Presentation

Kristen Hallam

[Presentation]

Hello, and welcome to our 2-part series on global food security. In Part 1 of our series, we will discuss the role of 3 key regions in the global food supply chain. The impact of the El Niño weather pattern, who benefits from higher food prices and who will pay the costs. Our panel of experts from S&P Global Market Intelligence is Carlos Cardenas, Head of Latin America Insights and Analysis; Hanna Luchnikava-Schorsch, Principal Economist, Asia Pacific Economics; and Ronel Oberholzer, Head of Sub-Saharan Economics. I'm Kristen Hallam, Lead Content Strategist for Global Intelligence and Analytics, and your moderator for this discussion.

Question and Answer

Kristen Hallam

We'll begin with a global view of the food supply chain. Hanna, what role does the Asia Pacific region play in the global food supply chain?

Hanna Luchnikava-Schorsch

Thanks, Kristen. So the Asia Pacific region is pretty well integrated into the food supply chains, and some countries in the region are major producers and exporters of important agricultural commodities like rice, wheat, sugar and also palm oil. In fact, 5 largest producers in the world of broken rice are all located in the region. Besides rice, we also see that about 80% of palm oil supplied globally come from Malaysia and Indonesia. In addition to that, sugar exporters, which are, again, India and Thailand in particular, are also the largest after Brazil. So the region is pretty important in terms of agricultural supplies. It also is one of the largest importers of food. And here, what matters a lot is in some countries, particularly in South Asia are very vulnerable because of the concentration of imports of food. For example, Pakistan's imports of wheat come almost entirely from the European region and the Baltic Sea. So this concentration, of course, makes it very vulnerable.

Kristen Hallam

And Ronel, what role does sub-Saharan Africa play in the global food supply chain? What are the key exports and imports there?

Ronel Oberholzer

Sub-Saharan Africa holds a very significant position in the global food supply chain and agricultural exports are a vital source of revenue for the region. Our key agricultural exports include vanilla from Madagascar, cocoa beans and cashew nuts from Cote d'Ivoire, citrus fruit from South Africa, tea from Kenya and coffee from Ethiopia. Now regarding import, grains, especially wheat play a pivotal role in the region. Ethiopia, Egypt and South Africa are the top wheat producers in the region, but only South Africa is a net exporter of wheat, which obviously highlights the continent's reliance on food imports. Now this food demand is driven mainly by the population growth, which the UN projects Africa to see the largest relative increase in the size of its population of the coming 15 years. This will obviously widen the gap between food production and consumption.

Kristen Hallam

You mentioned some of my favorite foods there. Now I want to bring in Carlos. Carlos, where does Latin America fit into the global food supply chain?

Carlos Cardenas

Latin America, it's a region that it's a net exporter of food. Currently exports around 17% of the world food exports. And according to the UN, this could go up to about 25% of the world's food exports by about the end of this decade. Brazil, of course, is the most important player, top exporter in the world of beef, corn, chicken, soybeans and much more. And if we look at it from the supply chain perspective and from trade, China, it's extremely relevant. China is the main consumer of the food, the Latin American exports.

And in a way, thanks to that demand, we've had a huge success story of the agribusiness industry, particularly in Brazil. 15.1% growth last year, much more than any other sector in Brazil and record exports of $166 billion. But reality is full of contradictions because on one hand, yes, Brazil is an agribusiness powerhouse. You have President Lula promoting its agribusiness industry as an industry that could help the world address food security issues. He's doing this at the G20, during the BRIC Summit, recently on a trip to sub-Saharan Africa.

But if you look at Latin America, it's really a region with lots of poverty, lots of populations, problem to have access to affordable food. At the same time, you have distortions like in Argentina having to tax the agribusiness industry, which is again the engine of growth of the country. And even though you have huge produces in the region, Brazil, Argentina, Uruguay, Paraguay, Mexico as well towards the U.S., there's a big vulnerability in terms of supply chains. It's Latin America, it's a region that depends on the imports of fertilizers. The supply chains vulnerabilities that we had during the COVID-19 at the beginning of the Russia-Ukraine war exposed this a lot more.

And what we have seen is that over the past 2 years, the region has taken more or less a pragmatic approach because it has no other option. It has to continue importing of fertilizers, and in a way, has continue a very strong relationship with Russia when it comes to the imports of fertilizers. When you combine food security, geopolitics and towards the end, agribusiness sector, this influences the position of the region with regards to Russia-Ukraine and many other positions they are doing as stands different than the U.S. and Europe. A lot is motivated by the fact that they still need that fertilizer.

Kristen Hallam

That adds another geopolitical layer to global food security for sure. Let's delve deeper into how weather patterns are affecting food security. El Niño always grabs headlines when it rolls around. We're starting to see the back of it now. Hanna, how has the impact of El Niño been on the APAC region? And how has this affected economic growth prospects?

Hanna Luchnikava-Schorsch

So El Niño weather phenomenon generally affects the Asia Pacific region with some increased precipitation in some parts of the region, but then mostly, it brings the patches of hot and dry weather to most parts of Asia, which then result in prolonged droughts and affect primarily agricultural output during very important agricultural seasons. In fact, the main agricultural season, which is brought by the summer monsoon in India is usually being impacted quite severely as a El Niño weather event.

The weather that which we currently are seeing, and you pointed out that we are basically now nearing the end of this phenomenon has been actually not as severe as many predicted back in 2023, and the impact on agricultural production and prices has been less severe than we anticipated was here. Nonetheless, agricultural damage has been widespread across the region.

So India, which I already mentioned, the poor monsoon season during the summer brought poor agricultural harvest of main commodities such as wheat, rice and sugar during the summer crops. We have already started getting some data on the national accounts and have seen that the agricultural output in India has declined during the December quarter. And we have seen that production of rice has been affected pretty much across the entire of Southeast Asia, including Philippines, Vietnam, Thailand, but also Indonesia. We have seen that palm oil plantations have experienced drier conditions and reduced precipitation across most of the Southeast Asia, the. World's #2 producer of wheat, Australia also took a hit during the season in terms of its production of wheat.

We have seen also the reduction of sugarcane and maize output in Pakistan, again, pretty severe by almost 10% for maize and 6% for sugarcane. So the region did see quite a palpable impact on production. And of course, what it also meant is that the prices for some of the agricultural commodities have risen across the region and globally. Given the importance of the region for world supply, in particular, we have already seen that prices of rice have risen within the region, but also globally and prices of sugar.

In fact, the food index for sugar has been rising within the food and agricultural organizations food price index. And that's the one which we have seen a particular sharp increases as opposed to other agricultural commodities, which have been rising as significant. And more generally, our research has shown that over the past decade, when we look at the years with severe or significant El Niño weather events. Agricultural gross median usually stands around 2/10th of a percentage point lower for those years. And if it's really a severe El Niño year, then the growth can decline in the agricultural sector for up to 0.5 percentage point.

Kristen Hallam

Ronel, has El Niño contributed to the demand-supply gap in the wheat market across sub-Saharan Africa? And are there other weather phenomena raising concerns in the region?

Ronel Oberholzer

Yes, Kristen. I think a little bit in contrast to what an APAC region is happening is that El Niño has had a significant impact on the agricultural market in sub-Saharan Africa, especially the tail end of this phenomenon. And it's not just affecting the supply effort, but also disrupting the supply chain overall. You talked about your favorite foods, and I'm sure you're referring to chocolates. And if we look at West Africa, where about 3/4 of the world's cocoa comes from, El Niño has brought drier conditions contributing to, according to the Cocoa Association an 11% drop in global cocoa supply in the '23 and '24 season.

Now this has contributed to the recent spike in cocoa prices that we have seen. Meanwhile, we've also seen a lot of flooding in South Sudan, Eastern DRC, Southern Tanzania and Burundi. Well, heavy rains in Madagascar has caused a widespread flooding, and we expect that to continue as well. On the other hand, the late rainy seasons and insufficient rainfall have caused dry conditions across parts of Angola, Namibia, Zambia, Botswana, Mozambique and Zimbabwe. And in Zambia, we have recently seen that they declared a national disaster situation because of the drought.

We are also experiencing abnormal hot conditions here in South Africa at the moment. And this has raised concerns that the maize crop will be barely enough to feed the domestic population. But if we zoom out for a moment, we see that Sub-Saharan Africa are extremely exposed to rising temperatures, changing precipitation patterns and more extreme weather events, climatic events that wreck crops and disrupt food transport are very common in the region. For instance, sub-Saharan Africa experiences 1/3 of the world's droughts. And this we saw in Ethiopia and Kenya, who faced one of the worst droughts in at least 4 decades up until 2023. Now these events not only worsen poverty and other human costs but also slow down economic growth, creating a ripple effect across the region.

Kristen Hallam

Carlos, El Niño did not seem to have an outsized impact on Latin America this time around. The region did experience water stress in 2023. What are we seeing in 2024? And how much of an impact is that likely to have on food security?

Carlos Cardenas

I think the main issue, of course, is the unpredictability of the weather patterns. You have El Niño. You also have La Niña. You have drought and water stress, as you mentioned. Through over the past months, many of the countries that had the drought last year, especially Argentina, are expecting a better crop and more export revenue as a result of the exports. But it's a phenomenon that really changes every year. Brazil had a huge drought, the largest in over a century in 2021.

And Colombia, Mexico, Chile, other parts of the region have all been affected by it. It's indeed a challenge. It's ongoing. It's unpredictable. But what it's clear, it's that last bit that Ronel mentioned, the impact on economic growth. Argentina, the deep effect of this drought was the main, you would say, negotiating argument that the previous administration in Argentina used when it was negotiating with the IMF trying to obtain a little bit more flexibility and a little bit more earlier disbursements using the impact of the drought on agribusiness industry as, look, we were not expecting this. You have to have more flexibility with us.

And again, depending on how much we extend this, but it could be argued that, that impact also, of course, generated social discontent, inflation and ultimately ended up bringing a political outsider into government as well. Big discussion there. It's more and more complex than that. It also expands beyond just crops and agribusiness. The other big issue related to water stress, it's the Panama Canal, affected by drought since last year, that amount of transit of vessels have had to be reduced.

And in terms of food. Now the market more or less has stabilized, but especially last year, we've had disruptions to especially fruit exports coming from the west of South America from Ecuador, from Chile, going through the Panama Canal, they had to adapt themselves. And now it's coping a little bit better, especially if the vessels pretty booked, everything related to perishable goods. Once you prebook, it's more manageable. But of course, you have that unpredictability, if we have this situation expanding more and the flow of vessels through the Panama Canal it's lower more, then that's when again, you have to see more of these sort of disruptions.

Kristen Hallam

Thank you, Carlos. So we are seeing greater volatility in prices for certain commodities. We've talked about cocoa, sugar. Will price increases benefit farmers and agribusiness? And who will pay those costs? Carlos, could we stay with you for this one? How does this apply to Latin America?

Carlos Cardenas

Well, obviously, it depends. Of course, if you have a situation of high commodity prices, the farmers and the countries that largely depend on these sectors to move their economies and generate export revenue will benefit. It will be very positive for the external accounts. The situation is different if you're a net importer. Obviously, I think towards the end, it gets complicated when that translates into inflation because one, it translates into higher inflation.

We see that's becoming also a political stability story. You have rising government discontent. You could say food prices and petrol prices are the 2 main indicators that we watch in terms of government stability. And again, depending on the location that could translate into protests or strikes, like we're seeing, for example, in Europe. It could be a situation in which governments might want to punish those in powers by voting for the opposition, bringing political outsiders, or also it could become a very serious situation in terms of civil unrest emerging because, again, that balance between the high commodity prices is not translating or going into high inflation becoming a critical issue.

Who pays the cost? It's a tough one. You could argue that in many cases, yes, the populations of the countries will face the burden of a higher cost of living crisis. The politicians, if they're not managed to be able to address the situations, bringing the possibility of opposition coming into power. But when you look into unrest and especially when we look at Latin America, once you have those situations of ways of unrest emerging, people always go to loot retailers and the supermarkets. So that happens a lot. It's one of the top sectors that we keep to highlight as, look, it's a high risk in the countries that we're seeing of major unrest, Argentina, Venezuela. It's one of the critical things that they were always watching.

Also, if you turn it around, when you have the lower commodity prices, and it has come up recently as well, many of the farmers that obtain loans or that were expecting higher commodity prices in an environment of high interest rates, the smaller ones and the medium size could also struggle in terms of their ability to stay solvent, and that's something that we're seeing progressively as well in Brazil.

Kristen Hallam

All right. Thank you, Carlos. And Ronel, will price increases benefit farmers and agribusiness? Who will pay the cost of these commodities that have been impacted?

Ronel Oberholzer

Yes, Kristen, much of what Carlos has said, also applies obviously to sub-Saharan Africa. But since we are talking about chocolates, we'll stick to the cocoa industry, for example. Now farmers often do not benefit from the rising prices due to structural challenges in the industry. The cocoa is mainly often produced by small subsistence farmers and involve a complex supply chain where the middleman usually capture much of the profit for themselves. Also, the farmers are often locked into pre-sale agreements at lower price. It's something Carlos also alluded to that.

And also quality and certification requirements usually require additional investment that the farmers just can't afford. We've also seen that low cocoa prices over the past years have deterred investment, prompting some farmers actually to uproot their trees in favor of other food crops. And this has led to the cocoa tree stock being now over 20 years old, resulting in lower yields and a heightened vulnerability to diseases like we have seen in much of the cocoa-producing countries.

Now who will pay the cost? Well, in the end, it's the consumer. The cost of cocoa is driven up by the supply and demand mismatch, that's make chocolate more expensive for people like you and me, chocolate-lovers like you and me. So ultimately, an increase in prices overall.

Kristen Hallam

That's not what I wanted to hear, but thank you for those insights, Ronel. And I will give a plug to our episode on the cocoa trade, who are the big global players in that trade. We also discussed sugar and other sweets in that episode if you want to learn more. Hanna same question to you for the APAC region. Will food price increases benefit farmers and agrobusiness? Who will pay the costs?

Hanna Luchnikava-Schorsch

Thanks, Kristen. So I second Carlos' and Ronel's comments. But I think what's peculiar for the Asia Pacific region, in particular, is that government interventions in agricultural pricing and also export policies are making these linkages between global prices and the benefits to -- or prices to agricultural producers or consumers not as obvious. In fact, just to give you a case of Vietnam and Thailand producers of rice is that after India has restricted or banned imports of broken rice, global prices have risen, obviously, and that has been benefiting at least partially producers and exporters of rice in those regions where no such export bans are place in Thailand and Vietnam, in particular.

But even if higher prices may, to a certain extent, benefit farmers. This is being mostly offset, of course, by poor agricultural outputs and also by increased cost of living for these same farmers, which eventually are also paying a price of higher food and other commodity. So overall, I would say that consumers certainly pays the price even if it is partially mitigated by government subsidies. And then, of course, the governments themselves when they're subsidizing agricultural commodities or also loans to farmers, this is being reflected in government finances with a particular hit to government budgets.

And this is where it gets even more complicated because, of course, if the government is running higher fiscal deficit, it eventually needs to look at its expenditure and where it's spending its money and this is where social programs for the broader economy can suffer or even investment plans for the broader economy can also take a hit. And then, of course, also on the revenue side that can mean that the government is looking to raise taxes, which has been happening across the world after the Russia-Ukraine conflict and a surge in subsidies paying for many of the Asia Pacific government. We are not seeing the same extent due to the El Niño impact this year. But clearly, we are still seeing an impact on government budgets from increased subsidy spending.

Kristen Hallam

Please join us next week when we'll continue the conversation in Part 2 of our series on global food security, focusing on food-related inflation, social unrest and government responses.