One of the main factors of apparently inevitable stagflation in developed economies is the inflationary shock on agricultural products and components of their production. The intensification of agro-commodity price growth is obviously caused by the geopolitical conflict in Eastern Europe, as the countries involved in the conflict are among the main players in the global agro-market.

The Russia-Ukraine conflict inevitably increases the threats of global stagflation (slower economic growth and simultaneous rise in inflation). In fact, supply-side inflation, which started as a consequence of the pandemic, intensifies and transforms into a general inflationary shock that reduces purchasing power, squeezes output and primitivizes consumer preferences. The agri-food market is one of the main triggers of this shock, and the danger lurks in the non-obviousness of monetary methods to reduce inflationary pressures.

Disruptions in supply chains, including agricultural export-import, originating in the pandemic, have worsened since the conflict escalated between Russia and Ukraine.

These two countries are among the world’s top producers of major categories of agro-commodities: sunflower (more than 50%), wheat (about 15%), and corn (about 5%).

The shares of Russia and Ukraine in world exports are also impressive. Wheat accounts for about 30% and corn for about 15%.

Now let’s look at the current picture

In Ukraine, according to estimates of different expert groups, more than 30% of sown areas will fall out of use – for obvious reasons. At the same time, more than 40% of the total production of corn and wheat in Ukraine falls on land in the conflict zone.

Even based on the optimistic assumption that the conflict will end one way or another in the next few weeks, the decline in wheat production in 2022 is projected at about 20%, corn production – about 35%. The forecast is relevant with the caveat that the planted areas that have not fallen into the “special operation” zone – the western and southern directions – will be fully utilized.

However, this does not take into account the problems with fuel supply, provision of mineral fertilizers, pesticides, logistics, risks of geographical expansion of the special operation to these lands, etc. In such a case, the mentioned forecasts of production decline may be significantly revised towards more negative values.

Now about Russia. According to the forecasts of the Ministry of Agriculture of the Russian Federation, the production of root agricultural commodities will remain at the level of 2021, and possibly exceed it: 123 million tons vs 212 million tons in 2021. However, two factors are worth mentioning.

First, this is the forecast of the Ministry of Agriculture, and the reliability of the variables put into models by Russian government institutions, as well as the models themselves, are highly questionable due to repeatedly observed manipulations.

Second, Russian agriculture is critically dependent on imported seed: corn – almost 60%, sunflower – over 70%, sugar beet – almost 100%, potatoes – over 90%, fruit and berry plants – about 90%, wheat – about 10%. At the same time, as for wheat, it is worth noting that the yield of domestic genetic sources is 2 times lower than imported ones.

All this seed stock is blocked for delivery to Russia not only due to the refusal of Western and other foreign producers to export to the Russian market, but also due to current difficulties in international logistics. Accordingly, producers will think several times whether to use all their sowing capacities – both seeds and land – this year or to hold back some of them for next year. If so, another factor of scarcity and inflation arises.

Thirdly, crop efficiency will obviously be reduced due to the shortage of pesticides, as up to 40% of such substances are imported. The devaluation of the ruble creates significant difficulties in purchasing, in addition to the fact that some manufacturers and distributors have refused to supply crop protection products to Russia at all, while others have raised prices.

In addition to the above, we can add the fact that both Ukraine and Russia have sharply reduced exports of key agricultural commodities to ensure national security. For example, in March, Ukraine completely banned exports of wheat, rye, corn and other crops to Eurasian Union countries, while Russia reduced export volumes. Some other countries, such as Hungary, Egypt, India, Pakistan and Hungary, have also blocked exports and re-exports.

Thus, it can be stated that the factors of global deficit of major crops are stable and will probably intensify.

A few words about the consequences and development of risks that intensify deficits and inflationary pressures in agricultural commodities leading to stagflation and recession in developed economies.

First, an important segment of agricultural production – mineral fertilizers – becomes unavailable for import from Russia and Ukraine for countries that are also agricultural producers.

The reason is the ban on fertilizer exports by Russia and Ukraine, which has caused an inflationary spike in the global market and will inevitably lead to supply disruptions with prolonged shortages and inflation into next year. The consensus forecast shows an average of 12% – 18% inflation over the next 12-20 months from current prices.

This will be facilitated by the fact that Russia accounted for a quarter of European fertilizer imports, and recanalization of supplies from the US, Canada, Israel, Brazil will obviously be more expensive than Russian imports. In addition, rising hydrocarbon prices are pushing fertilizer producers to tighten output and raise prices.

Secondly, rising prices and shortages of crops along the chain are actively affecting livestock and poultry farming due to feed inflation. The contraction of their exports from Russia and Ukraine will entail inflation in the livestock sector itself.

Thirdly, inflation and shortages in agro-commodities caused by the above-mentioned factors lead to further impoverishment of underdeveloped countries, where consumer focus is concentrated exclusively on basic necessities. This will certainly become an additional trigger of social unrest and crises in the Third World countries.

Fourth, the decline in Russian and Ukrainian exports of major crops can be partially compensated by imports from the United States, Canada, Argentina, Australia, Brazil and some other countries. However, in the USA and Canada stocks are low due to low previous harvests. Australia has almost fully committed logistical capacity, and Argentina is focused on fighting high inflation and may not be able to expand exports. As a result, according to industry experts, it is possible to recanalize supplies to the market at about half of former volumes.

Fifth, the above inflationary drivers are capable of pushing prices up by 20% from current levels. To clarify the picture, it should be noted that the year-on-year increase in wheat prices has already amounted to more than 160%.

Sixth, the main importers of major crops are already trying and will continue to try to build up stocks by all acceptable means, both through purchases from the other mentioned exporters, and by reducing re-exports and domestic consumption. As for Argentina, USA, Australia, etc., it has already been said that their possibilities are limited and supplies can be compensated by no more than 50%.

The conclusions are obvious

First, an armed conflict between two states integrated into the world’s production, logistics and raw material chains is an extremely negative factor even for stable economies in the stage of sustainable economic growth, not to mention economies in unstable recovery from shocks, as developed economies are now after the pandemic.

And if for the participants of the conflict, first of all, for the initiator, global disintegration threatens a complete shutdown of production and foreign trade ties and an unconditional economic depression, then for the third party – developed countries – it threatens inevitable stagflation and recession, accompanied by rising energy prices and logistical lockups.