Surging food prices and supply fears a threat to EMs

• Most EMs are not heavily dependent on Russia or Ukraine for their domestic food supplies, but there are key pockets of vulnerability due to large wheat, corn and vegetable seed/oil exports to Turkey, most of the Middle East and North Africa and parts of Asia. And even if supplies are not disrupted, higher global food prices will push up food inflation in many EMs to multi-year highs and could exacerbate external imbalances in some countries in North Africa.
• The war in Ukraine has sparked concern about surging global food prices and food supply in emerging markets. Some exports from Russia and Ukraine have either been disrupted or halted due to the war, hitting those most dependent on food supplies from those countries and contributing to the rise in the UN’s food price index in March to its highest level since 1990.
• Categorising EMs into those most dependent on Russia and Ukraine for food supplies requires looking at more than just the share of their food imports from those two countries. What also matters is the balance between domestic production and net imports and, therefore, how self-sufficient EMs are. We’ve looked at the UN’s food supply accounts and the breakdown of food imports for 25 large EMs and 15 food categories to assess which EMs are most dependent on food imports from Russia and Ukraine for domestic supply.
• Overall, most EMs do not depend heavily on Russia and Ukraine for their food supplies. Latin American countries are among the world’s most self-sufficient and least dependent on imports from Russia and Ukraine, but Turkey and most of the Middle East and North Africa are dependent on imports of many foods from Russia and Ukraine. Asia, Africa and Central Europe sit somewhere in between. (See Chart 1.)
• There are two food groups in particular in which there is a high dependence among EMs: cereals and vegetable seeds/oils. We estimate that imports from Russia and Ukraine account for 20-30% of domestic wheat supplies in Turkey, Indonesia and parts of Africa and 40-50% in Egypt, the UAE and Tunisia. Imports of sunflower seeds/oil account for 30% of domestic supplies in Turkey, Poland, China and Korea, 60% in MENA and more than 70% in Tunisia, India and Malaysia. Other vulnerabilities include soybeans (Turkey and Poland), corn (Tunisia) and cocoa products (the UAE). (See our Heatmap below.)
• What this means is that many EMs are likely to experience shortages of foods such as cereals and vegetable seeds/oils this year, particularly with planting and harvesting in Ukraine affected by the war. Some may benefit from a re-orientation of trade flows, with those in Central Europe, India, Argentina (and Australia), potentially able to export more wheat. Romania may be able to export more sunflower products. But this would take time given the timing of the farming seasons and there is a question mark about the ability to ramp up production as the prices of energy and fertiliser chemicals have surged, pushing up production costs sharply (Russia is a major exporter of fertiliser chemicals). (See Chart 2.)
• What’s more, many countries have banned the export of these products to protect domestic supplies and countries may need to draw upon strategic food reserves. The authorities in Egypt have said that they have less than three months’ worth of wheat in strategic reserves. Even if countries can secure supplies, they will be competing with other countries which will keep global food prices high.
• One important consequence is that food inflation will hit fresh multi-year highs in many EMs this year. This will weigh on real incomes given the high share of food in consumer spending and the limited ability to substitute away from cereals and oils. Central banks are likely to keep interest rates high to tackle above-target inflation, particularly in Latin America and Central and Eastern Europe.
• It will also aggravate external imbalances in many countries. Large food importing countries, such as those in North Africa, will experience larger import bills at a time when they are already rising due to higher oil prices. And finally, it will put pressure on public finances in some countries where foods subsidies are prevalent. Those in MENA will face a trade-off between more expensive food subsidies and reduced government spending elsewhere, or less generous subsidies and higher inflation.

Chart 1: Food Imports from Russia & Ukraine (as a % of Total Domestic Food Supply, 2019)*	Chart 2: Prices of Key Fertiliser Chemicals ($/Mt)
Sources: UN, Refinitiv, Capital Economics	Sources: Bloomberg, Capital Economics

Liam Peach, Emerging Markets Economist, +44(0)20 7808 4990, liam.peach@capitaleconomics.com