Insights from Aon The One Brief

Among the many significant consequences of Russia’s invasion of Ukraine, one of the most far-reaching is the conflict’s impact on the supply and cost of food for billions of people around the world.

“Even if the crisis stopped today, the impacts on food and agriculture are going to be felt for a long time,” says Tami Griffin, national practice leader of Food, Agribusiness & Beverage Industry Practice at Aon. “It’s very devastating to the world. You’re not just losing Ukraine production, you’re also losing Russian production.”

The region’s contribution to the global food, agriculture and beverage industry is massive. Combined, the two countries are responsible for nearly one-third of the world’s wheat exports. Numerous countries — many in the Middle East and Africa — are hugely dependent on that wheat. The threat of famine now seems very real for many of them.

“We’re talking about a long-term situation,” says Ciara Jackson, Aon’s EMEA Food, Agribusiness & Beverage Practice leader. “And a lot of these agricultural commodities, they’re going to Africa, they’re going to the Middle East. Lots of people in those countries were already food insecure before this crisis started, so these already challenging and volatile situations are going to be compounded.”

Ukraine and Russia are also responsible for major shares of the world’s barley, corn and oil seed production, adding further strain on global agricultural markets. Disruptions resulting from the conflict have already driven food prices to record levels. Russia’s position as a major exporter of fertilizers adds to precarious agricultural conditions, and its freezing of those exports in response to sanctions is expected to continue to have a dramatic impact on fertilizer prices and availability.

Amid this ongoing volatility, businesses in this increasingly interconnected world need to make decisions quickly to adapt their operations and workforces to new and difficult conditions.

In Depth

Even before the crisis in Ukraine, food and agriculture supply chains were already under stress as a result of the COVID-19 pandemic. Consumer demand, inflation, regulation, cyber-attacks on food supply chains, and climate and weather were among the other factors driving up food prices.

“Prior to this geopolitical activity, food prices were experiencing significant volatility, so it was already quite a problem,” says Jackson. “While there has often been a hesitancy on the part of manufacturers and processors to pass these inflationary costs to consumers, the quantum of the increase has now become so significant that they’re transferring these price increases on to their customers.”

Poor harvests in other parts of the world could exacerbate the impact of the Ukraine-Russia conflict on global food supply chains.

“Latin America has had weather struggles for the past year, maybe two years,” says Griffin. “The U.S. is in a weather pattern where 60 percent of the country is in a drought that’s projected to increase. We’re all holding our breath, because if we have a really bad crop weather year, that’s really going to throw another wrench in the whole system.”

Rising grain prices will also lead to higher feed prices, consequentially increasing prices for such protein sources as pigs, cattle and chickens.

Immediate Impacts, a Long-Term Issue

Even if grain in Ukraine’s fields is harvested this summer, those crops — along with tens of millions of tons of wheat in storage — are largely stuck inside the country while Russia blockades Ukraine’s Black Sea ports. Meanwhile, efforts to ship grain and other commodities by rail are facing their own logistical challenges. This is compounded by reports of mines in the Black Sea further impeding supply chains.

Reported attacks on Ukrainian agriculture facilitiessuch as railroads, ports and storage facilities will add to the impact on food supply chains, and the duration of disruptions. “That’s a long-term consequence,” says Griffin.

Furthering those consequences are the number of Ukrainian farmers who have left the country or don’t have access to their lands, inputs or equipment.

Political Implications Elsewhere

Famines caused by food shortages resulting from the Russia-Ukraine war could have their own political implications.

“In affected countries, there could be very widespread famine and a lot of political unrest and civil commotions,” says Griffin. “Hungry people are not happy people. So in those areas that aren’t seeing conflict right now, we could see a lot more of that in the next year.”

“The impact of the Russia-Ukraine conflict is prompting some governments to rethink their countries’ food security strategy,” Jackson says. Countries beyond Russia and Ukraine may encourage more farmers to diversify to include crops where they are not already doing so, Others are responding by imposing export restrictions or tariffs on food produced within their borders.

Incentivising Sustainability

A shortage of fertilizer and other crop protection products could prompt farmers to embrace more sustainable agricultural methods, according to Griffin.

“Because these prices aren’t going to go down — even in 2023 — in a significant way, we might see some farmers start to look to new crop technologies that offer biologics that provide improved plant health and soil fertility benefits, leading to an increase in the yield of crops,” Griffin asks. “Maybe this will accelerate the path we were already on to get to more sustainable regenerative agriculture.”

On top of this, the current climate is also prompting more and more businesses to reach long-term agreements with suppliers to lock in both supply and prices. “The smart organisations are seeing that as a strategic differentiator because there’s going to be limited supply and the supply is shrinking,” Jackson says. “On top of securing supply, these agreements also highlight the organisation’s commitment to good practice when it comes to environmental, social and governance factors.”

A Local Conflict, a Global Impact

While Russia’s invasion is an immediate crisis for the people of Ukraine, it’s also one more example of the potentially wide-ranging impacts of conflicts in our interconnected world.

The conflict’s impacts on food and agriculture are already being felt. Those effects will be significant and long-lasting, leaving agricultural producers, businesses and governments looking for ways to address shortages and disruptions.

-- ENDS --

About Aon
Aon plc (NYSE: AON) exists to shape decisions for the better— to protect and enrich the lives of people around the world. Our colleagues provide our clients in over 120 countries with advice and solutions that give them the clarity and confidence to make better decisions to protect and grow their business

Visit www.aon.co.zafor more information.

Follow Aon South Africa on Twitter, Facebookand LinkedIn.

Find our latest Insightsfrom a local point of view.

Hear from Aon’s expert advisors in The One Brief.

Aon South Africa’s Impact Report.