Agricultural Production in Ukraine and Russia: Economic Implications for Europe

Ukraine is known for its highly fertile black soil Unsurprisingly, the country has, over the last 30 years, emerged as an important producer of agricultural commodities. And so has Russia. Both countries are among the largest producers of agricultural goods in the world today. Especially for grains and sunflowers, a major share of world production stems from these two countries. The Russian war against Ukraine endangers this agricultural production.

The rest of the world cannot rely anymore on commodities sourced from these countries as production and trade is most likely to be hampered – either by war, sanctions, or both. This, of course, has direct economic implications for the European Union. In this post, I provide an overview of the economic relevance and the expected effects of these circumstances on prices and on European production and outline their implications for the agricultural goals of the European Green Deal.

Loss of Grains and Sunflowers from Ukraine and Russia expected

Both Ukraine and Russia produce a large variety of agricultural commodities. The latest data from the US Department of Agriculture (USDA) show that Ukraine is responsible for a high share of global grains production and is the biggest producer of sunflowers, which are relevant for oil production. The role of Ukraine is even more important for exports. Except for oats, it ranks in the top-5 positions for global exports of ALL grains.

Russia is also a major producer of grains globally. The production and global shares of Russia are comparable to those of Ukraine. However, the role of global exports is slightly smaller for Russia.

No Shortages in Europe because of Excess Production

Given the relevance of Ukraine and Russia for global food production, should we expect shortages of grains in Europe? The answer is definitely no. Except for corn and sunflowers, the EU-27 is the biggest producer of grains and other agricultural commodities. Production regularly exceeds domestic demand, making the EU-27 also a major exporter. Hence, it is not surprising that the EU-27 imports hardly any agricultural commodities from Ukraine and Russia. For no type of grains does the volume imported from Ukraine or Russia exceed 2% of the EU-27’s production. Only corn is imported in relevant amounts from Ukraine to the Netherlands, Spain, and Germany.

Higher Prices and Inflation can be expected in the short- and medium-run

While no serious shortage of grains is expected in Europe, the global supply of agricultural products can be vastly reduced, particularly if there are poor or no harvests, leading to overall shortages and higher prices. At the time of writing, futures for commodity prices are already rallying because of uncertainty and insecurity following the war actions in Ukraine, and they are likely to remain high or increase even further over the coming months.

Increases in global market prices for agricultural products affects the EU-27 by increasing costs along various value chains. This will affect many goods, including processed food, animal food, and energy, to name just a few, accelerating overall price increases and causing additional inflation pressure in Europe. This affects, among other things, prices for everyday groceries and hits the poor in particular, as groceries exhibit regressive demand – you don’t eat (linearly) more with increasing income.

Higher European Production in the medium-run possible

Higher prices for agricultural commodities will likely lead to an expansion of production in Europe in the medium- to long run. Expansion can – at the least – partially offset shortages caused by the loss of Ukrainian and Russian exports. Expansion in Europe can take place by utilizing currently under-utilized land, but also by realigning European agricultural production and shifting the focus towards crop production. For example, this may lead to reduced livestock farming, as higher costs of feeding animals with grains would incentivize switching to crop farming. Of course, not every livestock farm is equipped with suitable soil for such a switch to occur.

Even if Europe can compensate for the loss of Ukrainian and Russian exports completely by increasing production, global grain prices will remain at a higher level. This is caused by the higher production costs, driven not only by labour costs but also by the relatively lower quality of soil in Europe (especially for currently underutilized land.)

Europe’s Goals for Greening Farming under Pressure

An expansion of European agricultural production puts pressure on greening measures by the Common Agricultural Policy (CAP), which aims at sustainable land use by reducing the intensity of farming. For example, 5% of arable land should be dedicated to biodiversity, making it effectively non-utilized. Re-using this land may be an obvious solution in the given situation.

Similarly, the EU’s “Farm to Fork Strategy,” an integral part of the European Green Deal, focusses on the green transition for European agriculture. It aims to increase the share of organic production from 8% to 25% by 2030 and halve fertilizer and pesticide use by then. These highly ambitious goals might come into conflict with a potential expansion of European production for global food security, as organic production leads to lower output. For example, the EU’s Joint Research Centre assumes a drop in wheat yield of 36% (median) for organic production compared to non-organic production. In contrast, the goal of reducing fertilizer usage may be more straightforward as Russia leads in fertilizer production, which may lead to shortages and higher prices.

Summary and Implications

The war against Ukraine and sanctions against Russia will not lead to food shortages in Europe. However, as global prices for agricultural commodities are likely to increase substantially and permanently, Europe needs to ensure that those most in need are supported accordingly. Supporting low-income households for increased prices of everyday groceries will be of growing importance to avoid rising poverty in Europe.

As a direct consequence of the war, the European agricultural sector may transform over the medium term, leading to a realignment in which agricultural commodities will be produced in Europe. In this case, it is important that the goals of the Green Deal to reduce the ecological footprint should not be discarded entirely. Ideally, a reallocation of production efforts towards wheat and corn decreases production of agricultural products with higher carbon footprints like dairy. This can serve two goals: increasing self-sufficiency and resilience and supporting the green transition of agriculture.

Europe’s responses and actions for agricultural production will affect other parts of the world as well. Fewer exports from Europe may have mixed effects: In the short run, it can lead to higher prices and food shortages, especially in Africa. But it may also be a chance for those countries that experienced European exports below world market prices to increase local production.

BIO NOTE

Thomas Schwab is Project Manager for the Europe’s Future Program at the Bertelsmann Stiftung. He applies a data-driven approach to economic analysis by employing data science and econometric methods. 

Read more on the economic impacts of the war against Ukraine:

What are the economic implications for the Russian and European economies? The Russian war against Ukraine

Europe’s divided security

Russia’s Defensive Economic Model: Paper Tiger Reforms and State-led Investment Spending as Patchwork Fixes