In the last month, the invasion of the Ukraine by Russia, a brutal war of choice by Putin has seen the largest conflict in Europe and the greatest threat to global peace since World War 2. Since the breakup of the Soviet Union in 1991, the Ukrainian people have set themselves a forward-looking course as a young Democracy while the Russians have become more inward looking under Putin’s Autocratic rule. This war is about protecting a political ideology and securing the food and energy capabilities of the Ukraine.
Aside from the obvious tragedy of war that we are witnessing, this invasion has turned commodity markets on their heads. The Ukraine produces 20% of the world’s exportable wheat and 30% of exported corn, they are also major producers of oil seeds and potatoes for Europe. Their energy and mineral reserves are globally significant.
With regard to food, the world has two problems, the current “in-silo” old season crop is still in the process of being moved to export, or was, and the new season crop should be in the process of being planted. Currently the roads, rail and port infrastructure is being blown to smithereens by Russian bombs which is clearly problematic for moving the old season crop and it would be my bet that very few people in the Ukraine are focused on getting out in the tractor to get the drill started on sowing new crop.
This will create a global food crisis, even if the conflict was soon resolved in a Ukrainian victory. If Putin was to conquer Ukraine, those food supplies won’t be purchased by or available to Western countries anytime soon.
The same goes for fertiliser supplies, with much of the world’s ammonia, potash and sulphur supplies coming out of the Black Sea region.
So how does that impact us here in New Zealand?
Firstly, in energy prices as we have seen rapid rises in the Oil price driving our fuel prices. More on that later.
Secondly, Black Sea region sourced fertiliser products have risen $3-500/t since the start of the war, on top of what has been a near doubling of fertiliser prices over the last year. The cost of production of food will rise as a result. It will have to otherwise the crops will not be grown, clearly producers cannot produce at a loss without going broke.
Thirdly, commodity prices will and have already risen. We have seen the continuing strength of international dairy prices supplying into an international market that has been short on supply over several years. Grain prices have risen from USD7.60 per bushel to USD12.50 in just three weeks. Buyers from countries that would normally use wheat or corn from the Ukraine have flocked into markets such as Australia and bought any grain still available.
As our local cost of production increased, product prices have to keep pace, otherwise the producer cannot produce without going broke. It is simple economics.
“My expectation is we are entering a time where food security will become much more of an international focus and households will spend more of the available funds on accommodation, energy and food with much less available for discretionary, recreational and consumer spending than we have previously become accustomed to.”
While the war has hastened a move to higher petrol and diesel prices, we must remember that it is the publicly stated aim of Labour and the Greens to put in place policies to increase the cost of fuel to a level that will result in a change of behaviour by the public. That change of behaviour clearly is not being able to afford to use your car. All of the protests we have seen, the Extinction Rebellion, the Climate Emergency and so on have been aimed at banning fossil fuels and implementing an Emissions Trading Scheme that will increase the cost of fuel.
I am bemused in March by the populist garbage of subsidising the fuel price by way of robbing the Covid Recovery Fund (which is borrowed money) to reduce the Excise Tax on Petrol and the RUC on Diesel Vehicles, none of which does anything for the cost of fuel to actually run our machines to grow food.
All of the climate response aims were to increase fuel costs, now that fuel costs have increased, albeit by another means, a soft political decision has been made to borrow money to reduce fuel costs. I guess what this shows is that Climate Change is a cool thing to believe in so long as it doesn’t impact the pocket of the individual.
These changes will all have a dramatic inflationary impact, that has rapidly brought about the end of Quantative Easing and ultra-low interest rates. The asset bubbles grown since the GFC on the back of this cheap capital is potentially challenging for those with high levels of debt.
As we move into an era where food, energy and capital availability are constrained, or more expensive, our priorities will change. It is going to be interesting to see which priorities are held higher on the list of individual choice.
While we are fortunately a long way from the direct conflict, the impacts are already being felt.
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