The pandemic. Supply chain strains. Climatic events. Converging disruptions have sent food prices soaring—and Russia’s invasion of Ukraine, one of the world’s six breadbasket regions, risks tilting the food system into global crisis. In this episode of The McKinsey Podcast, Daniel Aminetzah, leader of McKinsey’s Chemicals and Agriculture Practices, and partner Nicolas Denis talk with global editorial director Lucia Rahilly about the vital roles that Ukraine and Russia play in the global food system, as well as what is at risk as the war continues. This conversation was recorded on April 4, 2022. The following transcript has been edited for clarity.
The McKinsey Podcast is cohosted by Roberta Fusaro and Lucia Rahilly.
The global food supply at risk
Lucia Rahilly: Let’s start with some context. Access to food is clearly of urgent concern for the millions of Ukrainians in the throes of this tragic invasion, so I first want to acknowledge that vital frontline priority. But the war in Ukraine also threatens to disrupt the food system globally, well beyond the conflict zone. Daniel, help us understand what that means.
Daniel Aminetzah: As you rightly recognized, our attention is primarily on the immediate conflict in Ukraine, including the food crisis. As we look at the broader global food supply chain, we clearly see this conflict shaking important pillars of this system in an already disturbed context.
In the global food system, previous supply–demand scenarios were mostly encoded around weather and other supply-related events. In the past couple of years, the global pandemic has clearly tested, and in many cases proved, the resilience of the food system. But now, we are in an unimaginable situation: a war of this scale in Europe, in such a critical food supply hub—especially when it comes to wheat and to fertilizers—as the Black Sea.
This instability starts to create a whiplash effect in the food supply chain. It’s hard to fully project the implications, but this crisis will have clear secondary effects on other breadbaskets, like Brazil. Russia and Belarus are critical for the export of fertilizer, which is the most important yield driver for farmers globally.
This event has also hit us at a point where we’ve seen unresolved challenges from sustained high prices for agricultural commodities and fertilizers since late 2020. We’ve seen corn prices, for example, at well above $5 per bushel since early 2021—well over a year now.
Despite efforts to strengthen the global food supply, and the overall resiliency we’ve seen in the past couple of years, we are quite concerned. The world, to some extent, seems unprepared for the crisis unfolding now. One exception is China, which has significantly increased its strategic reserve by over 70 percent since 2008. But many other markets in the world are not at the same level of readiness.
The instability from the Ukraine–Russia conflict starts to create a whiplash effect in the food supply chain. It’s hard to fully project the implications, but this crisis will have clear secondary effects on other breadbaskets.Daniel Aminetzah
Lucia Rahilly: Let’s talk more about this whiplash effect and the scale of the potential disruption. Nicolas, how much of the global food supply is at risk?
Nicolas Denis: Globally, there are six breadbaskets that together supply roughly 60 to 70 percent of global agricultural commodities. The Ukraine–Russia region is responsible for roughly 30 percent of global exports of wheat and 65 percent of sunflower, in a context where those markets are increasingly tight and interconnected—so a slight disruption in supply creates some impact on price.
Of course, we don’t know what the length and scale of this conflict will be. We ran some scenarios, and from our perspective, between 19 million and 34 million tons of export production could disappear this year. If we fast-forward to 2023, the figure could be between ten million and 43 million tons. To translate, that represents caloric intake for 60 million to 150 million people.
And the price of those commodities will affect an even broader range of the population, beyond the 60 million to 150 million people. For example, countries like Egypt and Turkey significantly rely on exports from this region for the caloric intake of their citizens. In fact, Egypt relies on Ukraine and Russia for 60 percent of its imports. And while the imports are important for its domestic consumption, Egypt also processes these commodities to export to Eastern Africa. So the impact of what’s happening in Ukraine and Russia will be felt across many countries.
Planting, harvesting, and transporting—disrupted
Lucia Rahilly: And to be clear, how much of the supply shock is due to the physical effects of the war on agricultural production? Are Ukrainian farmers able to proceed with planting their spring crops?
Nicolas Denis: The agricultural value chain is a bit more complex than other supply chains because there are some specific windows for preparing the field, for planting, and for harvesting. When we’re running our scenarios to understand the implications of this conflict on agriculture, we take those specific windows into account.
For instance, for barley, sunflower, and maize, the planting season is happening right now. It’s unclear if all the farmers in the region are able to plant those crops at the moment. There are some other crops, like wheat, whose planting season is around July–August. A prolonged conflict would also have an impact on the later production of winter wheat. And if this conflict continues toward summer, you could expect a problem harvesting crops, even if they are planted.
But the impact doesn’t stop just at planting and harvesting. These commodities are bulky. The Ukraine–Russia region represents roughly 105 million tons of commodities. And we typically transport them via the Black Sea, via ships. Some of those ports have been damaged or are unable to operate. So you could also expect a logistics disruption that will not be fully absorbed by alternatives like rails and road.
Food instability, social instability
Lucia Rahilly: Grains are global commodities, and in the US, we’ve already seen grocery prices surge during the pandemic. I would imagine the same is true in Europe. Should consumers expect to pay more for, say, a loaf of bread if these harvests are disrupted? Say more about wheat and why it’s so critical in the context of the global food supply.
Daniel Aminetzah: Wheat is a critical component of food security. Over 80 percent of wheat is primarily used for flour. And when you talk about a wheat price increase of more than 100 percent, which we’ve already observed in the last couple of years, you can translate this into [an increase in] basic bread prices, since wheat represents roughly 60 percent of bread’s raw-material costs.
Such a direct hit to the most important global supply hub of wheat has a clear link to food security. And bread is an important factor in social unrest in many emerging markets. Over a decade ago, for example, wheat prices were considered one of the main sources for the Arab Spring.
The impact on a vital commodity: fertilizer
Lucia Rahilly: And vulnerable populations obviously suffer most when prices rise. We’ve already begun to see some unrest in a few countries—for example, in Greece, where farmers were protesting higher fuel and higher fertilizer prices a couple of weeks back. Speaking of which, Daniel, you mentioned a secondary effect involving access to fertilizer. Say more about fertilizer and how it matters within this global food ecosystem.
Daniel Aminetzah: Fertilizer is not just any input; it’s probably the most important input for farmers. NPK—the combination of nitrogen, phosphorus, and potassium, the core components of fertilizers—played an integral part in the Green Revolution of the ’60s. That transformation spurred double-yield productivity over a couple of decades. It was one of the main drivers of population growth in the previous century.
And in today’s farmers’ lives, fertilizers are an essential part of ongoing operations—depending on the crop, roughly 30 percent of the overall cost of operations. It’s really hard to imagine a season for a farmer without fertilizers.
Lucia Rahilly: How important is the Black Sea region to fertilizer production? And what might a supply hit look like?
Daniel Aminetzah: Let’s focus on potash1 and nitrogen, two out of the three main fertilizers. When it comes to potash, there are two major global supply hubs: one in Canada, and the other in Russia and Belarus. Russia and Belarus are very well organized and supply to key markets, like Latin America.
The situation has clearly led to a massive increase in the price of potash, which has more than doubled in the last couple of months. This will take time to address, given the relatively tight supply–demand balance in the world of potash. And the continuation of sanctions and logistics challenges could cause significant supply shortages and price increases in potash. Nitrogen is directly linked to energy. The energy crisis and current energy prices also have a direct effect on nitrogen prices and supply availability.
Lucia Rahilly: Nicolas, you mentioned earlier that all this is happening on top of an already tight food supply chain. Please say more.
Nicolas Denis: Between Q2 2020 and December 2021, the price of wheat went up 18 percent. We already had a food security issue well before the Ukraine–Russia crisis started. Now, the causes are multiple. There’s increased demand overall. A majority of those commodities go into producing protein, for instance. The increase in protein demand is driven by various parts of the world. We still haven’t solved issues like food waste: we waste 30 percent of our food.
On top of that, we’re starting to see some first impact of climatic events. Last summer, we had hard wheat. The [production of] durum used to make pasta, which is the basis of many people’s diets, was disrupted by a combination of a Canadian summer drought and a very wet summer in France. Our research has shown that those disruptions are supposed to multiply by four until 2050.
In combination with more expensive raw materials, such as fertilizer, a very tight food security situation has been created, starting well before this crisis began. The Ukraine–Russia conflict is hitting another level in the complexity of this food system.
In combination with more expensive raw materials, a very tight food security situation has been created, starting well before this crisis began. The Ukraine–Russia conflict is hitting another level in the complexity of this food system.Nicolas Denis
The possibility of a global food emergency
Lucia Rahilly: We seem to be talking about a convergence of relatively substantive disruptions. The media has been reporting on the potential for a global food emergency and an increase in global hunger. How concerned should we be?
Nicolas Denis: We should definitely be concerned. But the extent of that concern should be assessed in the coming weeks and months. What really matters is which of these milestones in the different breadbaskets—from preparing the fields to planting to harvesting—will be hit and which ones will be missed. We should also turn our attention not just to what is under the spotlight of the media today but to some of the secondary impact we could see.
Daniel mentioned the fertilizer situation in countries like Brazil. Suppose the conflict is prolonged and we see some potential disruption in the supply of fertilizer. Planting season in Brazil is around July–August, which means some of the inputs need to arrive a bit before. A prolonged conflict will have an impact on the next planting season for Brazil—and therefore will have a compounding impact on what’s ahead of us in terms of a food crisis.
We need to study and understand various scenarios and the reaction of some of the stakeholders, including governments, to determine the extent of our concern about the food crisis.
Lucia Rahilly: What’s our view on how the risks of this disruption might compare with previous food emergencies? For example, the global food crises of 2007–08?
Daniel Aminetzah: From a price inflation and cost inflation point of view, we see some similar patterns compared to both agricultural commodities and fertilizer prices from about a decade ago. The question at the top of all our minds is the longevity of this crisis and the ongoing effect it could have. Having such a hit in the middle of an inflationary environment, which further boosts inflation and shakes the supply chain, makes it difficult to predict where it’s going to lead, especially if you throw into the mix the geopolitical effects of these crises and related events that could follow.
Nicolas Denis: And we combine in this case not just a commodity shock like we had back in 2008 but also an input shock. We talked earlier about a shortage of potash, of other micronutrients we need. This combines two crises in one.
Lucia Rahilly: Acknowledging that the war is highly dynamic and that the outcome and longevity, as you said, remain unknown, would you give us a sense of what a limited-disruption scenario might look like?
Nicolas Denis: A limited-disruption scenario would have an impact until 2024. What it might mean in practice is that we potentially miss some of the planting season, but we manage to resume the season after. We would see limited sanctions, at least related to agricultural commodities and fertilizer, and relatively open use of commodities—countries not closing their borders and continuing to export to other countries.
Lucia Rahilly: And what about severe and extended disruption? We hope that doesn’t materialize, but what might it look like?
Nicolas Denis: In that case, we would miss several important milestones—several planting and harvesting seasons. We might also see the refugee situation worsen, which would mean less labor available in places where we need hands for agriculture. We could see an escalation of sanctions that at some point could also include some agricultural commodities. There might be several governments that stop exporting some of these commodities to countries that need them. That is a situation that could result in a significant decrease in global food trade. Certain countries would then need to rely much more on their own reserve amid a tight global supply.
What can be done to help
Lucia Rahilly: Nicolas, you referred to trade protectionism. What about the converse? How might countries across the globe come together to compensate, at least for shorter-term supply shortfalls?
Nicolas Denis: Very short term, we have a few levers. Indeed, as you said, we could try to avoid some of the mistakes we saw ten years ago in the previous food crisis. Back then, we started to see some countries banning exports and therefore worsening the internal situation—farmers not having access to global revenues, countries not able to import. Limiting those trade restrictions is a way to come together.
Another is to reflect on the balance we have between food and fuel. Today, 18 percent of corn globally goes to fuel or biochemicals, so we could rethink that balance, at least for a brief time. And then we could also think about how we use some of the strategic reserve.
If we expand the horizon of what we can do, we might think about using fallow land, especially in Europe. We have set aside 10 percent, 15 percent, of fallow land for biodiversity purposes. We might temporarily get access to that.
Tracking and eliminating some of the waste, and rethinking our sources of protein, are also important parts of this. We know that red meat, white meat, and alternative protein are all options with different profiles in terms of the consumption of agricultural commodities. All those would be levers you could also use if you were to take a broader lens on time.
Lucia Rahilly: Daniel, how do you see the war in Ukraine changing the food and agriculture industry in the longer term?
Daniel Aminetzah: As we think about the food security situation, and if we link it to climate change, we expect this combination to further incentivize investments and behavioral changes across the board. On the innovation front, we’re likely to see much more focus by investors and other players on ag tech and food tech across biosolutions, alternative proteins, vertical farming, and many other segments.
We also expect to see a noticeable behavioral shift across all the key players in the system. Farmers will likely employ more efficient use of fertilizers and crop inputs, reducing waste and the like. Consumers might explore diet changes and alternative meats for consumption.
At a national level, we’ll see, hopefully, more attention to and acceleration of some transformations in key countries, especially emerging markets. One would hope that such a food crisis, linked to climate change, could result in a big acceleration in the global food system’s transition toward a much more sustainable model in the coming years.
While we encourage this acceleration, we have to continue to pay special attention to immediate needs and to food security, which we already see clearly emerging across Ukraine and Russia and which we’ve started seeing initial indications of across other emerging markets.
Nicolas Denis: Yes, there is a need to keep our attention on the most vulnerable people, for whom this crisis has significant impact on their access to food.