The War, Food Prices and Panama
Eddie Tapiero
Economist
March 20, 2022
Wheat, corn and barley are basic and essential crops for the food security of people around the world, either directly or through derived products such as additives for food mixes, beverages (beers), sauces or as animal feed. Their consumption includes developed countries and also large proportions of the population of emerging countries that depend on imports for their food.
On February 24, 2022, Russia advanced militarily towards Ukraine sparking a war and prompting the West to respond through financial and trade sanctions. This is not only affecting the population through military confrontations and unnecessary bloodshed, but also generating a global negative impact on food prices that will have political and economic ramifications in many countries. The increase in wheat prices in 2012 is already considered by many analysts as the driver of the so-called “Arab Spring”.
The UN published that Ukraine and Russia have a 12% share of calories sold globally[1]and the US Department of Agriculture indicated that both countries account for 30% of the world's total exports of wheat and barley and 80% of sunflower oil—important inputs in many foods in today's staple diet. Ukraine accounts for 15% of world corn exports, and Russia, together with Belarus, account for 15% of fertilizer exports. With these figures, any impact on production will have negative consequences on the basic basket, but the ones that will have the most problems will be the emerging economies. Emerging economies are on the road to recovery and are experiencing high levels of indebtedness and negative inflationary shocks. Thus, an increase in food prices could derail all those efforts and spur unprecedented social volatility, especially in Latin America, which has leaned to the left
At the price level, many of the prices of these grains were already high due to different problems such as climate change, the rise in natural gas (the main input for fertilizers), the increase in maritime freight as a result of congestion in the of supply, COVID-19 and due to trade frictions between China and the US that had fueled its rise. However, the war has once again triggered the cost of main inputs through increases in the cost of energy, restrictions on exports and blockades of exporting ports, especially in the Black Sea region, which will drive another round of consumer price increases. This situation causes significant vulnerability in the global food supply and increases the humanitarian, economic and political risks associated with a global rise in food prices.
Logistics chains of wheat and other grains in Russia, Ukraine, USA and Panama
Grain logistics is based on the efficient integration of the system, which allows the flow of grains since the performance of one node in the system affects the performance of the rest. For example, the congestion of port terminal operations reduces the capacity of the terminal to accept new cargo, which in turn, delays the storage capacity in the silos and the transport process, delaying the entire operation of the chain from the farm. These delays imply higher operating costs that are reflected both in the companies' margins and in the prices of exported products.
On the Russian and Ukrainian grain value chains side, the Australian government indicates that both countries have large tracts of fertile land that are farmed by an estimated 80,000 farmers and include large-scale operations. These farmers have a capacity between 51Mt and 14Mt in their temporary barns. Hence, the average distance between barn and elevator for industrial silos is between 30 and 60 km. Ukrainian elevators also have truck size restrictions. From the elevators, the grains are transported by rail, truck and barge to different areas that include the port terminals where 96% of the grain leaves by sea.
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Source: Australian Department of Agriculture[2].
Several transport links in the Russian-Ukrainian value chains, such as the railway, are owned by the state and are being seized for military logistics purposes. At the same time, the increase in fuel prices and its scarcity limit grain flows, delaying processes and impacting production. On the other hand, there are reports indicating that more than 100 bulk carriers are stopped in Ukrainian ports, which also reduces the available capacity in the world fleet.
In the US, the chains are a bit different and are well diversified at the corporate level. These chains start with seed suppliers like Monsanto and DuPont, and end with retailers like McDonalds and Costco. Because U.S. grain production is in the central part of the country, some of the grain travels by truck or rail to silos, processing areas, and ports on the West Coast and by barge to ports on the West Coast. gulf. Logistics there have not been impacted.
Source: https://engagethechain.org/wheat
In Panama, the chains are more vertical and involve a smaller number of companies. Transportation is mainly from the port directly to processors or consumers via truck. For their part, industrial processors use electrical energy in their processes, the cost of which remains high.
Source: self made
Panama is a net importer of grains and processed foods from abroad, which serve to satisfy different local needs that range from supplies for making bread and thickening sauces, to serving as supplies for animal feed. The initial price of the chain is the world price, plus the transport price from the origin to the port of entry. To this price are added the production margins of transportation from the port to the processing areas and of the processes of transformation, distribution, marketing and sales at the local level, which are then reflected in an increase in consumer prices.
Panama also imports other food products that have these grains as inputs, which, by parallels, implies an increase in the price of these products. On the other hand, the increase in energy and fertilizer costs will increase the costs of local production, which will be reflected in an increase in local prices. Overall, the picture is not positive and rational and rapid action is needed.
Global agricultural production has shown high volatility and resilience in its recent history that has been balanced by differences in productivity in the different productive regions. However, what is observed are possible effects not only on global production through restrictions, but also increases in input and transport costs to the extent that energy costs increase and the transport of bulk carriers is restricted (this impacts transport capacity and increases sea freight). As a result, there is a great deal of uncertainty about the impact of the war, which could be eliminated if it is brought to a conclusion quickly. Otherwise, an extension could affect not only this year's harvest,
Possible effects of the war at a global level
1.????Prices were already on the rise due to other reasons.
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2.????Increase in gas, increases the price of fertilizer.
3.????Increase in energy cost, increases the cost of production.
4.????Export restrictions/sanctions/port closures limit existing supply and increase prices due to shortages.
5.????Congestion and damage to supply chains increase total costs
6.????Increase in the price of the basic basket and a reduction in the family budget.
7.????Political volatility.
For Panama
1.????Increases in the cost of imported grains.
2.????Increases in food and beverage costs directly or indirectly related to grains.
3.????Increases in animal feed costs.
4.????Increase in existing inflationary pressure.
Recommendations
1.????Encourage the cultivation and use of Cassava as a substitute for wheat.
2.????Strengthen foreign purchases of fertilizers.
3.????Strengthen agricultural cooperatives in the purchase of inputs.
4.????Restrict tariffs on imports and exports related to food.
5.????Increase purchases of national products by the IMA.
6.????Strengthen the logistics chains of the country's domestic producers.
7.????Establish alliances with other countries to share/cooperate in the purchase/exchange of fertilizers and/or seeds.
8.????Strengthen local exports to the US, Europe and China as an aid plan.
This is another point in the history of the region where countries should work together, but they remain working independently.
[1]https://www.npr.org/sections/goatsandsoda/2022/03/06/1083769798/russias-war-on-ukraine-is-dire-for-world-hunger-but-there-are-solutions