following publication).