From Farm to Ship to Fork: The Role of Maritime Insurance in Facilitating Global Food Trade

Remote Visualization

Introduction

Developments in agriculture and transportation over the last century have shifted global diets from traditional to staple crops, largely concentrating the source of populations’ nutritional and caloric needs to a limited number of producing countries. Three staple crops—rice, corn, and wheat—now provide more than 40 percent of global caloric intake. The remaining dietary needs of populations are in part met by local markets, but the outsourcing of a significant proportion of food production is now a permanent fixture of food security and nutrition in a globalized agricultural marketplace. More than 80 percent of global trade in staple crops and oilseeds relies on a handful of maritime trade routes that, when disrupted, create a chokehold on food supplies.

Disparate threats to key shipping routes are affecting the flow of food globally, raising concerns over food price increases in vulnerable regions. Russia’s 2022 full-scale invasion of Ukraine is the first conflict between two major agricultural producers in recent history, and its disruptions to Black Sea trade triggered record increases in food prices around the world due to the Black Sea’s importance to food, energy, and fertilizer trade. Since November 2023, the Houthi rebel group’s attacks on commercial vessels in the Red Sea have diverted some Russian, Ukrainian, and European food exports from the Suez Canal to lengthier, more expensive routes around the Cape of Good Hope. These concurrent disruptions have especially affected the flow of Black Sea and European grains to food import–dependent regions particularly vulnerable to price increases.

Breakdowns in agrifood supply chains, including disruptions in maritime shipping, raise transportation costs—thereby raising food prices for consumers and lowering profits for producers in exporting countries. Supporting populations’ access to affordable, diverse diets and ensuring the livelihoods of agricultural producers therefore relies on the confidence of commercial traders to risk shipping through threatened waters.

The maritime insurance industry bolsters this confidence through the provision of hull and cargo insurance to protect traders’ vessels and producers’ goods, respectively. The high-risk environment produced by ongoing security challenges in the Black and Red Seas has complicated the rates and issuance of war risk insurance to the detriment of global food security and agricultural producers. Examining how maritime insurers and affected governments have adapted—or failed to adapt—to these conflicts’ disruptions to trade can inform public and private sector approaches to maritime insurance, vital to ensuring access to the basic building blocks of human health and economic development.

The Black Sea

Prior to Russia’s full-scale invasion, Ukraine was responsible for approximately 10 percent of global wheat exports, 15 percent of global corn and barley exports, and 50 percent of global sunflower oil exports. With more than 90 percent of these products having been exported from Ukraine’s deepwater Black Sea ports prior to the invasion, Russia’s war has forced the development of less efficient, higher cost rail, road, and river trade routes through the European Union’s “solidarity lanes.” Throughout the war, grain and oilseed products have transited by land across Ukraine’s western border through European neighbors as Russia has restricted, and even fully blockaded, exports from Ukraine’s Black Sea ports.

At the same time, Ukraine has managed to export some of its agricultural products through two distinct Black Sea trade routes. The first was the UN-backed Black Sea Grain Initiative (BSGI), which enabled Ukraine to ship 32.9 million metric tons of agricultural products through the Greater Odesa ports from July 2022 until Russia’s withdrawal from the BSGI in July 2023. Russia subsequently intensified attacks on Ukraine’s export infrastructure, damaging 105 port facilities and destroying 280,000 metric tons of stored grain in under two months following the end of the BSGI. The government of Ukraine has since worked to secure a second export route, the Ukrainian corridor, which passes along the western coast of the Black Sea through the territorial waters of NATO member states Romania, Bulgaria, and Turkey. As addressed in previous CSIS analysis, the corridor’s success has seen Ukraine achieve wartime record levels of agricultural exports. This defies widely held expectations that Russia’s withdrawal from the BSGI would precipitate a drastic reduction in Ukraine’s agricultural exports. Supported by the route’s immediate path through NATO territorial waters, the security of agricultural trade through the corridor is due in large part to the success of Ukraine’s air defense in weakening Russia’s naval capabilities in the Black Sea, reducing Russia’s ability to attack Ukraine’s maritime export infrastructure and ships passing through the Greater Odessa ports.

Equally important to Ukraine’s maritime export capacity are the private companies working to insure cargo vessels and Ukraine’s agricultural commodities. Without the security guarantees backing the BSGI, traders were reluctant to risk shipping in sea mine–contaminated Black Sea waters while Russia continued targeting maritime port infrastructure. War risk insurance costs were already prohibitively high, and rose further following a Russian attack on a commercial vessel entering the Greater Odesa ports in November 2023.

Shortly after this attack, Ukrainian prime minister Denys Shmyhal announced the launch of a special mechanism for providing discounted war risk insurance for agricultural product exporters using the Ukrainian corridor. The “Unity Facility” is a multinational public-private partnership among United States- and United Kingdom-based insurance companies Marsh McLennan and Lloyd’s of London with the Ukrainian government (specifically, the Ministry of the Economy, the Export Credit Agency of Ukraine, and Ukrainian state banks Ukreximbank and Ukrgasbank) and Germany’s DZ Bank. Ukrainian state banks extend up to $50 million in hull and separate protection and indemnity war risk insurance to shipowners, and the facility issues cargo insurance with the backing of the Ministry of Economy of Ukraine. Together, this mechanism has more than halved the cost of insurance policies available on the commercial market.

As opposed to the norm of insurance companies independently issuing policies to exporters and shipowners, the Unity Facility’s unique structure involves Ukraine’s state banks offering standby letters of credit to provide first loss compensation to shipowners and charterers. These letters are confirmed by the German DZ Bank and the facility is backed by the Ministry of Economy of Ukraine—thus establishing state-backed assurances for the insurance companies which would otherwise bear the full risks and costs of insuring trade through a war zone. As insurer Marsh McLennan’s president and CEO has stated, the facility mobilizes their “unique expertise to support global food security and stability,” especially benefitting the countries that had come to depend on Ukraine’s agricultural exports prior to the war while supporting Ukraine’s wartime economy and future recovery.

Trade disruptions in the Black Sea due to Russia’s invasion have already shifted Ukraine’s export markets from food import–dependent countries across the Middle East, North Africa, and Asia to the European Union, simultaneously disrupting EU agricultural markets and forcing Ukraine’s previous trade partners to turn to alternative suppliers, including Russia. Maintaining exports of Ukrainian food products to its prewar markets, where food security in countries like Indonesia, Uganda, Yemen, and Kenya is especially vulnerable to increases in food prices and price volatility resulting from transportation cost hikes, necessitates transport through the Suez Canal.

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Figure 1: Percentage of Total Wheat Imports

The Red Sea

According to the International Food Policy Research Institute, 43.5 percent of Ukraine’s maritime wheat shipments from marketing years 2020/21 to 2022/23 relied on this Red Sea route to reach destination markets. The transport of Russian and European grains depends on this route to a lesser, but still significant, extent, with nearly 26.5 percent of Russian wheat exports and 19.2 percent of European wheat exports traveling through the Suez Canal during the same period. Russia, however, reached a deal with the Houthis ensuring that vessels would not be attacked—mitigating risks for some grain shipments traversing the Red Sea and limiting impacts on countries importing from Russia. The Unity Facility has facilitated the flow of Ukrainian agricultural exports through the tumultuous security environment in the Black Sea. However, ensuring the transport of Ukrainian and European agricultural products through the Red Sea requires traders to choose between the conflict-stricken Red Sea route despite high insurance rates—or, in some cases, without insurance at all—or the Cape of Good Hope route, which adds significant costs and delays. As data from the International Monetary Fund PortWatch platform shows below, traders continue to opt for the Cape of Good Hope.

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Figure 2: Daily Volume Trade

From November 2023 onwards, the Houthis have launched around forty attacks on commercial ships sailing across the Gulf of Aden in the Red Sea. The Houthis, an Iranian-backed Yemeni rebel group which considers Israel an enemy, claim that the attacks are retribution for Israel’s military operation in the Gaza Strip, which has now claimed over 34,000 lives. Previous CSIS analysis also shows that the Houthis are leveraging the crisis as a means to attract global attention while distracting from their own domestic failures.

Given their growing geopolitical significance, the Houthis have received considerable support from the Iranian government, including in the form of weaponry, enabling their attacks to grow in sophistication. The Houthis have reportedly been using drones as missiles, crashing them into targets to cause explosions. The rebel group employs fixed-wing drones that have ranges of hundreds of miles, and they often attach explosive payloads for additional destructive power. The Houthis have also shown resilience to military responses from the U.S. and the UK governments: despite several strikes at Houthi military installations, the group has been able to continue carrying out attacks.

The increased risk of attack has caused shipping companies to reconsider transiting the Suez Canal via the Red Sea. Between December 15 and 19, 13 shipping operators announced suspensions of their trips to and from Israel or their voyages transiting the Red Sea. Maersk, for instance, initially reported that a near-miss incident involving a vessel compelled the company to pause passages through the Bab-al Mandab Strait. Maersk subsequently instructed ships to sail around the Cape of Good Hope. When Operation Prosperity Guardian—the United States–led military operation by a multinational coalition to respond to the Houthi-led attacks—was launched, the company briefly chose to reverse course. However, when the operation failed to deter a December 30 attack on another Maersk vessel, the Dutch firm again diverted all Suez-bound ships around the Cape of Good Hope until further notice—increasing shipping time by 30 to 50 percent for trips from Europe to Asia.

The attacks have thus disrupted shipments of grains and other key commodities from Europe and Ukraine. They have contributed to heightened costs of imported products for consumers who depend on these key goods—as well as lower prices paid to producers who are already facing financial challenges. The resulting distortion has exacerbated food insecurity issues in countries dependent on food imports. Countries in East Africa and Central Asia, chief among them Somalia, Ethiopia, and Pakistan, are the most exposed to disruptions.

Issues around insurance policies exacerbate the region’s maritime trade challenges. Absent a solution akin to the Unity Facility mechanism facilitating food trade in the Black Sea, insurance coverage meant to enable passage through the Red Sea will remain unable to adequately address the crisis. Current rate hikes render shipping more financially challenging; in worst case scenarios, some ships’ coverage can be denied altogether—an unsustainable state of play for global food security.

As a result of the Houthi attacks, maritime insurance rates have increased significantly: “we’re insuring on a war basis, both the hull and the cargo,” said Andrew McMellin, managing director of wholesale for Markel International. Experts have estimated that the war insurance premium has multiplied by between five and ten times for vessels and cargo crossing the Red Sea. At the height of the crisis, war risk premium stood at between 0.6 percent and 1.0 percent of the value of the ship—which can easily become enormous sums given that some of the vessel cargo worth can reach around $100 million. These hikes have contributed to heightened commodity prices; however, insurance has also been critical in enabling the ships’ passage in the first place, likely staving off a much more acute food security crisis.

There has been a national angle to risk premiums. The Houthis have specifically stated that they were targeting ships associated with Israel, the United States, or the United Kingdom. Some of their attacks have also impacted ships associated with other Western countries, such as the recent missile barrage against the Greek carrier Laax. Vessels associated with other nations, especially nations which are not considered to be strategically aligned with the three aforementioned states, are more likely to pay better rates given their lessened risk profile. Some ship insurers reportedly have begun to avoid covering U.S. and UK merchant ships against war risks when they navigate the southern Red Sea given their heightened risk profiles. Fortunately, not all insurers pursued that policy, and many ships’ ability to cross the strait depends on price fluctuations rather than coverage denial. Nevertheless, the Red Sea crisis has shown the limits of traditional approaches to maritime shipping insurance in the face of prolonged security problems.

Conclusion

Conflict is just one major driver of pressure on chokepoints in global food trade—climate hazards are another. The El Niño–linked extreme drought affecting water levels in the Panama Canal last year has since given way to a rainy season, but the reduction of trade through the canal due to low water levels harmed the competitiveness of U.S. crop exports by delaying shipments and raising transit costs. Still, the seven-day moving average of vessel crossings remains well below last year’s average as the Panama Canal Authority adapts and recovers from the 2023 drought. Climate change will only continue to exacerbate the extremes of natural climatic functions such as El Niño, producing adverse conditions in the trade routes on which global food security has come to depend.

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Figure 3: Daily Volume Transiting the Panama Canal

Whether they stem from geopolitical tensions or environmental issues related to climate change—both of which may well become increasingly acute in the future—global maritime commerce crises are here to stay. Shipping lanes will remain the theater of supply chain disruptions, which holds profound implications for how businesses and governments should approach global food trade. Ensuring access to sufficient quantities of critical goods, chief among them food exports, is set to be an enduring challenge.

Insurance will therefore also remain a key feature of supporting global food security given growing complexities around securing shipping lanes. However, the extraordinary risks associated with ongoing crises have put the viability of traditional insurance backing at risk—with occasional denials becoming a possibility. Global food trade, however, should not be endangered by inadequate coverage. Ukraine’s example of a successful multinational public-private partnership shows that novel pathways to back up the flow of goods amid severe disruptions could provide more sustainable solutions. A key consideration to ensure food security will therefore be how public and private institutions can further work together to support maritime transport of critical crops through effective insurance mechanisms.

Data visualizations are credited to Joseph Glauber.

Thibault Denamiel is an associate fellow with the Scholl Chair in International Business at the Center for Strategic and International Studies (CSIS) in Washington, D.C. Emma Dodd is a research associate with the Global Food and Water Security Program at CSIS. Joseph Glauber is a senior adviser (non-resident) with the Global Food and Water Security Program at CSIS. William A. Reinsch holds the Scholl Chair in International Business at CSIS. Caitlin Welsh is the director of the Global Food and Water Security Program at CSIS.

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Emma Dodd
Research Associate, Global Food and Water Security Program
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Joseph Glauber
Senior Adviser (Non-Resident), Global Food and Water Security Program
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Caitlin Welsh
Director, Global Food and Water Security Program