World Bank: War Drives Up Commodity Prices, Inflation, Food Insecurity

WASHINGTON, DC, United States – The war in Ukraine had immediate effects on the commodity market through higher prices and pronounced volatility, which will lead to secondary effects of inflation and a worsening food insecurity, according to the report “War in the region”, by the World Bank.

The report examines the humanitarian and economic impacts of the war, noting that it has threatened the stability of geopolitical relations. Economic output in Europe and Central Asia is expected to contract by 4.1% in 2022, making it the second major shock and second regional recession in two years.

The economic impact of the war was felt through multiple global channels, including commodity and financial markets, trade and migration links, and trust, the World Bank said.

Wheat prices have risen 40% since the start of the war in February. The war has disrupted planting and harvesting seasons in Ukraine, including other crops such as corn, barley and sunflower; destroys critical fields, infrastructure and production; and halted shipping from the Black Sea.

Russia and Ukraine account for a quarter of world wheat exports, with several countries importing 75% or more of their wheat from Russia and Ukraine.

Russian ports are operating but insurance prices have skyrocketed and prevented shipments from leaving, the World Bank said.

Agricultural production inputs are also experiencing shortages and rising prices. Russia and Belarus, which are subject to international sanctions, supply 38% of the world market by value for potash fertilizers, 15% for nitrogen fertilizers and about 17% for compound fertilizers. Russia is the world’s largest fertilizer exporter, accounting for 13% of global exports.

Russia is also a major supplier of natural gas, a key input in the production of nitrogen fertilizers — rising natural gas prices have already doubled the price of fertilizers.

The world’s second largest fertilizer company has announced a 50% reduction in production in Europe due to these constraints.

Rising commodity prices are expected to have side effects, spilling over into inflation and worsening food insecurity, the World Bank said. World food prices were already approaching record highs before the war. Trade restrictions on agricultural products, including stricter licensing quotas introduced by Russia before the war and export bans announced in March, are expected to put further pressure on food prices.

Additional export restrictions could slow trade in food and fertilizers, aggravate food crises and further fuel inflation. Although Russia and Ukraine account for less than 3% of global exports and less than 2% of global imports, the war and ensuing sanctions have weakened trade connectivity by disrupting transit routes, particularly for transportation container shipping and air freight traffic, while rising fuel prices and insurance premiums have pushed up shipping costs, the report noted.

Physical and logistical disruptions associated with the invasion, sanctions and rising commodity prices are likely to ripple through global value chains, exacerbating current tensions and extending delivery times and high production costs for manufacturers around the world.

These disruptions come at a time when global value chains are already under pressure from the pandemic and shortages of semiconductors and other industrial parts, the World Bank said.

About Mallory Brown

Check Also

Dow drops 300 points as traders fret over FedEx warning, Wall Street heads for big weekly loss

Stocks fell on Friday as Wall Street headed for a big losing week, and traders …