Russia – Ukraine Conflict puts Food Insecurity in the Spotlight: Reviewing the Nigeria Gameplan

April 20, 2022

Russia – Ukraine Conflict puts Food Insecurity in the Spotlight: Reviewing the Nigeria Gameplan

On February 24th 2022, weeks of mounting geopolitical tension between the West and Russia culminated in the latter’s invasion of Ukraine. This triggered a wave of uncertainty that roiled markets globally. Prior to this, the global economic recovery was already confronted with the specter of rising inflation triggered by the lingering COVID induced supply chain constraints amid surging demand, that sparked a rebound in energy, commodity and food prices.

For the global economy, the impact of the war will be far-reaching and long-lasting. It has also served to highlight the place and importance of Russia and Ukraine (once referred to as the breadbasket of the Soviet Union), in global supply chains – especially in agro-allied industries – as food prices continue to rise across the world and questions around food insecurity are being increasingly asked – mainly in developing countries.

Russia and Ukraine are the world’s first and fifth largest wheat exporters respectively, accounting for circa 34% of global exports. Ukraine supplies 14% of the global corn output and also accounts for 50% of sunflower oil. Russia is also a key player in the Nitrogenous Fertilizer market, accounting for 11.5% ($2.6bn) of global exports in 2020.

Prior to the war in Ukraine, data from the FAO Food Price Index (FFPI), showed that food prices reached an 11-year high of 135.6 in January 2022. The index measures monthly changes in average prices across various food categories – sugar, dairy, vegetable, cereals, oils and meat. It surged further to an average of 159.3 points in March 2022 (its highest level since its inception in 1990), up 17.9 points (12.6%) from 141.4 in February. The FAO in another report says that “in 2021… the Russian Federation also stood as the world’s top exporter of nitrogen fertilizers, the second leading supplier of potassium fertilizers and the third largest exporter of phosphorous fertilizers”. While the world is confronted with the prospects of food scarcity and higher food prices, it is also likely to be contending with higher costs for food production as fertilizer shortages raise prices in response to the removal of Russian supply in the coming months.

Import dependence and FX Demand Management Policy biting hard in Nigeria

For Nigeria, a country hugely reliant on food imports, the war further complicates an already delicate situation. According to the USDA, Nigeria imports approximately $10 billion worth of food and agricultural products annually – mainly wheat, rice, chicken, fish, food services, consumer-oriented meals, among others). According to the National Bureau of Statistics (NBS), in 2021, food imports rose by 62% year-on-year to ₦2.92 trillion (14.03% of total imports) with wheat imports (₦1.29 trn) accounting for 44%. This surge in the value of food imports is reflective of the increasing shift to the parallel market (currently at a 40% premium relative to the official exchange rate) by food importers who are unable to get foreign exchange at the official rate or their imports are among the 41 items banned from the official market. The rising food import is also indicative of a decline in domestic food output as a result of rising insecurity in Nigeria’s food producing belt in recent years. Nigeria is the fourth largest importer of wheat globally after Egypt, China and Turkey and the commodity is the largest item on the import bill after petroleum products (petrol and diesel). Wheat-based foods reportedly account for 45% of the daily food portions served in Nigerian households which means that Nigeria’s food security is effectively dependent on imported wheat.

Figure 1: Global Wheat Prices

Source: Bloomberg and Agusto & Co. Research

 

Wheat prices have risen 45% year-to-date to $11.04 per bushel in the international wheat market. This also represents a 72% rise since December 2020. However, the price of a bag of flour in Nigeria has spiked by 164% from ₦8,500 in December 2020 to around ₦22,500 currently. This price surge is reflective of higher global wheat prices, a weaker naira as a result of several devaluations by the Central Bank and foreign exchange scarcity which compels importers to source dollars at the parallel market. This is in addition to the increasing cost of freight, increased Freight on Board (FOB) rates at the port and higher operational costs.

In 2021, Flour Mills of Nigeria Plc, Nigeria’s largest flour milling company, bought a majority stake in Honeywell Flour Mills Plc, its main competitor. Thus, Flour Mills now controls circa 70% market share and is effectively the industry’s price maker allowing it to pass the burden of the aforementioned cost increases almost entirely to consumers.

The embattled consumer & gasping producers

Wheat flour is the chief ingredient in bread and other confectionaries pasta, noodles, semolina and many other pantry staples. Bread and confectionaries together account for 80% of flour demand. The prices of these food items have risen sharply in the past two years at a time when the real income of the average Nigerian has shrunk and the average Nigerian household now allocates more than half of its expenditure to food. For instance, the average price of a loaf of bread is up about 71% to ₦600 in March 2022 from 2020. Wheat prices are now forecast by the Economist Intelligence Unit (EIU) to stay above $10 per bushel for the rest of the year. The impact of this will be inflationary, and considering that the sanctions on Russia could linger long after the conflict in Ukraine is over, consumer wallets will face further erosion and inflationary pressures are likely to intensify.

This increased cost of flour and other inputs also presents a dilemma for many food manufacturers. Larger bakeries, for example, are able to absorb part of the additional cost and pass on only a portion of the savings to consumers, who may not only be reducing their consumption but also consider adjusting their consumption habits and switching to cheaper alternatives. However, smaller bakeries, with less financial buffers, may be unable to absorb these cost increases. They could, in a bid to stay competitive, compromise on the quality of other inputs, which could result in sub-standard products which could also have significant health implications for the consuming public.

 

The quest for self-sufficiency

Nigeria’s wheat production shortfall was approximately 5,460MT in 2021, with domestic production hovering around the 90MT level. The Federal Government of Nigeria has demonstrated a renewed commitment to domestic wheat production through the partnership between the CBN’s Anchor Borrowers’ Program and the Wheat Farmers Association to expand wheat output from five to 15 states. It is important to note that Nigeria’s inability to ramp up production and achieve self-sufficiency in wheat production has been hindered primarily by the unavailability of improved seeds and a lack of modern agronomic practices. In response, the CBN imported 13,000MT of quality heat-tolerant, early-maturing and high-yielding wheat seeds in 2021 aimed at boosting yield per hectare from 1.1 to 1.3. Optimistic expectations are for a wheat grain harvest of 400,000MT this year as 150,000 hectares across 15 states are currently being cultivated.

The adoption of modern agronomic practices is crucial to lowering cost and competing against high-efficiency wheat seed producers globally. This will happen with increased private sector participation in agriculture which hinges critically on the creation of an enabling environment by the government, accompanied with policies that incentivise agricultural production and lower the risks.

Achieving self-sufficiency in wheat production will not just lower Nigeria’s vulnerability to global conflicts and supply chain disruptions, more than anything else, it places Nigeria more firmly on the path to food security.

Download the report

Finance & Leasing

COMPANY RATING EXPIRY OUTLOOK COUNTRY
C&I Leasing Plc ₦10 billion 7-year Series II Bond Bbb+ Jun 03 , 2022 Stable Nigeria
C&I Leasing Plc ₦7 billion 5-year Series I Bond A- Jun 11 , 2022 Stable Nigeria
C&I Leasing Plc Bbb- Jun 30 , 2022 Stable Nigeria
Credit Direct Limited Bbb Jun 30 , 2022 Stable Nigeria
Citihomes Finance Company Limited SR3 Jul 05 , 2022 N/A Nigeria

Corporates

COMPANY RATING EXPIRY OUTLOOK COUNTRY
Axxela Limited A- Jun 30 , 2022 Stable Nigeria
Kawai Technologies Limited Bb Jun 30 , 2022 Neutral Nigeria

Corporate Bonds

COMPANY RATING EXPIRY OUTLOOK COUNTRY
Axxela Funding 1 Plc’s Series 1 Bond A- May 31 , 2022 Stable Nigeria
Viathan Funding Plc.’s ₦10 billion 10-year Series 1 Senior Guaranteed Fixed Rate Bond Due 2027 Aaa Dec 31 , 2027 Stable Nigeria
NSP-SPV PowerCorp Plc’s ₦10 Billion 15-year Series 1 Aaa Dec 31 , 2033 Stable Nigeria