Impact of Russia-Ukraine conflict and climate change on food security and GCC fertilizer industry
By Amit Dutta, Associate Director – Agri, Food & Nutrition Practice, and Navin Tamrakar, Principal Consultant – Chemicals & Materials Practice, Frost & Sullivan
On 24 February 2023, the Ukraine-Russia conflict marked its one-year anniversary and shows no sign of abatement. This has far-reaching consequences on the global supply chain, impacting the overall trade flows and the prices of energy, agriculture produce, and fertilizers in the past year.
As per World Bank estimates, high fertilizer prices are a significant obstacle to food production in many low-income countries, destabilizing the 2023 and 2024 crop cycle; approximately 205 million people are in acute food insecurity in 45 countries worldwide. According to “The State of Food Security and Nutrition in the World 2022,” the number of people affected by hunger globally rose to 828 million in 2021, an increase of about 46 million people since 2020 and 150 million since the outbreak of COVID-19.
As per IMF estimates, international food prices are estimated to have added 5 and 6 percentage points to consumer food inflation in 2021 and 2022, respectively, and are forecasted to add an estimated 2 percentage points in 2023. The prices of agricultural commodities were at a record high last year. The FAO price index increased by ~12.4% in 2022 compared to 2021. It is estimated that about 100 million people will be undernourished if fertilizer prices continue to rise, with the greatest burden in Sub-Saharan Africa, North Africa, and the Middle East.
The Russian Federation and Ukraine are among the most important producers of agricultural commodities. Both countries are net exporters of agricultural products and play leading supply roles in global markets of foodstuffs. Furthermore, the Russian Federation is a key player in the energy sector and the world’s largest fertilizer exporter.
The war in Ukraine has left the world short of important grains and fertilizers, which could tighten food supplies. Fertilizers saw a global increase in mid-2022 over preceding years. During the first quarter of 2022, the World Bank’s Fertilizer Price Index climbed more than 10% over 2021 to an all-time high in nominal terms. International benchmark prices of fertilizers rose similarly throughout 2021, with many quotations reaching all-time highs. Additional fertilizer shortages may have global consequences, especially in developing countries, where price repercussions might dramatically restrict usage and result in poor local harvests during lower global supplies and record global prices.
GCC in the center of climate change, water scarcity, and food security
Increasing temperatures are a key risk that GCC (Gulf Cooperation Council) countries must mitigate while battling climate change. The GCC’s economy could reduce by 20% by 2050 if the temperatures increase further by 2°C, compared to a case where temperatures remain at pre-industrial levels (Livemore, 2021). Along comes the need to meet water demand with a depleting supply and water recharge, driving the region to its highest water scarcity.
If this challenge is taken up as an opportunity, GCC fertilizer producers can benefit greatly. For instance, fertilizer companies like Yara are introducing new-age products that consume less water than normal fertilizers. This can be implemented for domestic and export markets. Most of the fertilizers produced in the GCC are exported to countries like India, the USA, Brazil, etc.
The GCC fertilizers industry can reap the benefits of new-age agricultural practices of water-holding capacity, such as drip irrigation, vertical farming, crop covering, hydrogels, drought-tolerant crops, dry farming, etc., provided contamination of water is in check.
Exhibit 1: Fertilizer exports in 2022 by the GCC and key importers of fertilizers from the GCC
Source: UN Comtrade
Food Security in the GCC Region
The GCC region imports about 80%-90% of its food requirement. Thus, food security is one of its top priorities. Some of the GCC countries like UAE, Saudi Arabia, Oman, and Bahrain have improved their food security rankings from 2021 to 2022 due to various initiatives. An increase in domestic production was one of the major reasons certain GCC countries showed significant improvements in food security in the years leading up to the pandemic.
Some of the key initiatives taken by GCC countries include:
- A free trade agreement (FTA) initiated between the GCC countries and India focuses on food security, energy security, technology transfers, etc.
- The use of novel technologies such as “precision fermentation” converts energy and a handful of ingredients (like CO2, H2O, etc.) to a variety of proteins and other food ingredients (energy-to-food) without negative environmental impacts.
- Investments in large-scale commercial farming in African countries and other regions that have arable land. For example, Saudi Arabia has also invested heavily in Africa’s agribusiness.
By 2050, global demand for food will be 56% higher than in 2010, and the world will need to feed an estimated 2 billion more people. In contrast, the GCC is predicted to have a total population of 80 million by 2040. Food consumption in the GCC is predicted to rise from 46.8m tons in 2020 to 52.4m tons in 2025, for an annual growth rate of 2.3%. The disruption to global supply chains precipitated by the pandemic and the more recent invasion of Ukraine by Russia have underlined the dire need to invest in domestic production capacity and supportive technological solutions. In addition to enhancing self-sufficiency in staple food items over the medium to long term, the GCC countries must invest in supportive technology solutions (including agri-tech), diversify import streams, and invest in existing and new food processing enterprises.
In terms of the fertilizer industry, GCC fertilizer producers have successfully captured CO2 for fertilizer feedstocks. This has helped them achieve sustainability targets such as GHG reduction. Another key forward-thinking initiative for implementation by GCC fertilizer companies includes:
- Capacity additions of portfolio diversification of fertilizers:
- GCC fertilizer companies are in a better position in the cost curve of fertilizers with large exports to counties like India, the USA, and Kuwait. The GCC can leverage the FTA with India to export more since India accounts for ~30% of total fertilizer exports from the GCC.
- Portfolio diversification of fertilizers: The development of specialty fertilizers like water-soluble fertilizers, controlled-release fertilizers, nitrogen stabilizers and inhibitors, etc., will improve the bottom line.
 A transformed fertilizer market is needed in response to the food crisis in Africa (worldbank.org)
 The State of Food Security and Nutrition in the World 2022 (fao.org)
 Global Food Prices to Remain Elevated Amid War, Costly Energy, La Niña – World | ReliefWeb
 Agri-tech & Food Security in the GCC Response Report, April 2022 – Oxford Business Group
 GCC-Fertilizer-Market-Outlook-Challenges-and-Opportunities-for-GCC-Fertilizer-Producers_ES.pdf (gpca.org.ae)