The Breakdown - A Food Crisis on the Horizon?

Episode Date: August 20, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.   Today on “The Breakdown,” NLW looks at something that could cause a new set of “big picture power shifts” – a growing global food crisis. He explores a set of causal factors including Russia’s invasion of Ukraine, inflation and environmental policies that are combining to form a perfect storm.  - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - I.D.E.A.S. 2022 by CoinDesk facilitates capital flow and market growth by connecting the digital economy with traditional finance through the presenter’s mainstage, capital allocation meeting rooms and sponsor expo floor. Use code BREAKDOWN20 for 20% off the General Pass. Learn more and register at coindesk.com/ideas. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsors today is “The Now” by Aaron Sprinkle and “The Life We Had” by Moments. Image credit: Anton Petrus/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Friday, August 19th, and today we are discussing the potential food crisis on the horizon. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, and give it a review or, if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. Lastly, a disclosure as always. In addition to them being a sponsor of the show, I also work with

FTX. So, happy Friday, everyone. Today we are looking at a topic that is important, future-oriented, certainly has the potential to shape power shifts, but is kind of lurking behind the topic. scenes. And that is the potential for a global food crisis. So what we're going to do today is look at the elements that might be contributing to a potential food crisis, as well as the evidence that it might be coming on. This is one of those episodes that's obviously a little bit outside of the normal sphere for the breakdown in terms of our day-in-day-out coverage of the macro scene or Bitcoin, but which I think really fits this theme of big picture power shifts. So I hope you enjoy it. Food crises have been on people's minds easily since the beginning of the Russia-Ukraine

crisis, but for those who have been paying attention, there were worrying signs even before this happened. In 2020, the number of people experiencing undernourishment went up for the first time in six years. In 2019, it was around 8.4% of people that experienced undernourishment, and by 2020, it was 9.9%, which represents 760 million people. There are a variety of reasons for this, but where we're going to focus today is on some of these more causal factors that started this year. The first thing that we're going to discuss is, of course, Russia's invasion of Ukraine. Almost immediately, as Russian tanks rolled across the border, the discussion of global food security came into view. Ukraine is the fifth largest exporter of wheat in the world. In 20,

In 2020, they represented 8.5% of global wheat exports. Russia, however, is also a major wheat exporter. Last year, they were, in fact, the largest wheat exporter in the world representing 13.1% of global exports. Russia has historically been a top three grain exporter going back about a century, and a huge part of that goes to geopolitical hotspots like the Middle East. In fact, the last time there was a major disruption with Russian production, wheat prices in the Middle East triple. and not very long after that we saw the Arab Spring. Which is, of course, not to say that the Arab Spring happened because food got more expensive. But it certainly wasn't helping an already volatile environment, and as we'll find out, there actually seems to be fairly consistent correlation between food crises and political unrest.

Russian exports for this year are currently running below averages going back to 2016, but not necessarily by a huge amount. In Ukraine, part of the challenge is that in addition to this export crop not being able to be readily harvested, the next crop has been much harder to plant. So you have issues that have the potential to last longer even than the current conflict should it resolve. August is the start of the peak season for exporting wheat, so there are some new dynamics at play as well. Until recently, shipping via the Black Sea had been severely restricted due to Russian blockades. Black Sea ports ship around 75% of Ukrainian agricultural exports. And because of those blockades,

Ukrainian wheat storage had begun to reach its capacity limits in July. On July 22nd, however, a deal to end the blockade was reached. The deal was brokered by the United Nations and by Turkey and allows Ukrainian exports to flow to destinations in the Middle East and North Africa, where imported wheat is such a stable part of the food supply. That said, the deal did not get off to a great start. Within 24 hours of it being signed, Russian missiles hit port facilities at Odessa. Still in recent weeks, the Ukrainian exports have begun to flow. The first cargoes headed towards Lebanon, where 2.4 million people, many of whom were Syrian refugees, are currently in dire straits when it comes to food. At current, Ukrainian silos hold an estimated 20 million tons of grain from last

year's harvest and around the same amount is expected to come from this year's reduced harvest. The deal to end the blockade is four months long, but can in principle be. extended. That said, Russian forces basically hold all the power in the relationship. They are easily able to interfere with slow hulking cargo ships if they so choose. In order to clear the backlog of grain, Ukrainian exports would need to move 167,000 metric tons per day over the course of the deal. During the first two weeks of the deal, they've only moved 26,000 metric tons in total, which is obviously well short of the 2 million metric tons pace that would be needed to clear the stockpile. What's more, this grain deal

ultimately does very little for severely affected countries like Afghanistan, Yemen, Ethiopia, and Syria. The terms of the deal are strictly market-based rather than humanitarian. Still, this influx of exports could assist in lowering global prices at least a little bit in easing the pressure on the worst affected countries. Part of the reason that Russia agreed to this deal was, in fact, pressure from allies, including Syria and Iran, who are struggling under high food prices. In the days following the signing of the deal, the Russian foreign minister toured Africa to reassure governments that Moscow was committed to lowering prices. So this is just one snapshot of the wheat and grain dimension of the crisis as relates this potential for greater food and security

in the months to come. In times like these, security of your assets should be your number one priority. If you want to offset risk as much as possible and still stay in crypto, you need a trusted partner by your side. Nexo is a security first company that manages risk by relying on mechanisms such as over-collateralization, real-time auditing, and insurance on custodial assets. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, chainalysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence,

and investigations support for all. crypto assets for organizations like Gemini, crypto.com, and BlockFi. Gain unparalleled visibility and maximize your potential with the leading blockchain data platform by visiting us now at chainalysis.com slash coin desk. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no $1,000.

H-C-T-H transaction fees and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FtX app today and use referral code breakdown to support the show. Another dimension of this, again stemming from the Russia-Ukraine conflict, however, has to do with fertilizer. A key ingredient in fertilizer is ammonia. ammonia is made from natural gas.

Before the conflict, Russia was the world's largest exporter of two of the three largest types of fertilizer. However, even before the conflict, there had been major inflation in the price of fertilizer. In February, before Russia invaded, fertilizer was two to three times more expensive than it had been the year before. All on its own, that could have been a cause for famine. Fertilizer, of course, being a key input of future food production. However, that's not where things stopped.

High natural gas prices have caused nitrogen-based fertilizer prices to be excessively volatile all year. They were up 43% in March, down 30% in May, and now they're starting to tick back up again. An export squeeze caused by the war is part of the story for fertilizer supply as well. Although fertilizer is exempt from sanctions on Russia, the logistics and insurance difficulties with shipping exports in the region have seriously hampered supply this year. China has also played a part in restricting supply. They enacted an export ban on nitrogen-based fertilizers in October of last year and extended the ban this year when it was originally due to expire.

Chinese fertilizer prices are now higher than they were when the ban was put in place, and analysts anticipate that their ban will carry through into 2023. European producers have been unable to make up for the shortages. Like everything in Europe, spiking energy prices are causing huge problems here as well. They've caused 10 plants to close or curtail production. An estimated 20% of European ammonia production has been curtailed this year, leaving a major shortage in this important input for producing fertilizer. Tony Will, the CEO of nitrogen giant CF Industries said, The global nitrogen market is likely to be short the fertilizer it needs if product prices do not incentivize greater production in high-cost regions.

The world is going to be incredibly tight availability of product as we get into both winter and then into spring next year. Particularly if the situation in Europe is not resolved in the coming months because that just further pressures the whole system with winter coming. Now, the fertilizer shortage has been especially acute in Africa. One anonymous UN official told Politico, quote, we are really starting to yell from every tower that there's a fertilizer crisis and the fertilizer crisis is enormous. In May, the African Development Bank warned that they were forecasting a 20% reduction in food production on the continent. David Beasley, the executive director of the UN World Food Program, thought that the 20% estimate, quote, could be very low. Exacerbating this problem is that African agricultural

policies have transitioned in recent decades. Whereas formerly, farmers relied on traditional methods used for generations, they've now come to rely more on nitrogen-based fertilizers to increase yields. Millianne Belay from the Alliance for Food Sovereignty in Africa said, for farmers who have been led down the path of applying more and more chemical fertilizers on their soil, this is a real crisis. For places like North Africa, it is going to be. be a disaster. Now, as we look at the potential for food crisis, it isn't all just Russia and Ukraine related. Another theme is the tension between production on the one hand and environmental goals on the other. For example, a schism in the Dutch agricultural sector has been flaring up this

year. Farmers have been attending mass protests against measures to cut nitrogen emissions in agriculture. Nitrogen is a major emissions byproduct from both fertilizers for crops and manure from livestock. The policy has a long and contentious history. A 2019 Dutch high court case brought by environmental groups under the Dutch nitrogen emissions permitting system established in 2016. These policies in the Netherlands have a long and contentious history. The Dutch nitrogen emissions permitting system was established in 2016, and then in 2019, there was a Dutch high court case brought by environmental groups that further restricted permitting for agricultural construction. Meanwhile, the Dutch agricultural sector is a huge export.

border. In the Netherlands, there are as many pigs and cows as there are people, with over 15 million. In June, the most recent measures were announced, as nitrogen emissions hit legal limits under the current permitting system. The policy then mandates a reduction of livestock numbers by a third. Under the scheme, the government would buy out smaller farms, but as you might imagine, this is not a satisfactory outcome to the group of farmers who have been holding ongoing demonstrations. The farmers are instead proposing that the government subsidized technological solutions, including air filtration in livestock sheds and cleaning robots that can reduce the amount of manure that is left lying in the open. This month, crisis talks between the government and the agricultural

sector are set to take place. However, multiple large Dutch agro businesses are currently refusing to attend until the government agrees to explore alternate resolutions other than closing ancestral farms. Basically, they're trying to get concessions to the farmers' demands even before the talks take place. This is exactly the type of disruption that the last couple years of unanticipated events have wrought. The Dutch are simply out here trying to get to EU climate goals by 2030. However, is it wise to be reducing livestock supplies by a third in a country when there's a global food crisis? Another dimension of a potential food crisis is inflation. The ripples of shortages and increased costs throughout the food supply chain are culminating in the higher cost of processed foods.

World food prices hit a record high in March this year, according to the UN Food and Agricultural organization data. They've since fallen slightly for four months straight, but remain higher than they were in any other year since 1990. And really, this is happening everywhere. The UK is in the middle of what has been labeled a cost of living crisis as food and energy price spikes combined to drive food inflation to 8%, which is a 14-year high. Germany is also experiencing extreme food inflation reaching an all-time high of 14.8% in July. And in total, more than 89% of countries have seen food inflation run at above 5% this year. Since the start, of the pandemic, the number of people suffering acute food insecurity increased from 135 million

in 53 countries to 345 million in 82 countries. But what about back home in the U.S.? While July's inflation data showed a stalling out of inflation and a glimmer of hope that the worst might be over, below the headline number concerning levels of food inflation continued to accelerate. The food at home basket representing food purchased at stores and markets increased by 1.3% between June and July, reaching a level of 13.1% year over year. That's the highest level of food inflation since 1971. Overall, food inflation was 10.1% over the last year and increased by 1.1% last month. That was its seventh consecutive monthly increase of over 0.9%. Some of the most concerning data is indications that the worst is still ahead of us. Prices paid by U.S. food producers

were up 16% over the last year. That's the biggest surge of that metric since 1974. A large portion of the increase was a 44.2% rise in the price of eggs, whose supply has been restricted by the first major U.S. avian flu outbreak in seven years. So why does all this matter? Well, if oil is the universal input, food is the universal output. It is the one thing that everyone needs every day, no matter what their circumstances. That means that disruptions to food have comparatively larger impacts than other types of economic disruptions. We're seeing glimpses of this in the United States. Despite inflation starting, what people hope will be a slow but steady descent away from its peak, food prices continue to rise. This discontent is fueling negative political sentiment,

especially for Dems as they are the party in power. In other parts of the world, the power of food dislocations to fuel discontent is even greater. I referenced the Arab Spring earlier. That event was kicked off, in many people's estimation, by a December 17th, 2010 event, where a Tunisian street vendor set himself on fire in front of a government office. Just four days before that, the New England Complex Systems Institute had sent a note to the U.S. government predicting exactly that a likely consequence of a recent spike in global food prices was going to be a wave of protests in the Middle East. The Institute had mapped previous riots to peaks in global food prices and identified

a threshold above which protests become likely. One of the under-discussed fallouts of the 2008 financial crisis had to do, in fact, with food and other commodities. In the wake of the crisis, there was a huge influx of speculative money into commodity markets. This wasn't about fundamentals, in other words, the supply and demand for those goods, but because other parts of the market like mortgages and stocks were in such a terrible place. This created a big peak in commodity prices in oil and food, which of course drove the price of food up for regular people as well.

There was also another fundamental driver increasing prices, which was ethanol from corn taking up 50% of U.S. corn, which represents a meaningful part of global supply. As ethanol production went up, the available corn went down, and so the price of related food products went up as well. In total, in 2007 to 2008, there were food-related protests or riots in 48 countries. So far, in the wake of all the dislocations we've talked about today, we haven't seen this type of protest activity yet. The question is, will that remain? A special UN crisis task force is watching more than 60 countries that are having a hard time paying for food imports.

In Kenya, Ethiopia, and Somalia, 26 million people face. food shortages over the next month. In Lebanon, real food inflation is no less than 120%. The World Bank says that domestic food price inflation is high in almost all low and middle income countries, and is saying that a record high of 49 million people in 46 countries could fall into famine-like conditions. This is exactly the stuff that big-picture power shifts are made of. And unfortunately, it feels like there's a lot more to come. For now, I want to say thanks again to my sponsors, nexus.io. analysis and FTX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each

other. Peace. I want to tell you about CoinDesk's new event, the investing in digital assets and enterprises summit or ideas. The event facilitates capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience where you can source, invest, and secure the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass. You can register today at coin desk.com slash ideas.