The four Ws driving food insecurity: War, weather, waste, and water

[Music]

Tracey Allen: Globally, around 282 million people experienced high levels of acute hunger in 2023, an increase of 24 million from 2022. What are the structural factors driving food insecurity, and what are the implications for markets? Welcome to Research Recap, on J.P. Morgan's Making Sense podcast channel. I'm Tracey Allen, Head of Agricultural Commodities Strategy at J.P. Morgan, and today, I'm really pleased to be joined by my colleague, Joyce Chang, the chair of global research at J.P. Morgan. I feel a little funny calling you my colleague, Joyce, of course, because you were my first boss when I joined J.P. Morgan, and you've always been so supportive of our agricultural research effort here, and of course our emerging markets output as well, amongst the commodities work. And we're here together to talk about and explore the global state of food security in light of World Food Security Day on October 16th, and, and particularly this year's theme of shining the light on the right to food for better life and for better future. Joyce, thank you so much for joining us.

Joyce Chang: Oh, thank you so much, Tracey, for having me to talk about this important topic. I'm happy to be here to really put the spotlight on this critical issue.

Tracey Allen: So Joyce, could you start off today by giving us the big picture, please? Just how prevalent is food security on the global level, and has the problem worsened in recent years?

Joyce Chang: So, unfortunately, Tracey, food insecurity has become the new normal, and you have a whole confluence of factors, climate change, biodiversity loss, that are pointing to recurring crises. On top of that, you have geopolitics, which are further compounding supply-side risk. While we have agricultural commodity inventories that are low, which I know you're going to address later and in this conversation. So what we saw was this increase in global hunger, which peaked during the pandemic, but progress on addressing this issue has stalled for the third consecutive year. So when we look at the proportion of the world that's facing hunger, which is measured by the prevalence of undernutrition, it's around a little over 9%, so that's 152 million more people facing hunger in 2023 compared to 2019, before the pandemic. The estimates are that over 2.8 billion people are unable to afford a healthy diet. We have some trends in the regions that are highly divergent, though. So, global progress has stalled, but we've seen the regional disparities have increased. And the increase in hunger in Africa is a dramatic outlier. Africa is projected to account for more than half of the projected 582 million people who are chronically undernourished at the end of this decade. By comparison, hunger has actually been on the decline at the margin in Latin America and the Caribbean, and it's remained unchanged in Asia during the same time period. But we have other factors that are contributing to some of the challenges, including food stockpiling, with producer and importer countries leaning on accumulated food reserves. There are still 20 countries that maintain some form of food export policy restrictions, through bans or limits, while fertilizer export restrictions continue to impact more than 40% of global trade we're seeing in nitrogenous and phosphate exports. So when we take this and look at the global annual financing needs, it's as high as $500 billion from now until the end of the decade. And that's just to establish safety nets, but you have, also, these indirect effects as well that need to be factored in. And we see some disparities when it comes to gender, and also disparities when it comes to children. So taking a look at this, food security is more prevalent among adult women than men in every region of the world. Worldwide, women are 1.3% more likely to be moderately or severely food insecure than men, and when we take a look at the impact on children, more than 22% of children under the age of five suffer from stunted growth. This is just such a complex issue right now. When we look at the overall financing needs, you can come up with numbers that could really collectively come up to $500 billion annually.

Tracey Allen: Thanks, Joyce, and you've written about some of the structural factors driving food security in some of your recent perspectives, and you've referred to the four Ws there, war, weather, waste, and water. Let's begin with the first. How are the ongoing wars exacerbating global food insecurity?

Joyce Chang: Yeah, we are calling them the four Ws, and they are really structural in nature. But we think this contributes to the severe food insecurity that we are seeing in nearly 30% of the global population, so let's start with the first W, war. Conflict and violence are primary causes of hunger, and affect nearly half of those suffering from acute hunger. The weaponization of food has become more prevalent with two wars that are raging, and the geopolitical risks are not going away. Armed conflicts are a major driver of food insecurity, with the weaponization of food widespread in Ukraine, Gaza, Haiti, and Sudan. Now, Gaza is particularly tragic as we look at events in the Middle East. The World Food Program estimates that 96% of the population in Gaza faces acute food insecurity. So that's an extraordinary number. That's 2.15 million of the 2.2 million total population at a crisis level for hunger. If you take a look at Russia and Ukraine, they provide more than a quarter of the global wheat supply, and Russia is the world's largest wheat exporter, has the largest share of exports of fertilizer inputs as well. And since the onset of the war, Russia has imposed export restrictions, they've ended the UN-based Black Sea Grain Initiative, and they have bombed some of Ukraine's grainaries as well.

Tracey Allen: That's really interesting, Joyce, and of course, weather plays a key role too, with record-high temperatures, droughts, and flooding in parts of the world adversely impacting food security. Can you talk to us a bit more about that?

Joyce Chang: Extreme weather conditions, including record-high temperatures, droughts, and flooding, are having a very adverse impact on food security. Food insecurity and climate change amounts to the makings of a perfect storm. Climate change disproportionately affects the rural poor, their agricultural yields and productivity, and contributes to increasing pests, diseases, and changes in the nutrient composition of major staple crops. The world's smallest farmers actually produce around 1/3 of the world's food, so this is a big problem. You've had Russia's unilateral exit from the Black Sea Grain Initiative. You've had drought across the Black Sea Breadbasket, and that's dampened production and export prospects of grains, and we see that the world's exportable inventories of corn and wheat outside of the US are at critical lows, which is something that you've written about extensively, Tracey. So, with the ongoing war, drought is also now weighing on Ukrainian corn production, and we're looking at seven-season lows on the production numbers. But let's just turn to El Nino, which peaked earlier this year, but has put climate adaptation into focus. Latin America is probably the most sensitive to weather-related shortfalls, and so they're actually getting a little bit of relief since this peaked earlier in the year. But the effects of El Nino are varied, and includes flooding and poor rains in parts of East Africa and drought in Southern Africa. So, looking at the Horn of Africa, it is really still suffering immensely from the effects of the 2021-2023 drought season that was followed by floods in the second half of last year, and there are estimates that this recovery could take as much as five to 10 years for many who lost between 80 to 100% of their livelihood because of the weather problems. Somalia has been the hardest hit, with over four million Somalis who were pushed into acute hunger. And so if you take a look at Somalia, one in five has no access to adequate food. In 2023, Somalia experienced five consecutive fail rain seasons followed by extreme flooding, and that left nearly seven million people in need with three million people displaced. And at the same time, when we look at humanitarian funding for Somalia, we saw a 50% reduction in funding between 2021 and 2023 as they've grappled with this crisis. But let me just say, Tracey, that it's not just an emerging markets issue. The US has experienced, and we're seeing that right now with all of the hurricane and flooding warnings that are going on in North Carolina and in Florida. But we've seen in the US, 340 weather and climate disasters, with damages that have been, for each one, over $1 billion since 1980, so if you take a look at this collectively, we're talking about $2 trillion, so it's not just limited to emerging markets.

Tracey Allen: No, certainly very much widespread and, and a growing risk globally. Joyce, we do need to talk about the problem of food waste, and in fact, it's estimated that around 1/3 of the world's food production is lost or wasted annually, at a cost of around $1 trillion, plus the emissions cost around that as well. How does that contribute to global food insecurity?

Joyce Chang: Thanks for that question, Tracey. Let's go to the third W, waste, and this is, in many ways, what I see as one of the most egregious and regrettable threats to food security. So, 1/3 of all food produced, or 24% of the world's food supply, is lost or wasted. We have, 40% of food that's grown that goes uneaten and around 30 to 40% of the food produced in Africa that is lost before it even reaches consumers. And that's due to poor infrastructure, logistical operations that are not reliable. It includes inadequate storage and inadequate distribution systems. And we are really seeing the consequences of this. There's an estimated more than 600 million people who fall ill and 420,000 who die every year as a result of eating food that's contaminated with bacteria, viruses, parasites, toxins, and chemicals. So there's really a great need to adopt and advance technology that uses less water, land, and fertilizer to ensure a more sustainable agricultural supply chain. And so, what we do see, is that the food production contributes to as much as 1/3 of global greenhouse gas emissions. So that's a cost of about $1 trillion annually on top of just the waste that we're seeing.

Tracey Allen: And Joyce, water is a critical piece of the puzzle here. There's an old adage across agricultural markets, "There's more money in mud than dust." Securing sufficient and suitable water resources for agriculture and using that in a very efficient manner is really key to advancing food security. What's happening on this front, and could you expand a little on this for us, please?

Joyce Chang: So let's get to the final W. Water is directly tied to biodiversity loss and water scarcity. There are around 600 million people who depend at least partially on aquatic food systems for a living. Water scarcity exacerbates insecure food supply, as half of the world's GDP depends on natural capital and its services. When we take a look at this whole issue of biodiversity loss, the wetlands, which are the most biologically diverse of all ecosystems, are disappearing three times faster than forests, and 85% have been lost over the last 300 years. We estimate that about four billion people live in water-stressed countries for at least one month of the year, so securing sufficient water resources for agriculture in an efficient manner is really a key challenge that needs to be met to advance food security. With four billion people around the world living in water-scarce areas, we have one in four cities experiences water insecurity. And one very interesting study that I point to is the World Wildlife Foundation published the first ever annual estimates of the economic value of water and freshwater ecosystems, and as an estimate, it's 60% of global GDP, or $58 trillion. What this report really looks at is direct economic benefits, that's water consumption for households, there's irrigated agriculture, and industries, but then there's also the indirect benefits from water that you need to look at, purifying water, enhancing soil health, storing carbon, and protecting communities from extreme floods and droughts. And that's a number that's seven times higher. This is how we get to a cumulative number that's $58 trillion. So, this is really coming into focus as we see that biodiversity loss is the next challenge after climate change that markets are really grappling with right now. But, Tracey, I wanna talk to you, because as I mentioned there are all the four Ws that we've talked about, but then when we turn to the agricultural commodities sector we're seeing the low inventories. So let's talk about the implications for market. How are these extreme weather conditions impacting agricultural commodity prices, inventories, production, markets, and exports, and affecting the food security dilemma that we're facing?

Tracey Allen: Well, it's a really complex one, Joyce, because food security intersects with agricultural commodity markets typically when food prices rise, and when the purchasing power of world food aid starts to diminish. The reality, however, as you've been pointing out here, is that food insecurity persists regardless of agricultural market conditions, and very often, food insecurity's very much influenced by regional conflict. And as you pointed out, the global availability of agri commodities is currently low, relative to historical norms certainly, but there is sufficient food in the world, and it's just not getting to the right places, for many and varied reasons as you've discussed. There are a lot of local initiatives trying to accelerate the agri food systems, particularly in parts of Africa, and they're very important here in improving supply and the affordable supply of diverse, and nutritious, and safe foods. But in terms of the longer outlook across the agricultural commodities complex, I am convinced that farmers, the agri industry and supply chains, the trade houses are very well placed to keep pace with demand and to manage at least three of your four Ws, weather, waste, and water. But this is not without risk, and they certainly need to be incentivized to do so. As you've discussed, the immense challenges around rapid and ever-threatening weather season after season, water insecurity. There are immense risks for producers in this space, and there needs to be an incentive to continue to invest in yield and productivity improvements. Interestingly, grain prices have very recently dipped to four-year lows, and as you've just discussed, my analysis is pointing to multi-decadal lows in global grain availability. So, the two there are somewhat disconnected, and I think there are big problems there. But nonetheless, when producers do receive those price signals, we do typically see quite strong responses in yield and supply. But Joyce, my main concern of your Ws is really the conflict, is the war element and geopolitical instability in our current fragmented world. I think it is a major underpriced risk for agricultural commodities, and it not only impacts agricultural supply as you noted, but also production cost. You alluded to implications on fertilizer supply chains, and particularly at the moment, with the situation in Ukraine unfolding and constant bombardment there of grain export facilities, we've seen Ukrainian export potential of grains really halve to prewar levels, and this is a primary origin for the FAO's wheat that is sourced for global food aid, and it is a major problem that the infrastructure, and merchant vessels are now being targeted there. So look, productive agri- arable land is not being farmed, and the market hasn't been able to really find a replacement for the lost productive capacity in Ukraine, which was really the fastest-growing agricultural exporter ahead of the conflict. Markets are really just starting to feel the pinch  of the declining, certainly wheat and corn stocks, and exports out of Ukraine, and as we discussed, there is immense concern for drought also across Russia currently, and also much of South America. I think the longer-term solution here has to be one of sustainable prices, and certainly production margins for farmers, to enable them to invest in adequate inputs to really shore up the supply chain and boost yield potential to ensure that agricultural output continues to grow here, Joyce.

Joyce Chang: Well, thank you so much for that, Tracey. I mean, it's a lot of food for thought. I just wanted to thank you, Tracey, for partnering with me to put a spotlight on this issue on World Food Day, as we really explore the global state of food security in light of the geopolitical risk and some of the supply-side shocks, and climate change dilemmas that are facing our ability to address global hunger.

Tracey Allen: And thank you so much, Joyce, for joining us today on this episode of Research Recap. We look forward to continuing the conversation.

Voiceover: Thanks for listening to Research Recap. If you've enjoyed this conversation, we hope you'll review, rate, and subscribe to J.P. Morgan's Making Sense to stay on top of the latest industry news and trends, available on Apple Podcasts, Spotify, Google Podcasts, and YouTube. This communication is provided for information purposes only. For important information, including disclosures, please visit www.jpmm.com/research/disclosures for important disclosures. Copyright 2024, JPMorganChase & Co. All rights reserved.

[End of episode]