Food shock will surpass the energy crisis
Eurasia Group estimates that the number of people facing food insecurity will rise by about 142 million to 243 million by November, from roughly 1.6 billion in mid-May.
Sydney-based Credit Suisse head of energy and resources research Saul Kavonic is keeping a close eye on the looming food crisis.
“Where energy goes, food follows,” he says.
“The energy crisis we’re seeing now is going to be nothing compared to the food crisis we start to see in the last quarter of the year. It’s very, very bad.
“There will be risk of political unrest and starvation, particularly in North Africa.
“Political unrest in other parts of the world will start to impact global supply chains, which will have a compounding effect on inflation. That will lead to more resource nationalism and geopolitical instability.”
There are four major drivers of the food crisis that will hit the world around September.
First, war-torn Ukraine is a huge producer of wheat and barley. Ukraine and Russia combined account for about 15 per cent of global wheat supplies and 30 per cent of all wheat exports, 30 per cent of global barley exports and 17 per cent of corn exports.
Eurasia Group says the ongoing war has damaged Ukrainian crops and disrupted planting. Exports will also be limited through the Black Sea, where about 80 per cent of all sunflower oil exports usually pass through.
Second, Russia is the world’s biggest exporter of nitrogenous fertilisers used to grow crops, and is also a major producer of potassium-based fertilisers.
Sanctions on Russia and export restrictions in other countries are impeding food and fertiliser sales from Russia and Belarus, Eurasia says.
Third, high gas prices are further adding to shortages of fertiliser. Gas is a key ingredient to make fertiliser.
Global fertiliser prices have jumped more than 230 per cent, according to the International Monetary Fund.
Fourth, bad weather events in key agricultural producer nations have decimated crops.
For Australia, a food crisis layered on top of the energy price shock will be a double-edged sword. Consumers will face higher energy bills, soaring petrol costs and rising prices for food such as wheat, meat and vegetables.
The financial pain for most households will be offset by windfall gains for farmers, government budgets, and shareholders in energy companies.
As a major exporter of energy and agriculture, Australia in aggregate will receive a national income boost from higher terms of trade (export prices relative to import prices).
A food bowl to the world, Australia’s agricultural exports are poised to hit a record $65 billion in 2022-23 as total production tops $80 billion, according to the latest Australian Bureau of Agricultural and Resource Economics forecasts released on Monday.
“Exceptionally high grain prices are expected due to poor seasons for major producers overseas and the unfortunate side-effects of Russia’s invasion of Ukraine on world grain markets,” says ABARES executive director Jared Greenville.
“While Australian producers have been able to benefit from favourable growing conditions over the past few years, longer term risks exist in the form of trade restrictions imposed by many countries in response to rising food prices.”
Australia really is a relatively lucky country. When most of the world is hurting from high commodity prices, there are alleviating positives for Australia.
It was similar immediately following the 2008 global financial crisis, when China’s massive stimulus bid up the price of iron ore and coal to record levels.
The dilemma for policymakers is that the gains for miners, energy exporters and farmers are concentrated, and not distributed evenly.
Australia has failed to collect enough tax revenue for the community from booming mining and energy prices.
The resource super profits tax attempted by the Rudd government was defeated by furious industry lobbying.
The Petroleum Resource Rent Tax allowed too generous carry-forward losses for capital expenditure, meaning most gas projects will not pay PRRT for many years, if ever.
Combined with our political inability to price carbon efficiently, Australians are paying the price for tax reform failure.
Windfall gains from high commodity prices could have been put in a sovereign wealth fund, or used to pay for cutting company tax, personal income tax and/or eliminating state property stamp duties.
This would have accelerated the economy’s growth potential.
Norway has built a $US1.3 trillion sovereign wealth fund from oil resources only the fraction of Australia’s riches in mining and energy.
Australia has ended up with a $1 trillion debt.
Australia needs to better manage lucky windfalls delivered during these turbulent global times.