Bad weather, the Russian invasion of Ukraine, and a shortage of fertilizer have led to fears of a global food crisis. This infographic will help you understand the problem by highlighting three key factors behind the mounting food crisis.
#1: The Fertilizer Shortage
Since the beginning of the Russian invasion of Ukraine in February 2022, the war has disrupted shipments of fertilizer, an essential source of nutrients for crops. Russia is the world’s top exporter of nitrogen fertilizer and ranks second in phosphorus and potassium fertilizer exports. Belarus, a Russian ally also contending with Western sanctions, is another major fertilizer producer. In addition, both countries collectively account for over 40% of global exports of the crop nutrient potash. Here are the top 20 fertilizer exporters globally: The main destination of fertilizer exports from Russia are large economies like India, Brazil, China, and the United States. However, many developing countries—including Mongolia, Honduras, Cameroon, Ghana, Senegal, and Guatemala—rely on Russia for at least one-fifth of their fertilizer imports. Furthermore, the war intensified trends that were already disrupting supply, such as increased hoarding by major producing nations like China and sharp jumps in the price of natural gas, a key feedstock for fertilizer production.
#2: Global Grain Exports
The blockade of Ukrainian ports by Russia’s Black Sea fleet, along with Western sanctions against Russia, has worsened global supply chain bottlenecks, causing inflation in food and energy prices around the world. This is largely because Russia and Ukraine together account for nearly one-third of the global wheat supply. Wheat is one of the most-used crops in the world annually, used to make a variety of food products like bread and pasta. Additionally, Ukraine is also a major exporter of corn, barley, sunflower oil, and rapeseed oil. As a result of the blockade, Ukraine’s exports of cereals and oilseed dropped from six million tonnes to two million tonnes per month. After two months of negotiations, the two countries signed a deal to reopen Ukrainian Black Sea ports for grain exports, raising hopes that the international food crisis can be eased.
#3: Recent Food Shortages
Besides the war in Ukraine, factors including the COVID-19 pandemic and climate change resulted in nearly one billion people going hungry last year, according to United Nations. France’s wine industry saw its smallest harvest since 1957 in 2021, with an estimated loss of $2 billion in sales due to increasingly higher temperatures and extreme weather conditions. Heat, drought, and floods also decimated crops in Latin America, North America, and India in recent months. Between April 2020 and December 2021, coffee prices increased 70% after droughts and frost destroyed crops in Brazil. In the face of multiple crises, the World Bank recently announced financial support of up to $30 billion to existing and new projects in areas such as agriculture, nutrition, social protection, water, and irrigation. on Last year, stock and bond returns tumbled after the Federal Reserve hiked interest rates at the fastest speed in 40 years. It was the first time in decades that both asset classes posted negative annual investment returns in tandem. Over four decades, this has happened 2.4% of the time across any 12-month rolling period. To look at how various stock and bond asset allocations have performed over history—and their broader correlations—the above graphic charts their best, worst, and average returns, using data from Vanguard.
How Has Asset Allocation Impacted Returns?
Based on data between 1926 and 2019, the table below looks at the spectrum of market returns of different asset allocations:
We can see that a portfolio made entirely of stocks returned 10.3% on average, the highest across all asset allocations. Of course, this came with wider return variance, hitting an annual low of -43% and a high of 54%.
A traditional 60/40 portfolio—which has lost its luster in recent years as low interest rates have led to lower bond returns—saw an average historical return of 8.8%. As interest rates have climbed in recent years, this may widen its appeal once again as bond returns may rise.
Meanwhile, a 100% bond portfolio averaged 5.3% in annual returns over the period. Bonds typically serve as a hedge against portfolio losses thanks to their typically negative historical correlation to stocks.
A Closer Look at Historical Correlations
To understand how 2022 was an outlier in terms of asset correlations we can look at the graphic below:
The last time stocks and bonds moved together in a negative direction was in 1969. At the time, inflation was accelerating and the Fed was hiking interest rates to cool rising costs. In fact, historically, when inflation surges, stocks and bonds have often moved in similar directions. Underscoring this divergence is real interest rate volatility. When real interest rates are a driving force in the market, as we have seen in the last year, it hurts both stock and bond returns. This is because higher interest rates can reduce the future cash flows of these investments. Adding another layer is the level of risk appetite among investors. When the economic outlook is uncertain and interest rate volatility is high, investors are more likely to take risk off their portfolios and demand higher returns for taking on higher risk. This can push down equity and bond prices. On the other hand, if the economic outlook is positive, investors may be willing to take on more risk, in turn potentially boosting equity prices.
Current Investment Returns in Context
Today, financial markets are seeing sharp swings as the ripple effects of higher interest rates are sinking in. For investors, historical data provides insight on long-term asset allocation trends. Over the last century, cycles of high interest rates have come and gone. Both equity and bond investment returns have been resilient for investors who stay the course.
