The Impact of Russia-Ukraine Conflict on United Kingdom’s Wheat Supply Chain. What Can be done to lessen this impact?

The United Kingdom produces 80 to 85 percent of the wheat it consumes. Although the country does not import a large amount of wheat, the ongoing Russia-Ukraine conflict has an indirect impact on its wheat supply chain.

Already, the country’s economy was reeling from the effects of Brexit and the coronavirus pandemic. Food prices increased due to inflation. In December 2021, the United Kingdom saw 30-year high inflation of 5.4%, causing a rise in many food items, petrol, used cars, clothing and furniture. In January this year, the price of staple food items such as margarine, tomatoes and apples increased by 45%.

The pandemic also affected truck drivers in the UK. They were under immense stress. They could not eat or sleep properly. As a result, many truck drivers switched jobs. Before Brexit, people from the continent came to the UK and worked as truck drivers. After Brexit, they left the country, creating a severe shortage. As a result, big stores found it very challenging to offer products to customers last Christmas.

In 2021, UK companies that traded goods to and from Europe were not required to make full customs declarations or go through a rigorous checkout process, but it all changed as 2022 rolled in. Now, these companies have to go through a long and rigorous checking process and submit documents containing details of the goods they are bringing in or out and pay all the tariffs. This has become a very challenging task for many UK importers. A survey conducted by the Federation of Small Businesses (FSB) and the Institute of Directors (IoD) revealed that many firms were not aware of these changes. Many UK companies had to readjust their supply chains after Brexit. The December 2021 UK economic report, published by the Office for National Statistics (ONS), said that only 7.7% of companies changed their supply chains. 41% of those who did are now using UK suppliers and 11.6% are using more EU suppliers. Overall, 60% of businesses saw a rise in their cost of doing business since Brexit. Nowhere this rise is more visible than in transport and bureaucratic processes.

Against this backdrop, the Russian-Ukraine conflict only made matters more complicated. Even if the war ends tomorrow, things will not return the way they used to be. Western countries imposed major sanctions on Russia and removed it from the Swift messaging system. It means the UK cannot do trade with Russia and Ukraine through traditional routes.

In this emerging geo-political situation, millers and other companies whose products require wheat as one of the major ingredients have to take various short-term and long-term initiatives to ensure the stability of their wheat supply chain.

Wheat Market in the United Kingdom:

Wheat consumption:

Wheat is used to produce flour, which is used to make bread. Aside from bread, many other food items are prepared from flour, including biscuits, cakes, pies, pizzas, pastries, batters, and coatings. 37% of the fiber, 35% of the calcium and 31% of the iron in the UK people’s diet come from flour. In the UK, per person, flour consumption was 59 kg in 2018 and 2019. According to 2019 Kantar data, 99.8% of households in the UK purchased bread. For this reason, wheat is the most grown crop in the United Kingdom. Approximately 1.9 million hectares of land are used to grow this crop. Based on climate and other factors, annual wheat production in the UK ranges from 11 million to 16 million tons per year. 60% of this wheat production is used to produce bread.

The UK is self-sufficient in flour production. The flour milling industry, whose main ingredient is wheat, has a £1.25 billion annual turnover. 32 companies operate 51 mills. Of these, the top four companies produce the lion’s share of the flour. Together, all these companies produce more than 400 different types of flour. They mostly use locally produced wheat. They produce 5 million tons of flour every year. These mills also produce bran, which is consumed by people, and wheat feed that is used to manufacture livestock feeds. Aside from flour, wheat is also used in starch and bioethanol manufacturing. These manufacturers use 1.3 to 1.5 million tons of wheat. 

Wheat Import-Export:

Although it is a small amount, the United Kingdom imports wheat from other countries. According to The Observatory of Economic Complexity (OEC), in 2019, the United Kingdom imported wheat worth $299 million, making it the 38^th major wheat importer in the world. Primary import destinations include Canada, Germany, France, Latvia and Ukraine. Latvia, Turkey and Ukraine are the fast-growing import markets for wheat for the UK. That same year, the United Kingdom exported wheat worth $243 million, becoming the 17^th largest wheat exporter. The Netherlands, Spain, Ireland, Portugal, and Algeria were major export destinations. 

Russia and Ukraine: Largest Wheat Exporters

Russia and Ukraine are the two largest wheat producers in the world. As per OEC, in 2019, these two countries accounted for more than a quarter of the global wheat export. In the 1980s, the then Soviet Russia was a major wheat importer. After the fall of the USSR, Russia started to become self-sufficient in wheat production. The Russian government allowed farmers to sell their products on the international market. Investment in agriculture technology and infrastructure, coupled with the devaluation of the Russian currency, accelerated this process. In 2001, Russia accounted for only one percent of the global wheat export. That increased to 26.4 percent by 2018. Vietnam, Senegal, the UAE, Sudan, Azerbaijan, Yemen, Nigeria and Bangladesh were the largest buyers of Russian wheat in 2019. Of these countries, Egypt, Turkey and Bangladesh accounted for more than half of Russian wheat export.

Ukraine, on the other hand, is the fifth largest exporter of wheat. As of 2019, the country accounted for seven percent of the global wheat export. 71 percent of Ukraine’s land is devoted to agriculture. Its highly fertile “black soil” makes it suitable for growing a wide range of crops. The country exports its agricultural products to Europe, so aptly named “Bread Basket of Europe.” Ukraine also exports wheat to Indonesia, the Philippines, Tunisia, Thailand, Morocco, South Korea, Spain and Israel. Turkey and Vietnam also import wheat from Ukraine.

Impact of Russia-Ukraine conflict on global wheat supply chain

From the statistics above, it is obvious that any instability in Russia and Ukraine will definitely have a major impact on the global wheat supply chain. After the conflict started, the export of wheat and other cereals from Russia and Ukraine almost came to a halt.

Traders around the world are very much afraid to make any deals that might come under sanction. The price of wheat exceeded the price seen during the food crisis of 2007-2008. Through seaports in the Black Sea, Russia and Ukraine export their products to North African and Middle Eastern countries. Many poor Asian countries also depend on Russia and Ukraine for their wheat. With more than $4 billion expenditure per year, Egypt is the world’s biggest wheat importer. Russia and Ukraine account for 70% of Egypt’s wheat purchase. 80 percent of Lebanon’s wheat comes from Ukraine. Lebanon is already suffering from high wheat price. Somalia and Syria are also suffering.

Turkey is another big buyer. In 2019, 76% of its wheat import worth $1.6 billion came from these two countries. In 2021-2022, Turkey alone purchased 4.5 million metric tons, followed by Egypt with 3.2 million metric tons. Even before the invasion, Turkey saw a high inflation rate of 54.4 percent in February, the highest in the country’s history in the last twenty years. Turkish officials are worried that the price of food will only increase in the near future.

For Middle Eastern and North African countries, the Black Sea route is very cost-effective, and the conflict forced them to import wheat from other leading producers, such as the US and Australia, at a higher cost.

Rising food prices are a major element of political unrest in these countries. During the 2007–2008 food price rise, countries like Haiti and Ivory Coast saw serious protests. Bread prices caused serious political unrest in Egypt over the last fifty years. Grain price rise in 2009-2010 started the Arab Spring.

No one can say when this conflict will stop. Even if it ends tomorrow, the grain crisis will persist because the seeding of the spring crops in Ukraine starts from March. Many people fled the country, and able-bodied men who stayed are fighting against the Russians. So, there is no one left for farming. This will severely hamper their 2022 harvest. Many foreign companies invested in Ukraine’s agriculture. Because of the war, they stopped their operations.

Impact of this conflict on wheat supply chain in the UK

Since the United Kingdom grows most of the wheat it consumes, there is no immediate impact on its supply chain, but the country is not totally immune from the conflict. It is already having an impact in other areas related to wheat production, one of which is fertilizer. At the time of this writing, the price of fertilizers reached £1,000 per ton from about £650 last week. The price of nitrogen fertilizer increased 200% year on year. Farmers, already burdened by the rising cost of fuel, labor and feed, are purchasing fewer fertilizers. The UK produces 40% of its own fertilizer, but the fertilizer manufacturing plants need gas, which is in short supply because of the conflict. Russia is also the top exporter of synthetic fertilizers. The UK imports one-fifth of its urea fertilizer from Russia. After the conflict, Russia restricted exports. Wheat and corn are also used for livestock feed in the UK. Hence, the wheat price rise will also drive up the cost of meat, dairy and eggs.

According to the Office for National Statistics (ONS), the UK imported goods worth £10.3 billion from Russia in 2021, equal to 2% of the total value of goods the UK imported from other parts of the world. Of these numbers, one import is oil. The UK imported refined oil worth £3 billion and crude oil worth £1 billion. Other major imports include gas and non-ferrous metals. After the conflict, fuel and gas prices rose sharply not just in the UK but all over Europe. Energy is also necessary for processing wheat and food in different stages. This means the price of bread and other staple items will increase rapidly.

What can be done to lessen this impact?

In an interview with ITV News, Dr. Peter Alexander, lecturer on global food security at the University of Edinburgh, said that the UK government should intensify the production of wheat on existing land and bring more land into agricultural production in order to lessen the impact of the conflict. He also mentioned that bringing more land into agricultural production would also have a negative effect on the environment. Another thing the UK can do is develop trade relationships with other major wheat-producing countries and get into trade agreements with them.

Final Thoughts:

Even though the wheat supply chain in the UK did not see any major disruption, other factors such as rising fuel prices, Brexit and the pandemic contributed to the price rise. If the conflict continues for a longer period of time, it will definitely impact the wheat supply chains of developed countries in various ways.  

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