The destruction of the Kakhovka dam affected almost 500,000 hectares of agricultural land in Ukraine. Credit: AP Photo
When the Kakhovka Dam in southern Ukraine burst last week following an alleged Russian attack, President Volodymyr Zelensky condemned an «environmental bomb of mass destruction» as water flooded hundreds of thousands of hectares of farmland.
The impact of the disaster will be felt far beyond Ukraine and threatens to exacerbate the food inflationary crisis in the UK.
Ukraine is known as the breadbasket of Europe, as it is one of the world's largest exporters of grain and wheat. It is also a major producer of sunflower oil, an ingredient in many food products.
The disaster instantly caused a surge in global wheat prices and raised fears of a wider rise in global food prices. affecting about 500,000 hectares of farmland,» says James Walton, chief economist at the Institute for Food Distribution (IGD).
«It is worth noting that Ukrainian farmland is actually some of the best in the world, because they are especially fertile.
“It is clear that this flood and its aftermath means that a lot of agricultural land will be taken out of circulation, perhaps 2 or 3 percent of everything that is in Ukraine. There is no clear timeline to get him back in good shape, even if the war ends tomorrow.”
Changes in exports from Ukraine tend to have a direct impact on prices in emerging markets in North Africa, the Middle East and South Asia.
However, Walton says UK buyers will also feel the impact at the box office as shrinking global wheat supplies push up prices across the board.
Presumably we'll see global markets looking for alternative sources of supply. This could well push back the return to more normal food prices,” he says.
What's more, the dam burst just as US scientists confirmed that the weather event known as El Niño had begun. This is causing one of the largest fluctuations in the Earth's climate system, causing even greater disruption to global agriculture.
This phenomenon is expected to make 2024 the world's hottest year, bringing drought to Australia and dampening the rainy season in India. Extreme climate conditions could drive prices even higher.
Ole Hansen, head of commodity strategy at Saxo, says the combination of El Niño and a natural disaster in southern Ukraine is particularly worrisome.
He said: «Combined with the current hot and dry weather, this is quite a powerful cocktail that we need to be aware of and keep an eye on.»
While last year's crop is currently affecting prices, in the coming months the outlook will become clearer, he says.
«Surely we're not wrong when it comes to food security.»
3105 Food prices bite
Food prices in the UK have risen at almost the fastest rate since the late 1970s, putting poverty on poor families and fueling general inflation. In April, groceries cost 19.1% more than a year earlier.
Rising food prices mean that inflation over the past two months has been higher than expected, prompting the city to forecast that the Bank of England will be forced to raise interest rates to 5.5%.
The peak may be even higher. Analysts at Deutsche Bank warned in a note to clients this week that El Niño “and flooding in Ukraine could provide additional inflationary momentum.”
Gov. Andrew Bailey recently said that food producers are not missing the fall in commodity prices after peaking last summer.
He said this means that inflation has not fallen as quickly as expected and appears to be reflecting that producers are «recovering» margins.
If global food prices start to rise again, the cost is likely to be passed on to others.
Walton believes that food inflation will still slow down, but he says the latest crisis will delay its return to normal levels.
1205 Bank rate
Uncertainty increases doubts about whether Chancellor Jeremy Hunt will be able to achieve his goal on halving inflation by December. To achieve this goal, by the end of the year, its share should decrease from the current 8.7 percent to 5 percent.
KPMG's Yael Selfin says the target should still be within reach. However, if the rise in food prices proves to be sustainable, Hunt will find the path to his goal narrower and narrower.
Rising food prices will also increase pressure on Rishi Sunak to help households struggling with the weekly shop.
The PM is already considering capping the prices of basic foodstuffs, mimicking the system in place in France.
Initial reaction to the proposal suggests it will be nasty for the right wing of the Tory party. However, if store prices remain high, or actually start to rise again, the pressure to take action will increase.
For the UK's poorest households, the impact of even higher food prices will be immediate.
Ms. Selphin says: “Poor households suffer the most because it makes up the bulk of their food basket. It really affects those who are most vulnerable.”
Clearly, the attack on the Kakhovka Dam is more than just a military provocation by Moscow, with consequences for households across the UK.
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