How War in Ukraine will impact Irish farmers

War in Ukraine could make major under-production inevitable on farms globally.

Fertiliser prices, already high, could jump by another 40%, and some grain prices could double.

The Russian attack against Ukraine represents a major concern for the global agriculture and food industries because of the likely effect on oil, fertiliser, wheat and maize markets.

For Irish farmers, the major impact might stem from the effect on the market for natural gas, the main raw material for manufacturing nitrogen fertilisers.

Fertiliser prices could go beyond the reach of many farmers due to the invasion of Ukraine. “There is no saying how high natural gas prices could go in the event of a supply disruption given how high prices already are,” said a team of strategists, economists, and other experts at Rabobank.

Well before the Ukraine hostilities, Europe and Asia were already feeling the effects of a natural gas supply crunch that sent prices soaring above $200 per barrel of oil equivalent.

Much of this trend was attributed to the push to decarbonise global economies.

It has affected farmers greatly because it caused prices for some nitrogen fertilisers to rise three-fold in the past year.

Rabobank experts said the one saving grace would be that we are approaching the end of the winter months when demand is highest for natural gas, after which the market would have a few months to adjust.

The currently very high fertiliser prices would also increase if key exports of other fertiliser raw materials from Russia or Belarus are disrupted.

Conflict in Ukraine would also greatly disrupt grain markets, which would be of great consequence for Irish farmers buying animal feed.

They have already seen animal feed prices rise significantly through 2021.

There could be more price rises soon, with the Russian-Ukrainian tensions having already boosted grain markets in recent weeks.

Ukraine is estimated to contribute 12% of global wheat exports.

War would stop Ukrainian wheat, barley, and maize exports, which would have a major effect on the already very tight global grain markets.

This would drive prices up, even if an estimated two-thirds of Ukraine’s annual wheat and barley and one-third of the maize crop has already been exported. Rabobank experts would expect a 30% rise in wheat prices and 20% in maize prices.

They also looked at how economies and markets would be affected by the combination of war plus effective sanctions.

The EU, US, UK and some of their allies started imposing sanctions on Russia last week, in response to Russia's moves which the western countries said laid the ground for invasion of Ukraine.

Such sanctions are among the toughest measures nations can use short of going to war against Russia.

They are measures to hurt Russia's economy, or the finances of individual Russians, or travel bans and trade embargoes.

The US sanctions are intended to damage Russia's ability to finance its military efforts:

In their analysis.

With wide-ranging sanctions, later this year, the price of wheat could double, and the price of maize could rise 30%. Only by mid-2023 could the wheat market rebalance somewhat.

China has said it disagrees with sanctions against Russia, and Rabobank experts included in their analysis the possibility of China working with Russia to evade the effect of sanctions, including the possibility of $100bn in commodity trade between sanctioning countries and Russia being rerouted to China, at a discount price.

Rabobank experts also included in their analysis the possibility of western countries imposing secondary sanctions on China, and on other economies that try to evade sanctions. They said this would have such a disruptive effect on global trade flows that their prediction models cannot capture it. “ Markets are unprepared for such outcomes”.

If China cannot buy grain from Russia or Ukraine, harvested volumes in Russia have to go into storage, and China buying from world markets would see a further global shortage.

The Ukraine conflict arises at a time when global vegetable oil markets are very tight.

These are extensively used in the global food industry, and Russia and Ukraine account for 15% of total global vegetable oil exports. There could be a further 20% rise in vegetable oil prices, according to the Rabobank analysis.

Russia is one of the world’s top three producers of crude oil, alongside the US and Saudi Arabia. Russia currently has 10% of global production and exports about half of that.

Russia contributes nearly 30% of Europe’s oil imports, but this could be cut off and perhaps re-routed to Asia.

As the Ukrainian situation developed in recent weeks, crude prices approached the $100 per barrel level, but war and sanctions could push it to $135 and higher for an extended period, warned Rabobank experts.

They fell short of predicting outright recession risks, and ruled out a World War 3 outcome of NATO going to war directly with Russia, but said the logical argument (to prevent the most painful geopolitical outcome) is for western countries to embrace whatever sanctions are needed (even with the risk of secondary sanctions on China and other economies that deal with Russia).

There could be an influx of millions of Ukrainian refugees trying to enter the EU. “We must remember it is the Ukrainian people who would pay the physical, psychological, and economic price of a war.” And the impact on poorer economies, particularly of higher food prices, could prove socio-economically destabilising. In developed economies, it could increase pressures for higher nominal wage growth that are already building, and could fuel political populism.

But war without sanctions could leave the Russian economy benefiting to the tune of the average Russian being $951 better off per year, if they win the war (without including their winning control of assets such as Ukraine’s fertile farmlands).

But war and effective sanctions is calculated to force Russian GDP per capita down 5.2%, or $1,440 per capita.