How Ukraine conflict is forcing the world towards greater food and energy sustainability

As communities took the opportunity this Earth Day, April 22, to reflect on the impact of climate change and raise awareness of the importance of sustainability, many are also re-evaluating the dynamics driving the stark changes in global energy and commodity markets.

The Russia-Ukraine conflict has fuelled an unprecedented rise in commodity prices. As a result, governments are putting greater emphasis on improving food and energy self-sufficiency, and reducing their dependency on Russia’s oil, gas, fertiliser, industrial metals and food.

Europe, in particular, has made significant commitments to bolstering energy production, which includes accelerating the roll-out of green energy sources. Last year, the EU lifted its 2030 renewable energy target from 32 per cent to 40 per cent, while the European Commission has more recently proposed targeting a two-thirds reduction in Russian gas imports by the end of this year.

While some countries may switch to nuclear power, others are expected to start increasing their solar, hydro and wind power generation capacity. Germany, for example, is planning to significantly increase its onshore and offshore wind power production. The UK has followed suit, aiming to produce 95 per cent of the country’s electricity from low-carbon sources by 2030.

All these initiatives suggest that the Russia-Ukraine conflict has pressured policymakers to reduce their energy dependency on Russia, accelerating the shift towards green energy and countries’ commitments to net zero emissions.

While energy market distortions have been the primary driver of inflation in Europe and the US, the conflict has also resulted in tighter agricultural exports, putting pressure on food prices, which play a more material role in inflation in Asia.

Russia and Ukraine contribute significantly to grain markets, accounting for 28 per cent of global wheat trade and around 18 per cent of global corn exports. Hence, wheat and corn prices are up 43 per cent and 33 per cent respectively in the year to date. Agricultural markets are directly affected by potential disruptions in grain trades, while surges in oil prices affect transport costs and biofuel prices.

Beyond the short-term effects of geopolitical uncertainty, the longer-term impact of climate change is likely to exacerbate the surge in food prices and food production costs. Changes in rainfall patterns could cause extreme weather such as flooding and drought, which will affect agricultural production.

Given that households in Asia spend much more of their income on food than energy, certain economies may be more vulnerable to food inflation than energy inflation.

Any spike in food prices could squeeze household purchasing power, jeopardising consumer demand and economic growth. Hence, net food- and energy-importing economies with high weights of these commodities in their consumer price index baskets, such as India, the Philippines and Thailand, will be more deeply affected.

Food self-sufficiency is also a useful indicator of an economy’s sensitivity towards changes in global food costs. Countries with a high dependence on food imports, such as the Philippines, are more vulnerable to global food price movements.

China, India and Vietnam’s net agricultural trades are closer to being in balance, indicating some degree of self-sufficiency. Meanwhile, Australia, New Zealand and Thailand, which are large net exporters of agricultural goods, should be more insulated from global food shocks.

For now, Asian food price inflation remains relatively benign. In China, it fell 1.5 per cent year on year in March, helped by a 41.4 per cent year-on-year decline in pork prices due to robust supplies.

Even though food price inflation in Thailand (4.6 per cent year on year in March) and Malaysia (3.7 per cent year on year in February) are at eight- and four-year highs respectively, the pace of such inflation is not particularly fast in the region – in the US, for example, it was 8.8 per cent in March and above 8 per cent in Brazil, Chile and Hungary.

Looking ahead, given that most Asian economies are still in the early stages of economic recovery, limited monetary policy action is expected to combat inflation, unless the rise in food prices poses significant risks. Fiscal support in the form of tax cuts and food and fertiliser subsidies should help cushion household and corporate income losses.

In the near term, geopolitical events look set to continue to affect the direction of commodity markets and inflation. To better evaluate the implications of food inflation, it is crucial to monitor the Ukraine conflict, international fertiliser prices and volumes, rice price trends, and expected harvests.

In the longer term, however, the transition towards green energy and the need to secure food self-sufficiency will become increasingly important.

*Marcella Chow, is a global market strategist based in Hong Kong

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