Food, Fertilizer, and Fuel: How the Russo-Ukrainian War Is Assaulting Markets

Food, Fertilizer, and Fuel: How the Russo-Ukrainian War Is Assaulting Markets

The big risk is that an escalation of the Russo-Ukrainian War and a deeper state of economic warfare between the West and Russia, quietly backed by China, could cause another major recession.


Odesa is the third-largest city in Ukraine. Throughout history, it was a coveted port by the ancient Greeks, Tatars, Polish-Lithuanians, Turks, and Russians. The modern city was founded in 1794 by decree by Catherine the Great and it was the fourth-largest city during the late tsarist era. One of the city’s attractions is that it is a warm water port, open year-round, something critical to trade. Directly related to that is Odesa’s role in the world grain trade. Historically, the city on the Black Sea was the hub from which much of Europe’s food was exported. Wheat was king and still is. Today, Odesa appears to once again be feeling the weight of history; it is a target for Russian military forces as they attempt to sweep the southern coast of Ukraine. The Russo-Ukrainian War could well disrupt that flow of trade, having ramifications well beyond the Black Sea and into global grain markets, reaching as far as the United States, where the consumer is feeling the bite of higher food prices and inflation for February hit 7.9 percent, a forty-year high.

It is always difficult to fully comprehend exactly how interconnected global markets can be. This is certainly the case with global grains, especially wheat. The loaf of bread being bought in the store in either Marysville, Kansas, or Bloomfield, Connecticut, is at the end of a long chain of planting, fertilizing, harvesting, milling, supply contract buying, transportation, and distribution, not to mention the loving attention given to where on the shelf the generic loaf of bread is proffered up to the hungry consumer. In 2022, this entire daisy chain of baguettes, brioche, multigrain bread, pasta, and pita bread is under considerable stress.


The war raging in Eastern Europe involves Russia and Ukraine, which together supply almost one-third of the world’s wheat exports. Economic sanctions are likely to cause problems for Russia in shipping its wheat, while the war in Ukraine is disrupting the planting/harvesting cycle. Moreover, the fighting that is sweeping along Ukraine’s Black Sea coast is likely to choke the ability of that country’s farmers to get their products to markets. This is bad news for Russia’s and Ukraine’s customers, many of them in Africa and the Middle East. Two large countries stand out, Egypt and Turkey. Egypt depends on the two European countries for around 80 percent of wheat imports while Turkey depends on Russia for more than 70 percent of its wheat imports. Turkey already has high inflation; higher wheat prices are going to make a bad situation worse.  

The risk of higher inflation is augmented by Ukraine and Russia’s roles in the sun-seed market. Although there has been little headline news about this market, it plays a major role in the daily life of millions of people. Sal Gilbertie, CEO of Teucrium, the largest U.S. exchange-traded fund issuer focused solely on agriculture funds, noted: “Sunflower oil is a major component of cooking oil and food, and you see palm oil rising, and soybean rising. This is a bid deal, especially for the poorest of the poor, where cooking is a big part of the daily budget.”  

The growing squeeze in wheat and sunflower prices is compounded by another factor: China. On March 5, 2022, China’s Minister of Agriculture and Rural Affairs Tang Renjian announced that conditions for his country’s winter wheat harvest were not good due to last year’s rainfall delaying planting of around one-third of the usual wheat acreage. According to Tang, “Not long ago we went to the grassroots to do a survey, and many farming experts and technicians told us that crop conditions this year could be the worst in history.” Considering that wheat prices have surged to fourteen-year highs, it is a tough time for China to be looking for grain in international markets.

Food security is a major concern for China and the Chinese Communist Party. Recent reports out of China indicate that even before the Russo-Ukrainian War, grain supplies were tight, despite consecutive good harvests in the past couple of years. According to the National Development and Report Commission, China will seek to guarantee that grain acreage for the year remains at its current levels and will concentrate on increasing soybean and other oilseed crops as well as increasing corn output. Moreover, the government will halt any efforts to utilize cropland for any purpose other than agriculture and specifically grain production to safeguard and revitalize the seed industry at a faster pace.  

A reflection of the seriousness surrounding China’s food security came from Premier Li Keqiang at the beginning of the country’s parliamentary meeting in March. China’s number two political leader stated that the state will ensure critical agricultural-product supplies in 2022, including grains. He noted that everyone must work together to ensure the country’s “rice bag” and “vegetable basket” are well-filled. The Communist Party is very aware that one of the root causes of the 1989 Tiananmen Square protests came from a rise in food prices (as well as dissatisfaction with corruption and social disruption related to uncertainties caused by rapid economic growth).

And then there is the issue of fertilizer. One of the critical ingredients for the production of fertilizer is potash. Russia is a significant producer as well as Belarus, which is now unofficially occupied by Russian military forces. Together, Belarus and Russia account for 37.6 percent of the world’s potash exports.

Before the Russo-Ukrainian War, Belarus’s potash exports were restricted from reaching markets due to Western sanctions and Lithuania’s decision to punish the Lukashenko regime by closing its main port to its neighbor’s main export. Western countries accuse Belarus’ President Alexander Lukashenko of rigging a 2020 presidential election. With the Russo-Ukrainian War in full swing, Russian potash exports could be halted, which would make an already tight market tighter. Canada’s largest potash producer could produce more, but has concerns that such a supply crunch could be short-lived (if a political settlement is reached) and it would be left with over-supply. Although end-users do not need to use potash-based fertilizer every year, it still remains essential. Indeed, the U.S. Geological Service noted: “There is no known substitute for potash, a major ingredient in most commercial fertilizers…”  

Potash prices are likely to head higher, which, in turn, will be passed on to farmers; who, in turn, will pass them on to food retailers; who, in turn, will pass them on to consumers. The fertilizer picture is further troubled by Russia’s involvement in the export of other ingredients, including ammonia (23 percent of world exports), urea (14 percent), and processed phosphate (10 percent).

The landscape of rising food prices is even more complicated by the fact that most companies in the agro-food supply chain face higher energy costs. This was occurring even before the Russo-Ukrainian War, but with the potential for sanctions against the sale of Russian oil and gas, transportation costs could skyrocket, another factor feeding inflation throughout much of the world, especially in the more advanced economies. Europe is particularly vulnerable to this due to its high dependence on Russian energy.

The last time wheat prices spiked was in 2007-2008, which resulted in riots in nearly forty countries, including Haiti, Bolivia, and parts of Africa. Concerns over food security also prompted a number of other countries, like Cambodia, India, and Vietnam to curb their rice exports to ensure food security at home. The root causes at the time were a number of interacting factors, which encompassed rising oil prices, higher demand for biofuels, financial manipulation, and trade decisions (such as export restrictions).

Rising food prices have also been regarded as a contributor to sparking the Arab Spring in 2010, which started in Tunisia and soon spread to much of the Arab world. The roots of political revolution, which toppled governments in Tunisia, Libya, and Egypt, came from a combination of shrinking farmlands, weather (droughts and fires in Australia and Russia), and poor water allocation, which pushed up prices and fueled anti-government sentiment.

While the United States did not experience political turmoil related to higher food prices in 2008 or 2010, it is not immune to voter angst over higher prices. Fortunately, there is currently enough wheat production to feed the population. Unfortunately, U.S. wheat farmers have been dealing with an extended drought, which could factor into this year’s production with implications for the second half of the year.

And then there is the unpredictability of geopolitical events. As Vincent Smith, an economist at the Montana State University Department of Agricultural Economics and Economics, noted on March 6, 2022: “The issue, probably for all food prices, as well as every other price, is actually the impact of the Ukrainian crisis on the price of oil, diesel and the price of gas.” The mix of geopolitical risk, rising energy prices, and rising food costs is certainly something that will play out in the U.S. Congressional elections set for November 2022.

Looking ahead, global food prices are going higher—at least in the short term. The empty shelves experienced by Americans in grocery stores in 2020 and 2021 could become widespread again due to global supply chain disruptions. This puts increased pressure on the Federal Reserve, the Bank of England, and probably the European Central Bank to raise interest rates. The risk of rate increases is that they could combine with a sharp decline in economic activity as the consumer’s pain threshold is found and they opt to postpone purchases. Food will remain a core purchase, though prices are likely to pinch further. While the United States is better situated than most to ride through a food price shock, it is not immune. If nothing else, there is a whiff of stagflation in the air.