War, Drought, and Other Reasons for Expensive Food

Severe drought hitting key grain and oil-producing countries in Europe may adjust the optimistic forecasts previously disseminated by the United Nations Food and Agriculture Organization (FAO) at the end of last month. Issues with supply chains and poorer-than-expected harvests will lead to higher prices in supermarkets. When we talk about supply chains, it’s not just about the cost of freight or restrictions on international food trade. In the past two years, as well as this year, the war that Russia started against Ukraine has created enormous problems.

FAO continuously monitors food prices using a so-called food basket, or more precisely, a price index. In the most recent data published on 5 July, reflecting the results for June, the index hardly changed compared to May's figure. It stood at 120.6 compared to May's 120.4. However, it’s not calm and quiet everywhere. While cereals, such as wheat, maize, and rice, have somewhat decreased in price, vegetable oils, sugar, and dairy products have become more expensive.

It is worth noting that the FAO index is now at one of the lowest levels in recent years, after peaking at 160.3 points in March 2022 due to the war that Russia started against Ukraine. This means that current price levels are approximately a quarter lower than in March 2022. The current figure is 2.5% lower than a year ago, by the way.

Photo: The import of Ukrainian maize saved European livestock farmers in 2023 and is expected to do so again this year. Source: The Gaze

Currently, cereal prices have dropped by 3.0% compared to May and by 9% compared to June last year, due to positive expectations regarding production volumes, particularly in Kazakhstan and Ukraine, despite negative forecasts about production and exports in Russia due to drought and logistical problems in the Black Sea region. Maize prices have also fallen, influenced by news of increased production in Argentina and Brazil, as well as increased planting areas in the USA.

However, vegetable oils have become more expensive, with the price index rising by 3.1% compared to May. It is now at its highest level in the last 15 months, since March 2023. All types of vegetable oils have become more expensive, from palm and soybean to sunflower and rapeseed. Specifically, global prices for soybean and sunflower oils have risen due to demand from US biofuel producers and export difficulties from the Black Sea basin.

Expectations for sugar have worsened slightly due to poorer production forecasts in EU countries and a lower harvest in Brazil, leading to a 1.9% increase in the FAO sugar index for the month, although it had been falling for several months before that. Compared to June last year, this index is 21.6% lower.

However, it seems we will see less calm news regarding cereals and oilseeds by the end of July, a month that is almost decisive for harvesting grain in the EU and neighbouring countries. The drought that hit the region in the first half of July will inevitably have an impact, though experts argue about the scale of this impact.

Two other factors, no less significant than the climate, will also play a role – the war in Ukraine and export restrictions from Turkey, which will be in place at least until mid-autumn this year.

And Yet Ukraine Will Feed

Throughout the first half of July, Ukrainian farmers and large producers were extremely anxious. For nearly two weeks, an abnormally intense heatwave persisted, breaking century-old temperature records. Finally, on 17 and 18 July, the heat began to subside, and rains started. Nevertheless, even with these circumstances, the Ukrainian association Ukroliyaprom, which unites local producers of oilseeds and vegetable crops, released a forecast predicting a 3.8% increase in the harvest of oilseeds compared to last year, reaching 22.5 million tonnes. Slightly more sunflower (13 million tonnes) and soybeans (5.1 million tonnes) will be harvested, and slightly less rapeseed (4.1 million tonnes).

However, the Ministry of Agrarian Policy of Ukraine has warned that the July heat will negatively affect the harvest of late grain crops, sunflowers, and soybeans, but will have almost no negative impact on the harvest of early grain crops. Early grains and oilseeds include wheat, barley, oats, peas, rye, and rapeseed. Overall, the acting Minister of Agrarian Policy and Food of Ukraine, Taras Vysotsky, predicted that this year's yield will be 5-7% lower than last year's result, due to weather conditions.

An even greater impact on Ukrainian exports will be the circumstances during the harvest and transportation abroad. In 2022-2023, the Ukrainian agribusiness suffered significant losses due to strikes on port infrastructure, as well as the destruction of crops in close proximity to the front lines with Russian troops in the east of the country. It is in eastern Ukraine where regions predominantly growing wheat, sunflower, and maize are located.

How important is this for the EU? Incredibly important. It is worth noting that the EU became the key importer of Ukrainian wheat and maize in the last marketing year.

During the 2023/2024 marketing year, 53 million tonnes of grain and oilseeds were exported via the Ukrainian grain corridor. The hubs of maritime export were the ports around Odesa and the ports on the Danube River. In the new marketing year, grain exports from Ukraine are expected to be 45 million tonnes, provided there are no significant obstacles in the operation of the maritime route.

For instance, from July 2023 to May 2024, approximately 8 million tonnes of wheat were imported from Ukraine to the EU, with nearly three-quarters of that bought by Spanish importers, as Spain suffered severely from drought in 2023. Spain also imported almost 40% of the 13 million tonnes of Ukrainian maize that was purchased by EU countries from Ukraine. The European Union also imported 1 million tonnes of barley, almost half of which went to Spain. Thus, Ukraine helped alleviate the grain shortage in Spain, which lost its harvest due to poor weather conditions last year.

Photo: Acting Minister of Agrarian Policy and Food of Ukraine - "…this heat will indeed prevent achieving record yields of maize and sunflower." Source: FB MAPFU

The Heat Will Affect, Unfortunately

Taras Vysotsky, Acting Minister of Agrarian Policy and Food of Ukraine:

"There is also some effect of the heat on early grain crops, but it is not critical. And in terms of harvesting conditions, there are even favourable conditions. As of mid-July, the average yield of early crops is forecasted to be approximately 45-48 centners per hectare, and overall, production of 27 million tonnes of early grain crops is expected.

As of today, this heatwave will indeed not allow us to achieve record yields of maize and sunflower. What the final situation will be (regarding maize and sunflower), we will be able to forecast in the second half of August."

EU Receives Food, Ukraine Gets Money

The suspension of import duties and quotas on Ukrainian exports to the European Union has been extended for another year, from 6 June 2024 to 5 June 2025. This decision was voted on by the previous European Parliament on 23 April and approved by the EU Council in early May 2024. The official EU statement noted that this decision means the European Union is fulfilling its commitment to support Ukraine for as long as necessary.

It should be recalled that this is the second extension of the so-called Autonomous Trade Measures (ATM), which were introduced in June 2022. This regime allows Ukraine to export a significant amount of agricultural products to the EU and transit through EU ports, which have become more difficult to supply through Black Sea ports that, while operational, face high risks from Russian air and missile attacks.

The Autonomous Trade Measures significantly ease the critical situation faced by Ukrainian food producers and exporters due to Russia's unprovoked aggressive war. Along with the solidarity chains, i.e., logistical channels through EU territory, the Autonomous Trade Measures have helped maintain export flows from Ukraine to the EU during the war. Imports from Ukraine to EU countries amounted to €22.8 billion in 2023, compared to €24 billion in 2021, before Russia's full-scale invasion.

It is worth noting that these measures not only help the Ukrainian economy earn more but also enhance the competitiveness of European agriculture and the food industry. For instance, large supplies of feed grain, primarily maize, to EU countries help Italian, German, Spanish farmers and their colleagues from other European countries contain rising costs for meat and milk production. Consequently, this helps curb price increases in European supermarkets.

However, these measures also take into account the concerns of some countries and communities in the EU regarding Ukrainian food imports. The updated Autonomous Trade Measures include an enhanced safeguard mechanism, as was the case last year. This safeguard mechanism allows for quick corrective actions in case of significant disruptions in the EU market or the markets of one or more member states of the Alliance.

For example, emergency brakes on Ukrainian food imports can be applied to supplies of eggs, poultry, sugar, oats, maize, groats, and honey. For these goods, restrictions can be automatically activated if import volumes reach the average annual level recorded between 1 July 2021 and 31 December 2023. Alongside the decision to implement an almost free import regime, the Directorate-General for Trade of the European Commission published these import volumes, making it easy to see the supply limits.

Photo: Drought is a significantly smaller obstacle for Ukrainian agribusiness compared to the war. Russia is mining fields and stealing grain from occupied territories. Source: FB MAPFU

On 15 July, it became known that Ukraine had already reached the annual export limits for sugar, eggs, and oats to the EU under the existing Autonomous Trade Measures. Regarding duty-free trade quotas with the EU for honey, maize, and poultry, Ukraine will reach the limits soon, according to European Commissioner for Agriculture Janusz Wojciechowski. He announced this in Brussels on 15 July during a press conference following the EU Agriculture and Fisheries Council meeting. The closest to reaching the limits is the supply of honey from Ukraine, whose export has already reached 89% of the limits. For maize exports to the EU, Ukraine has used 67% of the limits, and for poultry, 59%.

In his speech, Wojciechowski noted that he was pleased that on 15 July, during the discussion on Ukraine, EU member states generally expressed positive views on the new mechanism of Autonomous Trade Measures and preventive safeguard guarantees. These measures and mechanisms were introduced from the beginning of June 2024 for the next 12 months.

Supporting his position and the overall mechanism of Autonomous Trade Measures, Janusz Wojciechowski reminded that criticism of the EU's Common Agricultural Policy from some Alliance members is incorrect when it refers to threats to domestic production and risks of import dependency. As an argument against this criticism, Wojciechowski reminded that the EU's positive trade balance in agricultural products reached a record €70 billion. And it seems this figure will be exceeded this year.

Photo: Executive Vice-President and Commissioner for Trade Valdis Dombrovskis: "…another year of zero tariffs/quotas for EU imports from Ukraine, but with safeguards for sensitive EU agricultural sectors. Ukraine's future is in the EU." Source: X (formerly Twitter) Valdis Dombrovskis

It Is Vital

Valdis Dombrovskis, Executive Vice-President and Commissioner for Trade, explained the purpose of implementing this near-free trade regime: 

"Given the destruction caused by Russia's unprovoked aggression, these updated autonomous trade measures are vital support for the Ukrainian economy. They will ensure that Ukrainian goods keep moving while addressing the concerns of the EU agri-food sector. Thanks to the revenues generated from Ukrainian exports to and through the EU, Ukraine will have more financial resources to win this war and be in a stronger position to recover from it."

It Doesn't End Here

In his speech at the first meeting of the EU Agri-Food Chain Observatory, European Commissioner for Agriculture Janusz Wojciechowski sharply outlined the contradictions that significantly threaten food price stability in the EU and supply chains overall. He reminded that in recent months, farmers across Europe have actively protested against the neglect of the issues they face.

Specifically, he mentioned the feelings of dissatisfaction and distrust in the functioning of the food supply chain. This is the same sentiment expressed by farmers during protests, citing their belief that their work is insufficiently rewarded. At the same time, it is worth mentioning the dissatisfaction of processors and retailers. They also feel they are treated unfairly. However, Wojciechowski did not specify what these contradictions consist of. Farmers are well-organised, with certain political forces advocating for them, seeking rural votes in European Parliament and national elections. Conversely, the voices of retail and processing sectors are almost unheard on the political landscape.

"A fair and well-functioning food supply chain is a major strategic interest of the European Union," said European Commissioner for Agriculture Janusz Wojciechowski.

What is the way forward? "On 15 March, we presented a document for consideration on how to ensure quick and concrete actions to address the raised issues. Along with proposals to amend the Common Market Organisation and strengthen the Unfair Trading Practices Directive, the creation of this new Observatory is one of the first outcomes of our analysis," explained Janusz Wojciechowski, outlining the purpose of the new platform for shaping the agenda regarding food supply chains.

This platform is intended to gather perspectives from all participants in the supply chain and formulate policies regarding regulations and support mechanisms. One particularly inspiring function of this platform is to "ensure increased transparency of costs and margins in the chain." This means a desire to understand who earns what on the journey from the field to the European consumer's table. This is somewhat surprising, as it suggests that decisions about enormous agricultural subsidies are made by EU governing bodies without sufficient information. However, this is not surprising, as these decisions are often made under significant political and public pressure from various stakeholders.

Photo: European Commissioner for Agriculture Janusz Wojciechowski aims to "ensure increased transparency of costs and margins in the supply chain." Source: X (formerly Twitter) Janusz Wojciechowski

Therefore, Wojciechowski declared rather medium-term prospects for this platform than immediate actions: "...the Observatory's aim will be to develop methodologies and indicators to assess and monitor cost structures, as well as the distribution of margins and added value. Ultimately, the Observatory will aim to build trust among all participants in the agri-food supply chain and ensure fair compensation for each participant for their work for the benefit of all economic actors, consumers, and the public at large."

But what should be done here and now? Especially under conditions of enormous threats and risks – climatic, military, political.

An example can be the further intentions of the European Commission regarding food trade with Ukraine. Along with implementing urgent actions within the framework of autonomous trade measures, the EC is conducting consultations with Ukraine under Article 29 of the Association Agreement between Ukraine and the EU to agree on long-term mutual tariff liberalisation. This is already a medium-term process that will form economic certainty and a stable basis for trade for both Ukraine and the EU, as well as for farmers and businesses. "This will also be an important step in the reconstruction and further integration of Ukraine into the EU internal market, with the ultimate goal of ensuring the country's future accession to the Union," stated the European Commission.