It is no news that the world is currently in a food crisis. Yes, food has become much more expensive and scarce than it used to be just last year.
In its recent Nigeria Development Update (NDU), the World Bank estimated that the inflation shock will push eight million people into poverty between 2020 and 2021—this is bound to worsen as food prices increase further. For example, wheat has doubled in price this year alone. The price changes badly affect countries in the Middle East and North African (MENA) region like Egypt. Egypt is the largest wheat importer globally, and most of the imported wheat goes to the government's subsidised bread program.
Key takeaways:
- The world is going through the worst food crisis in almost 15 years, driven mainly by the Russia-Ukraine war. However, for many countries, the crisis began with supply chain strains and extreme weather conditions in 2020.
For Egypt, bread is life. In fact, bread is called "aish" or "eish" in Egypt, which means life/living. So, when wheat prices rise, the entire country feels the impact. The rise in wheat prices in 2008-2009 was partly responsible for the Egyptian uprising (Arab Spring) in 2011. The cost of bread had increased by over 30%, and the government suspended its subsidised bread program. This, coupled with the rising unemployment in the country, led to severe dissatisfaction with the government. The country might be facing a similar hike in food prices caused by the Russia-Ukraine war.
At the moment, the government's wheat import bill might increase to $5.7billion, from an annual rate of $3 billion—which makes the bread subsidy more expensive than usual. This is one of the grim impacts of the food crisis.
Likewise, in Nigeria, we’re feeling the impact of the high wheat prices in food items like flour and bread, of which wheat is a key input. The situation is largely out of our control because we barely produce our wheat. Nigeria’s wheat consumption was about five million metric tonnes in 2021, meanwhile our production was estimated at about 300,000 metric tonnes. Therefore, the primary way to plug the wheat supply in Nigeria is through imports.
Also, the most recent vegetable oil index published by the food and agriculture organisation (FAO) shows that the price index for edible oils—like palm oils and groundnut oils—is the highest it has ever been in the last decade.
This year alone, the price of palm oil—a critical commodity for producing everything from food to cosmetics—has also increased by 27%. The price increase led Indonesia, the world's largest exporter of palm oil, to ban the exportation of palm oil across the globe. We've written extensively about the impact of the ban on the world and the opportunity it presents for Nigeria. However, the country has lifted this ban and replaced it with export taxes as the local price slightly stabilised.
What we're experiencing, therefore, is a food crisis, where people lack access to regular food that is required for everyday living. The world is facing a record-high surge in food prices and scarcity of food—a terrible combination.
So, you can see that the global food crisis is indeed dire for the world, and it's just as bad locally.
Presently, food inflation is 19.5%, meaning people buy food at almost 20% more than last year’s prices. That's outrageous! But the impact of this increased cost of food is further heightened because food is not the only thing that is more expensive now; other things like energy are a lot more expensive too. People already have less disposable income to spend on things, and now they have to spend more on food to survive.
The increased energy prices also make food transportation more expensive. Diesel prices have tripled in the past month, and most food distribution trucks (vehicles that move food from the north where it's produced to the south, where the majority of the market is) use diesel. In a conversation with Stears, Mr John Olateru, the All Farmers Association leader Oyo State chapter, echoed this concern, saying that the price of transporting food to the markets has now tripled.
Likewise, due to the Russia-Ukraine war, the price of fertilisers in Nigeria has also spiked. It doesn't matter that Nigeria produces all the fertilisers it consumes. Urea, an essential ingredient for fertiliser production) has tripled this year alone, which has led to increased fertiliser prices.
But Nigeria's food crisis did not just start when diesel or urea prices rose; it began way before. Food inflation has been rising since 2019 because of issues like insecurity and supply chain constraints that the Covid-19 pandemic further exacerbated.
Like Nigeria, the global food market was already suffering from a severe food insecurity problem before 2022, driven by the Covid-19 pandemic and lockdowns around the pandemic. These lockdowns made it difficult for people to access food and other inputs for production. About 68% of households in the country were moderately or severely food insecure, the National Bureau of Statistics recorded.
In many parts of the world, weather challenges significantly worsened the situation and reduced production. A case in point is India, one of the world's largest wheat producers, which has started exporting its wheat to make up the shortfall of global demand—although it rarely exported its wheat in the past. Still, a heatwave now threatens India’s supply and export, making it worthwhile to appraise other nations' approaches to global hunger.
How are countries responding to the food crisis?
Countries have taken more drastic moves to solve the problem of scarcity by being protectionists. Like Indonesia, many food-producing countries are shutting their borders and restricting the export of food out of the country. The World Bank estimates that over 260 policy measures have been announced and implemented by 75 countries since the beginning of 2022.
Going by the Food and Fertiliser restriction tracker by the International Food and Policy Research Institute (IFPRI), exports of 32 products have been restricted till the end of the year. This is an example of protectionist policies that countries have had to resort to, which is understandable. Agriculture companies and farmers that produce crops in high demand want to take advantage of the global price hike, but the government would not want people in the country to starve when there’s an abundance of food being exported. Also, when they restrict exports, they can control the food price and ensure that the global price hike does not affect their domestic market much.
However, this is detrimental to the global economy. The World Bank estimates that export restriction policies implemented worldwide since February are responsible for at least 7% of the global wheat price increase. As explained in this story, countries with a comparative advantage in producing certain goods and services can increase supply and reduce prices.
The impact of supply is further heightened when we think about the entire value chain of food production. Think of how the hike in crude oil prices—caused by the war—affects service charges in Lagos estates or the cost of transporting food across Nigeria. Another example is the impact of the restriction of foreign exchange for maize importation by the CBN on the Nigerian poultry sector in 2020.
But even when countries attempt to protect their domestic market by implementing protectionist policies, there's no guarantee that prices will still fall locally. Producers might attempt to hoard their food to prevent people from gaining access to them—thereby increasing the local prices.
Another global policy move is the call to reduce the use of food for biofuels and biodiesel production. Biofuels are ethanol made from maize and sugarcane, while biodiesel is made from soybean oil and other edible oils. About 30% of US maize production historically goes to biofuel production, and countries are now calling for this to be reviewed because of the urgent need for maize production worldwide.
In response to these protectionist moves by various governments, the World Bank has also responded by announcing that it plans to support countries with $30 billion in food security projects over the next 15 months.
Silver lining?
Despite the dire effects of the food crisis, increasing food prices might have advantages, especially for local farmers and countries. Countries which don’t typically export their crops are now rising to the occasion to make up for the shortfall. Governments are looking to sources outside their usual suppliers to meet their domestic food demand. In some cases, they have even gone as far as establishing bilateral agreements which mirror trade by barter.
“India had a large stockpile of wheat before the crisis—because they're the second largest producers of wheat in the world, but they couldn’t get palm oil, one of its largest imports. So India is now considering exchanging wheat with Indonesia in exchange for palm,” Abigail Alabi, an agriculture equity research analyst at Vetiva Capital shared with Stears.
In some cases, however, countries have started looking for alternatives. For instance, palm oil is an alternative in the face of sunflower oil shortages, and companies have begun to see the benefits. For example, in the first quarter of the year, Okomu Oil, a publicly listed palm producing company, recorded an 80% increase in its profit after tax (PAT) despite an increase in its cost of production by six times—mainly driven by an increase in fertilisers and fuels. Okomu oil’s improved performance is driven by local demand because even though the global price has increased, local demand has still not been met.
Likewise, Nestle Nigeria witnessed a 27% increase in its PAT as of March 2022. Although its cost of sales also increased, it only increased by 26%, causing the company to rake in significant profit. Most of its profit is also driven by its Nigerian market, which means domestic food inflation has been favourable to the company.
And then, with restricted wheat imports (and global wheat price surges), local wheat production could increase. Olateru, in his conversation with Stears, echoed this, "we're seeing FlourMills partner with local farmers to produce wheat and barley locally." Therefore farmers get to benefit from the high price increases.
However, the increased cost of inputs such as fertiliser might prevent farmers from increasing their production capacity. This was one of the insights the COO of AFEX, Akinyinka Akintunde, shared with Stears, “Some of the challenges we foresee in the near future are that there may be reduced production of food commodities; the increase in the cost of inputs will prevent farmers from producing what they would typically.” So, even though farmers want to take advantage of the increased global prices, they may struggle to produce at the same rate they used to.
Finally, the quality of output from the farmers due to limited access to effective post-farm processing materials can be low, preventing farmers from taking advantage of the high prices. Imane Dodo, the VP of Strategy at Releaf, echoes this in an email interview with Stears, "The hard work and industry of our farmers have never been in question. However, limited access to effective processing equipment limits farmers' ability to get more value from their products. The inputs delivered to food factories are up to 90% dead weight (water or chaff), affecting the prices buyers can pay for the raw material, as they incur high logistic costs."
How has the world responded to global crises in the past?
But this is not the world's first faced food crisis. In 2009, the world experienced a global food crisis where the cost of food increased significantly due to the increase in oil prices and higher demand for biofuels. As we're seeing today, when crude oil prices rise across the world, transportation and cost of production become costlier, and we pay for it at higher food prices.
To avert the crisis that lasted about two years (2007-2008), the response from some countries—especially emerging economies—was across three significant themes: increasing food supply through trade policies, protecting consumers through social welfare projects and improving the wellbeing of farmers. Let's dive deeper to see what each entailed.
At least forty countries across Asia, Africa and Latin America imposed a trade-related policy to increase domestic food supply. These policies were in two broad categories: restricting exports like we're seeing today and reducing import barriers. The goal was to ensure there was more than enough domestically to manage local food prices.
Towards the end of 2007 and the beginning of 2008, India, Vietnam and some other key rice producers imposed significant restrictions on rice exports, which sent the price of rice multiplying by 3x. This is not too different from what we see in the palm oil market—shortly after the short-lived export ban on palm oil. The issue, however, is that even with the ban, there was no guarantee that domestic prices didn’t rise. Some countries, like the Philippines, set up a task force to prevent hoarding by punishing people hoarding goods with life sentences.
The countries attempted to increase supply by removing import barriers, reducing Value Added Taxes and releasing food from the country's strategic grain reserves into the market. In a study by the Food and Agriculture Organisation (FAO) on the impact of the policies introduced to avert the food crisis of the late 2000s, we see that the governments of some African countries increased the food supply by removing import barriers to food items.
The issue with increasing supply by removing import barriers is that the food crisis is global, and therefore it's more expensive to import than usual. Also, many countries, including Nigeria, have already used their strategic grain reserves to meet supply shortfalls caused by Covid-19 restrictions in 2020, making it even more difficult for them to increase supply. This is where multilateral organisations come in, to improve the supply of food (especially grains) from countries where they are surplus to areas where they are scarce.
The next form of support to the country was through social welfare programmes, mainly targeted at the poor. Again, governments attempted to do this in various forms. On the one hand, targeted cash transfer programs were aimed at the country's poor and vulnerable. Then, there was the food-based assistance project where food was given to the vulnerable through school feeding programs or work for food programs. In 2008, 19 countries provided safety net programs for their population. While it achieved increased health and nutrition for its population, the project's high cost made it unsustainable for emerging countries that could not afford it.
Finally, countries attempted to alleviate the impact of the food crisis on their population by supporting farmers through input support programmes. The country attempts to reduce the farmers' cost of production by providing subsidised inputs—like seeds and fertilisers to the farmers. However, the implementation of such a project is key to guaranteeing success.
A system that withstands shocks
First, to solve some of the supply chain issues, we need proactive solutions such as providing farming communities with storage facilities and funding to access finance for farmers at times like this when input costs are high. Akintunde shared some of such solutions already being adopted in Nigeria, “the government privatised some of its silos that were not operational, and at AFEX, we provide some financing like asset-backed loans and input loans for farmers.”
While we won’t determine how viable these solutions are, especially for smallholder farmers, it is worth acknowledging that such solutions are suitable for driving stability to the Nigerian food market. Solutions like these would be good for creating a food system that can withstand shocks in the long run.
Lessons from past food crises give us a glimpse into how we can solve the problem of food scarcity in the world in the short run. While the support programs are essential, there is no one-size-fits-all approach to improving the food crisis worldwide. Food-producing countries must take advantage of the current global supply shortage by plugging in the gaps. This not only reduces the current price but also diversifies the existing global supply chain to be more resilient to subsequent shocks in the future.
