Analysts have expressed concern about the impact of Russia’s invasion of Ukraine on the world’s fertiliser and grain prices, but South African farmers who may benefit from higher export prices might have to pass rising costs on to local consumers.
According to the Bureau for Economic Research’s Weekly Review released on Monday, the war has already unleashed a major commodity supply shock on the global economy.
Russia is a major oil and gas producer and also contributes significantly to the global grain output, along with Ukraine, often referred to as Europe’s breadbasket.
“Combined, the two countries are responsible for more than 25% of global wheat exports.
“Amid concerns that the war will not only severely disrupt wheat exports from last year’s crop because key Ukrainian ports are shut, but also derail the harvesting of this year’s crops, global wheat prices surged last week,” the Bureau said.
In the US, the wheat futures on the Chicago Board of Trade soared by more than 40%, while some European wheat prices rose to all-time highs.
“Although not nearly to the same extent, local Safex wheat futures were also up notably by 13% last week.
“Compared with this time last year, the Safex wheat future is 36% higher.
“There are additional concerns about the cost of fertilisers as Russia and Belarus are important players in this market,” the Bureau said.
Belarus, which has been hit by severe sanctions for supporting Russia’s war efforts, is one of the world’s largest producers of potash, a key component of fertiliser.
“The sharp rise in grain prices, with fertilisers to follow, puts large upside risks on already record-high global food prices, while the severe sanctions imposed on Russia have, up to now, excluded the energy sector,” said the Bureau, adding that the oil price had continued to climb higher last week.
Agricultural Business Chamber of South Africa chief economist Wandile Sihlobo said fertiliser constituted a significant share in the growth of agricultural commodities and input costs globally. He said fertilisers accounted for about 35% of grain farmers’ input costs in South Africa.
As with the grains and oilseeds market, he added that the actual disruption of export activity was yet to unfold.
“But the extensive sanctions that Western countries have imposed on Moscow, including the agreement to exclude some Russian banks from some global payment systems such as Swift, could negatively affect Russia’s trading activities.
“This disruption could push fertiliser prices even higher than the spike experienced in the past 18 months,” Sihlobo said.
In some cases, for example, ammonia, prices rose by 260% between December 2020 and December 2021.
“This meant that farmers had to absorb substantial costs for the 2021/2022 crop across the world. The generally higher commodity prices, specifically grains and oilseeds, provided financial flexibility to absorb some of these costs, but not fully.
“For consumers, the knock-on effects will typically be through the size of the final harvest of the crop. Farmers are price takers, and might therefore not necessarily pass on the input costs to consumers,” said Sihlobo.
Efficient Group economist Dawie Roodt said the grain price was “going through the roof” but local farmers stood to benefit.
“Our farmers will have a wonderful harvest and can benefit but food prices are likely to go up, although the whole economy is unlikely to be affected.
“Inflation is likely to accelerate to 7% or 8% in SA depending on the oil price,” he said.
