Spain’s agricultural sector and its dependence on international agricultural commodity markets
The war in Ukraine has fuelled fears of shortages of certain essential inputs for the agrifood sector, as Russia and Ukraine are major players in the global supply of cereals, oils and fertilisers, among other commodities. It is therefore not surprising that, following the outbreak of the conflict, the prices of agricultural commodities rose sharply on international markets. This price hike has been passed on to the production costs of Spain’s agricultural sector, a net importer of fertilisers and animal feed, and is also having an impact on the food prices paid by end consumers. Nevertheless, the most recent developments (agreements to release part of the grain retained in the Black Sea and good harvests in other producing countries) have helped to stabilise agricultural prices and reduce the risk of a global food crisis.
The agrifood sector is notably one of the sectors suffering most directly from the consequences of the war in Ukraine, both because of the increase in agricultural commodity prices (cereals, vegetable oils and fertilisers) and also due to the risk of shortages among these inputs that are so essential for agrifood production. In this article we assess how such developments in the international markets for agricultural commodities are affecting Spanish farming, analysing the impact from the point of view of both quantity and price. First, we examine the extent to which the agrifood sector depends on certain imported inputs in relation to domestic consumption, paying particular attention to dependence on Russia and Ukraine, as well as the ability to replace these imports with other products or producers at a global level. Secondly, we analyse how the rise in international prices of agricultural commodities influences price formation through the different links that make up the food chain, up to the final consumer in Spain.
The war in Ukraine has fuelled fears of shortages of certain inputs for the agrifood sector, as Russia and Ukraine are major producers and exporters of cereals, oils and fertilisers, among other commodities. The countries involved in the conflict are key global suppliers In the cereals market (corn, wheat and barley) as well as sunflower oil, and are therefore the agricultural products receiving the most attention since the outbreak of the war.
Russia and Ukraine are major world exporters of cereals, oils and fertilisers. Spanish farming is particularly dependent on Ukrainian corn and sunflower oil and Russian fertilisers
The importance of Russia and Ukraine in world cereal and vegetable oil markets, and Spain’s dependence on them
Share of world cereal and oil exports
Origin of Spanish imports of cereals and oils
Top 10 corn exporters
Top 10 wheat exporters
Top 10 barley exporters
Top 10 exporters of sunflower oil
Spain’s agricultural sector is a net importer of cereals. According to Spain’s Ministry of Agriculture,7 the country’s cereal trade deficit (i.e. exports minus imports) amounted to 13.6 billion tonnes in the 2021-2022 season, while its degree of self-sufficiency (ratio between domestic production and consumption) was 64%, lower than the 68% of the previous season. The country is particularly dependent externally for corn (with a trade deficit of 8,280 tonnes and 34% self-sufficiency), a cereal that is mostly used for animal feed (81.2% of total uses). In addition, a large part of these imports came from Ukraine, namely 30% of Spain’s corn imports in 2020.
- 7. See «Evolución de los balances de cereales en España. Campañas 2020/2021 y 2021/2022», July 2022, Ministry of Agriculture, Fisheries and Food.
However, we need to determine to what extent there are other suppliers that can make up for the supply shortfalls caused by the conflict. In this respect, the US accounts for around 25.4% of the world’s corn exports while, in Latin America, Argentina and Brazil account for a further 32.5%. There are also important producers within the euro area (France exports 4.5% of the world total of corn and 9.3% of its wheat), so in principle it seems feasible for supplies to be redirected to the Spanish market.
With regard to sunflower oil, Spain has a high external deficit (–338,000 tonnes in the 2021-2022 season), with the Ukrainian economy being its main supplier (slightly more than 70% of total imports in 2020). Globally, Russia and Ukraine account for more than 70% of global exports of a key product for the agrifood industry. Consequently, in this case it does not seem so easy to obtain imports from other suppliers. The alternative would be for the industry to use other types of vegetable oil (olive, rapeseed, soya, etc.), increasing the number of potential global suppliers. It should be noted, however, that such changes in the processing industry tend to be more medium to long term. As for the other oilseeds (soya and rapeseed), the situation is quite different: soya is practically all imported while, in the case of rapeseed, Spain’s agricultural sector is self-sufficient (in fact, its production has reached record highs in recent seasons).
As for the fertiliser market, Spain’s agricultural sector is a net importer; i.e. it depends on imports from abroad. In 2020, the country’s fertiliser trade deficit reached 2 million tonnes, particular in terms of complex fertilisers (932,000 tonnes) and simple nitrogen fertilisers (903,000 tonnes). Nevertheless, domestic fertiliser production is not negligible: the agricultural sector’s degree of self-sufficiency was 83% in 2020 (fertiliser sales in the agricultural sector as a percentage of domestic production).
Russia is the world’s leading exporter in the global fertiliser market, closely followed by China (both account for 23% of the total). Despite this high concentration of the global market, the main suppliers of Spain’s agricultural sector are Morocco (14% of the total fertiliser imported by the country), Belgium (11%) and Portugal (8%). Therefore, in principle, it would be possible to import fertilisers from other suppliers. However, although it does not seem that there will be a supply problem, there are significant inflationary pressures which could intensify with the sharp rise in the price of natural gas, an essential input in the production of fertilisers.
Russia is the world’s largest exporter of fertilisers but the tenth largest supplier to Spain
Top 10 fertiliser exporters
Top 10 fertiliser suppliers for Spain
On balance, it seems there is no imminent risk of shortages for Spain’s agricultural sector as a result of the conflict in Ukraine. Although the Spanish agrifood sector is highly dependent on imports of cereals, oils and fertilisers to cover domestic consumption, its exposure to the countries in conflict is only worrying in the case of sunflower oil imports, given the country’s strong dependence on Ukraine and the fact that world supply is highly concentrated in both Ukraine and Russia, making it difficult to find other global suppliers. In this sense, the EU has temporarily allowed the use of fallow land for oilseed production, which should help to increase European production.8 In fact, according to the most recent estimates of sunflower oil production in the EU, record highs will be achieved in the coming 2022-2023 season and the European Commission itself believes this will be enough to compensate for the production losses in Ukraine.9
- 8. In March 2022, the European Commission introduced a derogation to allow the production of any crops for food and feed purposes on fallow land, enlarging the areas sown with protein crops in the new commercial year 2022-2023. An exceptional package of €500 million to member states was also approved to support producers most affected, to contribute to global food security or address market disturbances due to increased input costs or trade restrictions.
- 9. See the report «Shortterm Outlook for EU agricultural markets in 2022», European Commission, July 2022.
The European Commission has implemented new measures to ensure food security, not only in the region but globally
Regarding cereals, EU production is forecast to be lower than expected due to drought in several producing regions and, in any case, will be less than in 2021 (–2.5% year-on-year). However, stocks in storage will help to meet domestic consumption needs and part of the export demand, which is likely to remain high in view of the pressures on world markets.
In the first part of this article, we have seen that the risk of shortages among certain commodities used by Spanish farms is relatively limited. As we will see below, the main channel through which the war in Ukraine is being felt is via the sharp rise in international food commodity prices. According to the World Bank’s agricultural commodity price index, in March and April 2022 these rose by 36.5% and 32.6% year-on-year, respectively, due to fears that exports from these countries would be affected by the war. The price of fertilisers rose even higher (137% year-on-year on average in March and April 2022), as it is closely linked to the price of natural gas.
Already high agricultural commodity prices grew considerably in March and April 2022, although prices returned to prewar levels in July and futures markets point to a stable trend
The increase in agricultural prices resulting from the war in Ukraine occurred when prices on international markets were already at historically high levels due to the consequences of the COVID-19 pandemic (lack of supply because of lower production during the big lockdown and a strong surge in demand with the end of pandemic-related restrictions). Specifically, food prices rose by 31% in 2021 (30% for grains, 42% for vegetable oils and meals, and 20% for other foodstuffs) and fertilisers by 80%, putting the prices of food and fertiliser well above pre-pandemic levels by the end of 2021.
Sharp spike in international food and fertiliser prices after the outbreak of war in Ukraine
Sharp spike in international food and fertiliser prices after the outbreak of war in Ukraine
However, after the first few weeks of conflict, the prices of the main agricultural commodities quoted on international markets have fallen from the highs reached in April,10 and futures markets point to a somewhat more stable trend at levels similar to those before the outbreak of the war.11 Futures markets expect wheat prices to be around USD 850 per bushel in 2023, somewhat higher than in December 2021 (around USD 790) but significantly lower than this year’s peak (above USD 1,400). A similar trend is expected for the price of corn, as can be seen in the chart below.
- 10. According to the World Bank index, between April and July 2022 food prices fell by 12.7%, led by oils and meals (–19.3%) and grains (–12.0%). Fertiliser prices, on the other hand, fell by 16.4% between April and July.
- 11. In addition to agricultural commodities, metal and mineral prices have also fallen back down from April’s record highs. One notable exception to this downward trend is natural gas, whose spot and futures prices have risen over the summer due to smaller supplies from Russia. This will add further pressure on fertiliser prices, as gas is the main energy source used in the production of nitrogen fertilisers.
Among the factors that may have helped to moderate the price of agricultural commodities is the agreement negotiated by the United Nations at the end of July, which allows Ukrainian grain exports to leave the port of Odessa, as well as higher grain production in economies such as the US and improved weather conditions in producing areas such as Latin America. These recent developments have lowered the risks of a global food crisis and should help to contain pressures on food prices paid by the end consumer. However, the impact of higher agricultural commodity prices on the price formation process along the food chain could still be felt for a few more quarters, which we discuss below.
The global rise in food commodity prices is having a major impact on the consumer prices that Spanish households pay for their food. But how are price increases passed through the food chain to the end consumer? To shed light on this question, we have developed an econometric vector autoregressive model (VAR)12 that enables us to measure the intensity and duration of price pass-throughs in the food chain. In the case of the EU, the analysis must be carried out using the internal prices of the single market for these commodities, which already incorporate the effect of the Common Agricultural Policy (CAP).13
- 12. The analysis in this section is based on the article «Rising food commodity prices and their pass-through to euro area consumer prices», Fructuoso Borrallo, Lucía Cuadro-Sáez and Javier J. Pérez, Bank of Spain, July 2022.
- 13. The CAP includes a set of measures (direct subsidies, price support mechanisms and guaranteed minimum prices) that affect agricultural commodity prices in the EU. One consequence of the CAP is that, historically, the reference prices for food commodities in the EU have been less volatile than for international prices.
The following chart shows the effect of a shock to the rate of change of food commodity prices in the EU on consumer prices (food CPI).14 The results reveal that a transitory increase of 10 pp in the rate of change of food commodity prices in the EU leads to a 2.3 pp increase in the food CPI after 12 months, implying a 0.5 pp increase in total inflation in Spain.15
- 14. The analysis has been carried out on five food groups using a disaggregate approach (cereals, dairy, meat, oils and sugar) and the results are aggregated using their relative weights in the CPI.
- 15. The same transitional increase of 10 pp in the rate of change of food commodity prices in the EU has an impact of 2.6 pp on the prices received by farmers.
Transitory 10 pp increase in the rate of change of agricultural commodity prices in the EU
Impact on the food prices paid by Spanish households
In the coming months, the moderation of international agricultural prices should help to reduce pressure on final food prices
Equipped with these sensitivities, we then simulated how the food CPI would have evolved in the absence of commodity shocks since January 2021. According to our estimates, food prices would have grown by 2.7% between January 2021 and July 2022, a much smaller rise than the 13.0% actually observed in that period.16 It can therefore be concluded that most of the increase in Spain’s food prices is attributable to the external shock of higher agricultural commodity prices. Over the coming months, the moderation in international agricultural prices should help to reduce the pressure on the final price of food, although the sharp rise in energy prices, especially gas, will have the opposite effect.
- 16. For more details, see the Focus «The exposure of consumer goods in Spain to international agricultural commodity prices» in the Monthly Report for September 2022.