Why the end of the Ukraine-Russia war won’t end the global food shortage 

Given that Ukraine and Russia account for just under 30% of global wheat exports, it is no surprise that wheat prices have risen by 60 percent since February. As a global producer and exporter of wheat, corn, barley, sunflower oil, and fertilizer, the two countries account for 12% of the world’s calories, according to the New York Times.

Take wheat for example. There are several contributors to the surge. Gasoline prices have climbed back up from their 2020 low, and global economic recovery is driving up oil demand despite being bumpy and volatile. An increase in oil price affects the cost of fuels used in farms. So long as energy prices stay high, food prices likely will.

Yet wheat prices are climbing much more sharply than oil prices. This suggests that other factors – such as different countries that rely heavily on wheat imports are hoarding supply – are at play. Egypt imported about 75% of its wheat from Ukraine and Russia. Turkey, 85%. And Saudi Arabia, nearly half. 

The beginning of Ukraine-Russian war is the end of Europe’s reliance on Russian energy 

In most cases, it is extremely difficult to predict the exact impact of geopolitical activities. Still, the Ukraine-Russia war has left Europe with little choice but to begin distancing itself from Russia as it fends for new energy sources. 

In practice, this is an extremely difficult feat. The EU imported more than 155 billion cubic meters of natural gas from Russia, accounting for 45% of its gas import and close to 40% of its consumption. However, the global LNG market is only 523 billion cubic meters a year, nearly 20% of which is therefore already going to Europe.

The EU’s plans to cut its reliance on Russian gas by two-thirds within 2022 will therefore be met with harsh practical constraints. Natural partners in this energy quest are the US and Qatar. Energy experts expect that building a terminal on both sides of the Atlantic to significantly expand US exports of LNG to Europe could take two to five years. Qatar’s volumes, on the other hand, are locked into long-term contracts mostly to Asian buyers. The amount of divertable volumes that can be shipped to Europe is only 10-15%.

Eventually, the war will end and the food crisis will worsen

All war eventually comes to an end. But the Ukraine-Russia war has already severely devastated both the agriculture infrastructure and the hgeopolitical relationship that has sustained the pre-war international trade volume. 

In the short-term, each country will fall back on its stockpile of supplies, but these “extra” supplies—including fertilizer—will eventually diminish. With food supply dropping and energy prices remaining high for the foreseeable future, food prices will continue to rise. 

Politically speaking, high food prices are bad because it hurts the poor the most. There is a natural ceiling on how much and how fast food prices can go up before they become untenable. With rising costs and downward pressure on food prices, food growers and producers will likely see their margins squeezed. 

And to make matters worse, we are entering an all-time low with unemployment, driving labor away from the most laborious task in food production: agriculture harvesting. 

Transient factors aside, the agricultural labor shortage is secular and will worsen over time

The average age of principal operators in the agriculture industry is 59.4, with fewer young farmers coming in to fill the shoes of the retiring farmers. Producers ages 35 and younger account for only 9% of all farmers. 

Source: AgAmerica
Source: AgAmerica

The younger generation’s loss of interest in blue-collar work affects not only the agriculture industry but also the broader industrial sector (such as construction and manufacturing industries). The rise of e-commerce fulfillment centers and warehouses is luring away young workers. These compounding factors result in rising real hourly wages. 

Automating agriculture is hard

Agriculture is arguably the most difficult industry to automate. 

Robots thrive in a constrained environment in which variables that impact the workflow of the robots are known and accounted for. Agriculture, however, is one of the most unconstrained environments, especially with much of agriculture being outdoors. 

Further, objects in the agricultural industry are irregular and fragile. State-of-the-art gripping technology has challenges being both gentle and fast. Harvesting tomatoes quickly without bruising it, for example, remains one of the biggest technical challenges facing agriculture robots today. 

Selling efficiently in the industry is also made extremely difficult because of both a fragmented market and skeptical customers. Market fragmentation leads to high cost of sales and thinner balance sheets from the customer to invest in new technologies. Geographical fragmentation also makes robot deployment difficult and expensive. 

Seasonality is the ultimate ag startup killer

Perhaps no challenge goes beyond the seasonality effect that is unique to the agriculture industry. 

Every automation technology requires a pilot. At the end of each pilot, the customer reassesses whether to roll out the technology. Usually, there are some technical challenges to overcome when “the robot meets the road” and the company needs to go back and do more work. If they have to wait until another growing season before they can test the robot again, they will likely run out of runway by then. 

Even if they manage to have a successful pilot, the customer will likely ask them to wait until nearer to the next growing season before signing a contract. That pushes out their financial performance and dampens their ability to fundraise. The rollout will typically be in phases, starting at 5-10% of total volume at first and scaling over time. It might take a few years for a successful rollout to complete given that rollout can only be done periodically. 

Solving the food crisis starts from within

Fortunately, some crops are perennial and can be grown indoors. Successful automation is likely to start from perennial crops that can be grown all year and in a controlled environment. Crops with short growing seasons – such as lettuce, tomatoes, and mushrooms – are more likely to maximize the utilization of the robot. Ideally, they would also have a sufficiently consolidated market.

As we distill this down from the global macro, perhaps the answer to our food shortage lies in solving a simple, though still difficult, engineering problem: the ability to pick and harvest crops at speed and efficiency with minimum downtime. 

We just need to know where to start, one crop at a time. 

Leave a Reply