The war in Ukraine and the global energy and food markets
The war in Ukraine hit the one-year mark on February 24 with no prospect of a solution. The impacts on the global food and energy markets—although they have cooled down since the price spikes shortly after the Russian invasion—will continue to be present and depend on the outcome of the conflict in Europe. Other instability factors, such as extreme weather phenomena, epidemics, and geopolitical disputes, may prompt prices to rise again.
“Since 2020, the world has been experiencing a multi-dimensional food crisis with several simultaneous challenges, including the negative impacts of the Covid-19 pandemic, climate change, and physical (such as Ukraine) and trade wars (between the U.S. and China), which paint a picture of many uncertainties,” said agronomist Marcos Jank, coordinator of the Insper Agro Global Center, in a webinar hosted by the Fundação FHC and the The German Marshall Fund, a Washington-based think tank.
According to Joseph W. Glauber—former chief economist of the U.S. Department of Agriculture (USDA)—wheat and corn prices have been falling, as Ukrainian exports have resumed (albeit partially) in the Black Sea, and other prominent producers have had record harvests. However, the world stock levels of these products are at a decade-low, which leaves little room to manage further shocks.
“As the group of countries exporting the main commodities is small, the global food supply is susceptible to unforeseen events. If one of the exporting countries has a crop failure resulting from an extreme weather phenomenon, the result could mean further price increases in the international market,” explained the researcher from the International Food Policy Research Institute (IFPRI) and the American Enterprise Institute.
Brazil has benefited from rising food prices as a major exporter of some of the key commodities—mainly soybeans, sugar, and meat, but growing in corn and cotton. In 2022, Brazilian agribusiness exports increased by 32% over the previous year, with increases in the value and volume of exports.
But if, on the one hand, the high prices of agricultural products stimulate production, the rising prices of fertilizers—another negative effect of the war—and energy affect costs and may limit the expansion of supply. Although futures markets point to declining food prices, it is still a precarious scenario.
Global energy market also under pressure from geopolitical and climate factors
“The global energy market is complex, fragmented, and hardly transparent. The outcomes of the trade and economic sanctions imposed on Russia are not automatic. It’s not like pressing a button. The trend is for the West to lose even more influence over the Russian regime and for Beijing to intensify cooperation with Moscow, albeit unofficially,” said Elina Ribakova, chief economist at the Institute of International Finance and visiting fellow at Bruegel, a Brussels-based think tank.
“The question is how the world, and not just Europe, will be able to adapt without relying so much on Russian gas. The European Union and the leading economies of the bloc quickly reacted to the invasion of Ukraine by announcing measures to reduce consumption, seek alternative sources to Russian gas, and expand investments in renewable energy. However, we need to see the long-term results of those decisions,” said Clarissa Lins, an economist with an extensive background in energy and founder of Catavento Consultoria.
In the short term, the European Union (E.U.) has been forced to shift gears in its decarbonization policy, in some cases using deforestation and burning coal to fill the shortage of Russian gas, which could jeopardize the target of reducing carbon emissions by 55% by 2030 compared to 1990 levels. However, the bloc remains steadfast in its commitment to achieving the goal of net-zero greenhouse gas emissions by 2050, with the expansion of renewable energy.
Partly helped by a winter with temperatures above historical averages, Europeans’ biggest problem has been energy prices, not shortage. That has forced governments in the region to use fiscal resources to mitigate the impact of energy bills on business and household budgets. Europeans will take time and bear relevant costs to overcome their dependence on Russian gas, which has been growing for at least twenty years.
Russian President Vladimir Putin is betting that the economic cost of energy in European countries will eventually sever the unity between the United States and Europe in imposing sanctions on Russia. “Meanwhile, to reduce the consequences of those measures, Moscow has earmarked the bulk of its foreign oil and gas sales mainly to China—and to a lesser extent, India,” said Ribakova.
It isn’t easy to know the prices of those transactions. Still, they have been sufficient in keeping the Russian economy afloat and enabled the financing of the war in Ukraine to continue. Therefore, the rapid outcome of the conflict caused by the collapse of Russia’s economy is unrealistic.
Food producers reacted well, but there is no room for unforeseen events and mistakes
“The good news is that some of the major food-producing countries had a very positive reaction in the post-pandemic period and in the wake of the invasion of Ukraine. Brazil was one of them,” said Joseph W. Glauber.
The bad news is that as stocks are low and demand for food will continue to grow, there is no room for mistakes and unforeseen events: “These instabilities are part of the game, but they are increasingly unpredictable due to climate change.”
“Increasing productivity requires adequate funding and investment in research, technology, and logistics. It takes time. The worst that can happen is that countries create barriers to hinder food exports under the pretext of guaranteeing domestic consumption or resort to subsidies and protectionism that prove ineffective for agricultural production in the medium term. The answer lies in more international trade, not less,” said the IFPRI researcher.
“Some of the major food-producing countries had a very positive reaction in the post-pandemic period and in the wake of the invasion of Ukraine. Brazil was one of them,” said Joseph W. Glauber.
During his speech, the U.S. expert presented graphs that show the evolution of international commodity production and trade in recent years. They also showed the negative impacts of recent events, such as the war in Ukraine, the Covid-19 pandemic, and climate events. That information is available in the Related Content section to the left of this page.
Marcos Jank, who has worked on international agribusiness issues in Europe, the U.S., and Asia for a decade, warned of the need for the international community to create programs to support the most vulnerable populations, especially in sub-Saharan African countries. “It is essential to create global policies to reduce food insecurity, but the likelihood of that happening in the short term is small, given the profound crisis that international and multilateral institutions have undergone. Brazil can help to propel that,” he said.
Brazil’s exports are increasing, but it needs to protect the Amazon
“The strong growth in demand for food in Africa, the Middle East, and Asia opens up many opportunities for us, and we are prepared to seize them. Thus, we must do our homework in the environmental area, increasingly invest in productivity, and open new export channels,” said Jank.
The agronomist pointed out that Brazilian agribusiness performance has been very positive for several decades, and logistics have improved significantly in recent years. “Our immediate challenge is to contain Amazon deforestation and convince the world that we are committed to protecting the Amazon and the environment, thus reversing the negative image created in the last four years (during Bolsonaro administration,” he said.
We should also aim to reduce our dependence on fertilizers produced in Russia, Belarus, and Ukraine: “We import about 85% of the fertilizers we use for our agricultural production, and much of it comes from Russia. Increasing domestic production is important, but so is diversifying suppliers.”
Decarbonization should be organized and done as soon as possible
“At the end of the day, the world will have to decarbonize, and the best we can do is to act so that this transition is organized and occurs as soon as possible, and not pressured by extreme events, which are already happening. The sustainable energy policies recently announced by the U.S. and Europe will have a global impact and could benefit countries like Brazil if we know how to take advantage of them,” said Clarissa Lins, an economist from PUC-Rio with a master’s degree from the same university.
About 80% of the world’s energy mix still depends on oil, gas, and coal. Burning those fossil fuels in large proportions causes global warming and climate change, leaving the planet vulnerable to extreme events such as prolonged droughts, storms, and floods.
Brazil’s highly diverse energy matrix puts the country in a privileged position in this world under threat. Hydraulic energy supplies more than 60% of the country’s electricity grid, biofuels are a common fuel source, and wind and solar energy production is rising. However, Brazil is also a major oil and gas producer and has been the target of criticism because of the increased slash-and-burns and deforestation of the Amazon Rainforest.
“The transition between the old world and the new one will take a while, and until we get there, we will have to live with technologies and actors from the past and the future. There is ample room for innovation and for startup companies to find creative ways to accelerate this process,” said Elina Ribakova (Institute of International Finance – IIF).
Developed world needs to contribute transition funds
Although the goal is global decarbonization, each country will have to define the best strategy to achieve that goal based on its advantages and disadvantages, society’s commitment to the consequent changes in habits, and the availability of resources. However, the most-developed countries’ contribution is fundamental to the energy transition of the least-developed nations. Many still depend on fossil fuels and have insufficient resources to promote their replacement.
On several occasions, rich countries have pledged to contribute funds for the environmental and energy transition, such as at the U.N. Climate Summits. Still, the meetings and summits transpire, and the money never surfaces. Financing the energy transition is key to accelerating the decarbonization of the planet and reducing the climate threat,” Ribakova said.
“The time to innovate and reindustrialize Brazil by introducing sustainable technology is now. We have a unique chance to attract investments to the energy area, improving, even more, our matrix and becoming producers and exporters of new renewable sources, such as green hydrogen”, said Lins.
Otávio Dias is the content editor at Fundação FHC. He is a political and international affairs journalist, a former correspondent for Folha de São Paulo in London, and former editor of the estadao.com.br website. Portuguese to English translation by Melissa Harkin, CT and Todd Harkin – Harkin Translations.