Excessive Intervention Exacerbates Global Food Shortages

Excessive Intervention Exacerbates Global Food Shortages

Daniel Lacalle,

Many have read that there is a food crisis looming and there are significant concerns about grain shortages. The main reason for this possible crisis is the Ukraine invasion. However, this is not the full picture.

Many countries around the world have a large deficit of cereal production, which is essential to feed livestock. The main culprit is rising government intervention that has made costs soar even in periods of low energy prices, and an unsustainable level of restrictions that have made it impossible for farmers to continue planting and producing grain.

In 2020, Ukraine produced 4% of the world’s wheat production, and Russia 10%. Together, they produce almost as much wheat as the entire EU, but the reason is that the EU has made it impossible to produce wheat in an economical way.

According to the European Union website, the main costs (categories of expenditure) for cereal production are seeds, fertilisers, crop protection products and machinery/infrastructure. According to the EU cereal farms report, the EU average total operating cost for cereals was €635 per hectare in 2020. In terms of crops, the EU admits that maize production has higher costs at all levels except for crop protection, which is higher for common wheat production.

The rising cost of production came from increasing administrative burdens, environmental pressures, and rising taxes to farmers in the middle of challenging weather periods, as we have seen throughout Europe. 

In Europe, farmers have seen rising minimum wages and increasing direct and indirect taxes on top of a soaring cost of energy driven by the cost of CO2 emissions multiplying even before oil and natural gas rose due to the war. The average direct and indirect cost has increased even in the periods when inflation in the energy input was low. This has made the marginal producers react less rapidly to price changes and many farms simply to give up.

In any other circumstance, the partial collapse of supply from Ukraine and Russia would not have a significant impact, as analyst Aaron Smith points out.

More...