Muscat – Russia’s invasion of Ukraine has sparked price increases across commodity markets, most evident by the surge in oil and energy prices since late February. But agricultural commodity prices have also jumped higher globally given the importance of both Russia and Ukraine to key export markets.
The Middle East and North Africa region is particularly exposed to the war via higher agricultural commodity costs given the relative shortage of arable land in the region and its dependency on the flows of commodities from both Russia and Ukraine, according to Emirates NBD, one of the largest banks in the Middle East.
The Middle East is highly reliant on imports of food commodities, particularly for basic goods like wheat, rice and coarse grains (including corn, barley and other feed grains). More than 50 per cent of the Middle East’s wheat consumption needs are met by imports, as per a research note published by Emirates NBD on Tuesday.
“With such a high dependency on imports of basic agricultural commodities, any prolonged disruption can feed through into considerable economic and social pressures, particularly via higher food price inflation. A prolonged conflict in Ukraine and international trading firms avoiding transactions with Russian exporters will contribute to acute price pressures across the region,” Edward Bell, senior director – market economics at Emirates NBD, said in the research note.
The war in Ukraine has ‘multiplied risks’ for the Middle Eastern countries by raising food and energy prices, the World Bank said in a report last week.
According to the World Bank report, inflation in the Gulf countries is expected to reach 3.0 per cent this year compared to 1.2 per cent in 2021, and will rise to 3.7 per cent in oil-importing countries from 1.4 per cent last year.
Both Russia and Ukraine are major suppliers of agricultural commodities to import markets. Together they accounted for an average of 29 per cent of total global wheat exports from the 2017-2021 marketing years and 18 per cent of total coarse grain exports, with particularly large shares in barley and rye.
Outside of grains, both countries are the largest producers of sunflower seed as well as the associated seed meal and oil. While the war progresses, Ukraine has limited options to divert agricultural exports from normal seaborne routes with bottlenecks on rail capacity to European markets, let alone internal disruption as the conflict remains fraught, Bell said.
He said importers in the Middle East and North Africa are particularly reliant on flows of exports from both Russia and Ukraine.
“Just taking wheat imports as a baseline, both countries are among the single largest source origins for imports and in some case account for a large majority of total imports. The UAE sourced around 63 per cent of its total wheat imports from Russia and Ukraine while in Egypt the share is closer to 80 per cent,” Bell said.
Carry-over inventories of wheat, the research note said, were at relatively normal levels ahead of the conflict and already shipments are increasing from major producers in South America (Brazil and Argentina) to the regional importers.
“A general benefit for food inflation across the region is that rice production is still set to expand this year, helping Middle East economies in particular relative to North Africa given higher regional consumption. However, a prolonged conflict that destroys or interrupts Ukraine’s export infrastructure and sanctions on the export of Russian agricultural commodities will pose meaningful medium-term risks for prices and regional security of supply,” Bell explained.
He further said that the conflict in Ukraine is also passing through to agricultural markets via higher fertilizer costs. Russia is a major producer of fertilizers—potash, phosphates and nitrogen—and has a large share of global export markets.
While fertilizers are not a major direct input cost for the Middle East’s food costs given the shortage of arable land, higher agricultural chemical prices will pass through to other exporters and feed back into the Middle East and North Africa region, Bell added.