2022-2023, ...: The war in Ukraine and its relationship with food prices in Israel and the Middle East and North Africa region

Alexander PAVLOV, Chairman of Board, Ukraine-Israel Business Council

A few words on today’s situation and its prospects:

Outside the window - spring 2022. The fierce hostilities in Ukraine, which began on February 24, 2022, continue for the 2nd month. The significant part of the territory of Ukraine is in the zone of direct hostilities. Bombed or damaged many large oil depots, logistics centers, 2 oil refineries. The supply of fuel, fertilizers, plant protection products, and agricultural machinery has been disrupted. Many specialists have been mobilized or left the combat zones. Many areas require mine-clearance.

Sea and river ports are blocked or captured.

Experts compare the situation in the Black Sea to last year's crisis in the Suez Canal, when a large ship got stuck in the canal and paralyzed world trade.

The hostilities have already caused significant disruption to food exports from Ukraine and, to a lesser extent, from the Russian Federation. The reason, among other things, is the sanctions imposed on the Russian financial system and exports, as well as the refusal of the largest container companies to cooperate with Russia, and the lack of freight offers.

The price of oil products rose sharply, which immediately affected the cost of processing and shipping agricultural products around the world.

In addition, Russia and Belarus announced a reduction in the potash fertilizers export, which is about 40% of the world market.

It should not be forgotten that Ukraine and Russia produced together in peacetime about 30% of the world volume of main types in grain and industrial crops, vegetable oils and animal feed.

Ukraine is the world's largest supplier of sunflower oil (about 50% of the global market), it produces about 10% of world wheat exports, 15% - corn.

- What should we expect from agricultural exports from Ukraine and the Black Sea region in 2022 and in the coming years?

Ukraine has left to export about 6 million tons of wheat and 13-14 million tons of corn of the last harvest in 2021.

Russia still has to export about 7-7.5 million tons of wheat and 1-2 million tons of corn of the last harvest in 2021.

Wheat – bread and coarse grains, corn - mainly fodder positions.

This spring, in the face of fierce hostilities, many Ukrainian farmers and agricultural companies will not be able to enter their fields and start sowing.

And even the sown areas will be under constant threat of capture or military action. Fertilizers, plant protection products, machinery, fuel and labor may not be enough to process them.

The future harvest is under the threat of destruction or blocking in the places of its storage, the impossibility of exporting in the required volumes and in time required by the importer.

Transshipment by rail or road, unlike by sea, is more expensive, which will lead to an increase in the final price. In addition, this type of transportation does not allow organizing the mass export of agricultural products in the required volumes and in a short time.

- What speak experts today?

According to their estimates, in 2022, at least 10-30% of the sown area in Ukraine will remain unsown, and this is the corresponding amount of crop losses.

It is expected that the real wheat harvest will be about 18.2 million tons, which is significantly lower than last year's record of 33 million tons. At best it will be able to export about 20 million tons of grain, including 10 million tons of wheat.

As a result, the prices of basic bread and coarse grains, sugar, vegetable oils will rise sharply all over the world.

Many experts see this as a prerequisite for a protracted global food crisis, even famine in some regions of the world. Not only in 2022, but also in the next 2-5 years.

These fears are confirmed by the April report of the Food and Agriculture Organization of the United Nations (FAO).

According to this study, since the beginning of hostilities in Ukraine, the world has seen a sharp increase in the cost of a basket of basic food products (wheat, corn and other grains, meat, milk, vegetable oils, sugar).

Thus, in March 2022, compared to February, grain prices increased by 17.1% and reached the highest level since 1990.

World prices for wheat in March rose by 19.7%, for corn rose by 19.1%, for feed grains also reached a record level, having increased by 20.4%.

Also, quotations of sorghum and barley reached their historical maximum - by 17.3% and 27.1%, respectively.

Dairy products rose in price by 2.6%. Prices for butter and milk powder rose sharply.

Meat prices also reached a record high, up 4.8%.

The price of poultry meat has risen significantly.

Sugar rose in price by 6.7% over the month, which is more than 20% higher than the corresponding period last year.

Vegetable oils (sunflower, soybean, rapeseed) rose in price by 23.2% over the month, also reaching a record level.

- How will this affect the prices of basic foodstuffs in Israel and neighboring regions of the Middle East and North Africa?

Experts believe that we should expect an increase in prices in domestic markets in proportions calculated by the FAO or close to them. You should also expect a disruption in terms or volumes of deliveries.

Israel is included in a large group of countries - the main importers of Ukrainian agricultural products, including animal feed.

In particular, Ukraine has been Israel's main grain supplier for more than a decade (about 50% of Israeli consumption).

In particular, the main Ukrainian export commodities for Israel are corn (about 32% of all imports from Ukraine for more than USD 200 million), wheat (14.3% of imports), barley (4.5%), rapeseed (2.05% ), soy (1.5%).

In a significant volume, Israel imported vegetable oils (2.41% of total imports), as well as chicken eggs (8.5% of Ukrainian exports in 2019).

Israel also imported from Ukraine large volumes of biscuits, caramel and other confectionery products, carbonated drinks, chocolate and chocolates, ice cream, beet sugar, strong alcohol, wine and beer, butter and condensed milk, milk powder, margarines, tomato canned food, sauces and tomato paste, cigarettes and other tobacco products, yeast, canned meat and fish, frozen fish, honey, fruit juices, jams, nuts, spices, chickpeas (hummus) and other beans, natural dyes of animal or vegetable origin.

In recent years the Ukraine's direct total agricultural exports to Israel was over $400 million annually.

The Israeli food industry, animal husbandry, the production of flour, bread and confectionery, poultry meat, eggs, fish, baby and diet food, and the entire dairy industry are closely dependent on it.

Hence the questions:

• - Will Israel be able to continue to receive agricultural products from Ukraine in 2022 and subsequent years in the range it needs, in the quantities it needs?

• - What can be bought and at what prices, will the delivery schedule be disrupted?

• - Will Israel be able to replace Ukraine as its main importer of agricultural products and how painlessly?

• - Will new prices rise in the domestic market, and if so, how much, will this not lead to inflationary processes, a slowdown in economic development and an increase in the living costs in Israel in general?

In solving this task it is worth taking into account that this military operations in Ukraine in addition to Israel threatens food security of many densely populated states, including China, India, Indonesia, and Pakistan. As well as Israel's neighbors in the region - Turkey, Saudi Arabia and Jordan, Egypt, the countries of the Persian Gulf, many African countries. There are disruptions in logistics and rising food costs in the EU as well.

Competition between buyers in the international food market is intensifying.

They all faced the problem of buying food, filling national and regional reserves. Most are already concerned about finding ways to reduce unwanted costs for their budgets and economies, rising inflation, and, as a result, social and political risks.

So, according to the statement of the Minister of Foreign Trade of 100-million Egypt, Ali al-Masalhi, wheat reserves in this country as of the end of March 2022 amounted to 3.2 million tons, "which should be enough for four months."

Egypt is one of the world's main wheat importers, and it receives grain mainly from Russia and Ukraine. We all remember that in 2010-2011 was the abrupt rise in grain prices that was one of the causes of the Arab Spring.

It is no coincidence that at the beginning of March 2022 in Cairo was held the emergency meeting of the permanent representatives of the League of Arab States (LAS), convened at the initiative of Egypt, which explored the issue of food security of its participants. On March 9, based on its results and in order to examine the situation and to convey the position of LAS to the parties to the conflict, was formed An Arab Contact Group composed of Foreign Ministers of Algeria, Egypt, Jordan, Iraq, the United Arab Emirates and Sudan, as well as the Secretary General of the Arab League Ahmed Abu al-Gheith.

Food security of the region was one of the main themes of the meeting in Sharm el-Sheikh at the March 21 between Egyptian President Abd al-Fattah al-Sisi, Israeli Prime Minister Naftali Bennett and the heir to the throne of Abu Dhabi, Sheikh Mohamed bin Zayed.

On March 31 Egypt’s President Abdel Fattah El-Sisi had a phone conversation with his Ukrainian counterpart Volodymyr Zelensky “in which they discussed the latest developments in the Russia-Ukraine conflict, including the state of negotiations”.

The spokesman for the Egyptian presidency said El-Sisi stressed “the importance of addressing all means leading to a calm and peaceful solution to the conflict,” as well as Cairo’s interest in “making all efforts to achieve this, whether at the bilateral, regional or international levels.” “This was the second phone call between the two presidents in a week”.

In early April, on behalf of the Arab League, Egypt again returned to the topic of food supplies from Ukraine and Russia and offered the parties its mediation in the speedy settlement of the conflict. The Egyptian leader also named Cairo as a possible venue for peace talks.

It was emphasized that "the Arab countries were greatly affected by the Ukrainian crisis, they are acting within the framework of the decision of the emergency meeting of the Council of the League, trying to help in the search for a settlement in the interests of the parties and other states."

According to Ma'an News Agency, during a one-day visit to Jordan by Israeli President Yitzhak Herzog on March 30, 2022, King Abdullah proposed the creation of a major regional food reserve.

It is assumed that such a hub may be common to Israel, Jordan, Egypt and the Palestinian Authority.

Earlier, representatives of the United Arab Emirates came up with a similar idea, proposing to create such a hub for the Arab countries of the Persian Gulf.

Their conclusions and fears are not groundless. There is nothing to replace deliveries from Ukraine and Russia. And in 2022 and 2023. Opportunities for other major global exporters are limited. You cannot grow two crops instead of one in these zones. The production of milk, meat, eggs cannot be doubled just like that - this is not a plant where you can run both the 2nd and 3rd shifts.

Animals need to be fed regularly - daily, strictly according to the schedule and in compliance with the recipe, the balance of feed to which the animals are accustomed. A livestock farm is not a machine, you can't turn it off for a month or two.

Yes, Canada, the US and Argentina are also major grain producers and importers. However, their wheat, taking into account transportation, will cost more, especially in conditions of increased demand. In addition, a significant part of their harvest has already been sold under forward contracts or as a result of other agreements.

There is another problem that few people know about: the Ukrainian fields not sown this year will be overgrown with weeds, the quality and structure of the soil will deteriorate.

Even if by the next season in 2023 will be real peace and an end to hostilities in Ukraine, the preparation and restoration of unsown fields will require additional significant efforts and costs. And it is not a fact that Ukraine and Ukrainian farmers will cope with this task in one season.

It is also not known how long and to what extent the sanctions against the Russian Federation and Belarus will be in effect, what their consequences will be.

Therefore, it should be assumed that in 2023 and the next 1-3 years it will be very difficult to restore the pre-war volumes of agricultural products and, logically, the exports volume from these Black Sea countries will be very difficult to secure.

At a minimum, without real peace in this region and powerful administrative and financial support from the entire world community.

- And what is happening in Ukraine on the export agricultural market today?

Today, wholesale buyers from all over the world call to large Ukrainian exporters, offices of working Ukrainian enterprises, small agricultural firms daily from morning to evening, including weekends and holidays.

Their representatives offer various payment and logistics options, agree to various delivery options, containers and packaging. There were queues of those wishing to urgently purchase the necessary goods.

- Brief conclusion:

Objectively speaking and dealing only with facts, in these difficult conditions we should expect a shortage and a further rise in the cost of agricultural products over the course of several 3-5 years.

Substantial food inflation is inevitable.

Competition for food is intensifying around the world.

Social and political risks will increase in some regions and countries.