Will Russia Cause a Food Crisis?

By David Ruff, Portfolio Manager

In our last quarterly commentary, we predicted the Wagner group mutiny would probably not result in the removal of President Putin from power, but sadly, may accelerate his efforts to bring Russia victory or at least a measure of success from the Ukraine invasion.  Recent events provide clarity on Russia’s new military strategy.  A strategy reflecting a diabolical approach designed to not only punish Ukraine, but also cause catastrophic collateral damage to the globe’s poorer economies.  While not likely to be completely successful, given the complexity of projecting the consequences of this development at this point in time, we highlight the importance of global diversification and emphasize the value of investing in financially stronger companies, from richer nations.

Russia withdrew from an international grain shipment deal which allowed Ukraine to ship its grains through the Black Sea.  Not an idle threat this time, Russia appears committed to this path, indicating any ship visiting any of Ukraine’s ports will be viewed as carriers of military equipment, and targeted accordingly.  Further, Russia states they will focus on the carriers’ flag states, meaning a country seen with its ship in a Ukrainian port, even if it is just trying to export food, now becomes a belligerent party in Russia’s view, potentially expanding the War.  In conjunction with these moves, Russia recently launched a barrage of missiles and drones bombarding Ukraine’s Black Sea coast, specifically targeting agricultural port facilities, destroying 60k tons of grain and damaging critical storage infrastructure.  Basically, Russia opened another chapter in the conflict, declaring War on global food security through a blockade of Ukrainian food transport.  Surprisingly, given the world’s likely reaction to such a strategy, Russian leadership appears totally transparent about this.  Indeed, Margarita Simonyan, the ubiquitously followed Russian TV editor-in-chief for RT News, declared “all our hope is in the famine” believing this could be the fillip to induce the West to lift Russian sanctions, and shift the tenor of the War to Russia’s favor. 

The Kremlin, of course, hopes the resultant food shortages will induce the allies to abandon Ukraine.  Specifically, Russia’s message to Africa, Europe, and anybody who will listen, is that US actions are responsible for their famines.  For example, the West’s economic sanctions crushing Russia’s ammonia sales, a key nitrogen-based fertilizer for corn, wheat, and barley, foreshadowed the grain shortage, and Western bans against Russian oil left Moscow little choice, but to respond in kind.  With this new front on the war, Russian leaders believe they can gain almost universal support from the Middle East, Central Asia, and Africa, and possibly splinter some of Europe’s backing for Ukraine.  Whether these areas of the world swallow this propaganda remains to be seen.

Unfortunately, the ramifications of this tactic can be massive as Ukraine, known as the bread basket of Europe, provides globally critical supplies of wheat, corn, and barley.  Crop destruction and disruption of grain movements will significantly lift prices worldwide.  Although wealthier countries like those in Western Europe, the US, Canada, Japan, Australia, and China can better handle these food price challenges, many countries of the third world could see chaos, particularly from wheat shortages and skyrocketing prices.  A number of these countries produce insufficient quantities to feed their populations, and their governments possess inadequate resources to pay inflated import prices.  In Egypt, for example, which imports substantially all of its wheat, there have been numerous bread riots including 1977, 1984, 2011, and 2017.  As the seventh largest exporter of wheat, a Ukrainian shutdown of wheat transit could be on a scale setting off unrest in multiple countries.  In other words, there could be many “Egypt” food crisis experiences throughout the world with likely concentrations in the Middle East, Africa, Eastern Europe, and Central Asia.  Sometimes this unrest leads to revolution.  Historical examples include the 1713 Boston Bread Riot contributing to the American Revolution; the 1775 Flour War spawning the French Revolution; the Bread Riots of 1848 setting off multiple revolutions in Europe, and more recently, the 2011 Arab Spring where high food prices triggered the overthrow of several authoritarian regimes in the Middle East and North Africa.

Such a dastardly scenario is not without precedent, as Soviet Union leader Joseph Stalin orchestrated the early 1930s Holodomor, a great famine targeting the Ukrainian population to extirpate their independence movement.  The forced agricultural collectivization cratered land productivity, and combined with government grain confiscation, starved millions of Ukrainians.  How darkly ironic that export interdiction of Ukraine’s current agricultural bounty may cause an even more pervasive famine today.

As we know the pandemic disrupted semiconductor production, unleashing problematic shortages of chips, and impacting availability of our electronic gadgets and electrified autos.  An inconvenience, yes, but certainly not on a scale that compares to the potential havoc created by an upset of the world’s basic food supply.  Obviously, we’re not talking pomegranates here, the importance of grains cannot be overstated.  A key element of the food chain, they supply the primary source of human nutrients for billions of people.  This includes the basic input for breads, pasta, cereal, beer, as well as feeding our livestock to produce protein.   

Before you go load the pantry and refrigerator with bread and beer, however, you should know that although Ukraine plays an important role in the world’s grain production, producing 9% of the world’s wheat, 17% of the world’s corn, and 6% of the world’s barley there are other countries producing far greater amounts.  China ranks first in grains by a vast margin, leading in production of wheat, rice, and corn, but India, the US, France, and Canada also qualify as significant producers.  Thus, most of the world’s supply comes outside of Ukraine, beyond the reach of Russia.  Moreover, Ukraine produces small amounts of rice, the globe’s second most important grain after wheat.  Also, while ships through the Black Sea represent the most efficient method of Ukraine grain export, transport through trains, barges, and trucks offer a viable alternative for a meaningful portion of Ukraine’s grain.  Although roads and railroad tracks can also be destroyed by missile and drone, they can generally be repaired more quickly than damages to sea ports. 

Although it’s incredibly difficult to gauge the likely winners and losers from a regional and country perspective at this point.  We would guess countries with extensive grain reserves and greater tolerance for higher inflation like China and India, and unfortunately, Russia, may benefit relatively.  Also, generally richer countries like Western Europe and the US should be positioned better should Russia’s military strategy yield the feared repercussions mentioned above.  It may a hazardous time for third world countries equities.  But, we want to stress, tampering with the global food chain creates multiple, possible geopolitical and economic pathways.  Assigning probabilities to these outcomes becomes an exercise in futility.  Better to focus on quality companies with stronger balance sheets, generating propitious amounts of free cash flow.  Portfolios should include an extensive allocation to richer countries, but be globally diversified.

The foregoing content reflects the opinions of Advisors Capital Management, LLC and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.