Falling prices for commodities such as wheat or corn should slow the rise in consumer food prices and ease pressure on a key driver of global inflation.
However, economists warn that it is too early to announce victory. Agricultural markets remain volatile and the ongoing war in Ukraine, combined with unusually hot and dry weather in Europe and parts of the US, could lead to fresh food supply disruptions.
“We will certainly see price adjustments in the short term,” said Rob Vos, an economist at the International Food Policy Research Institute. “I would be very cautious about making big predictions that things are stabilizing and getting better because we’re still in quite a difficult and tense situation.”
Supply problems caused by the Covid-19 pandemic caused food prices to skyrocket last year. Russia’s invasion of Ukraine in February this year added additional pressure. The two countries combined accounted for 28% of global wheat exports and 15% of corn exports last year. Russia is also a major exporter of agricultural fertilizers, and Ukraine is a world leader in sunflower oil exports.
The outbreak of war pushed global food prices up 13% month-on-month in March, according to the United Nations Food and Agriculture Organization.
Since then, prices have fallen slightly and in June were about 3% below March levels, although according to the FAO they are still higher than before the war began.
The futures markets are pointing to continued price declines. Wheat futures prices are now about where they were before Feb. 24, when Russia began invading Ukraine. Corn prices are at their lowest level so far this year.
A recent deal between Russia and Ukraine allowing the export of Ukrainian wheat could help cool global prices. After the deal was signed, Russia attacked two of Ukraine’s largest ports, Odessa and Mykolaiv, which handle much of the country’s food exports, raising doubts about Russia’s compliance with the deal.
While the war in Ukraine has upended global grain supplies, a WSJ investigation reveals how Russia has quietly institutionalized the theft of hundreds of thousands of tons of grain from newly occupied Ukraine and into Russia’s allied countries in the Middle East. Photo illustration: Adele Morgan
The recent fall in commodity prices is already reflected in consumer prices in some countries, and economists expect further weakening in the coming months.
Annual food inflation in Colombia has moderated from its peak in April, although it remains at historically high levels, according to government statistics. In Egypt, food prices fell monthly in June, the government reported.
In the US, restaurant chain Wingstop Inc. said it had begun to see chicken prices falling. “We are benefiting from significant bonewing deflation,” Chief Executive Officer Michael Skipworth said in an earnings call.
JP Morgan economists are now forecasting global food inflation rates to fall by half to about 5.5% or 6% in the fourth quarter of this year from about 13% in the second quarter.
That would make a big difference in emerging markets, where groceries account for a larger share of consumer spending than in developed markets. A cut in food inflation could cut global inflation by 1.5 percentage points and 2 percentage points in emerging markets, JP Morgan estimates. That could take some pressure off central banks, many of which have been raising interest rates in a bid to control inflation.
The ship Navi-Star, full of grain since the Russian invasion five months ago, waits in Odessa, Ukraine on Friday.
Photo: David Goldman/Associated Press
Food prices could also be moderate in the USA. However, agricultural economists say the effect may be muted in US grocery stores. Raw materials contribute only about 15% of retail grocery costs, while labor, shipping, packaging, advertising and profit margins contribute the rest, said Jayson Lusk, an agricultural economist at Purdue University.
Lower commodity prices “certainly can’t hurt,” he said. “From a consumer perspective, it’s a positive sign that we may see some downward pressure, or at least a reduction in surge.”
According to the Department of Labor, U.S. consumer food prices at both grocery stores and restaurants rose 10.4% year over year in June, the highest in more than four decades. Food inflation accounted for about 1.4 percentage points of headline inflation of 9.1% in June, according to the Labor Department.
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Higher prices are causing some consumers to back out or switch to cheaper brands. Unilever PLC and Kraft Heinz Co., which own many big food brands, both reported last week that higher raw material costs had forced them to raise prices, although it meant losing some customers.
Mr Vos said food prices are falling for the wrong reasons. Rather than signaling an easing of supply constraints, the price declines reflect dollar strength and expectations that demand will fall as global growth slows, he said.
Because commodities are valued in US dollars, an appreciation in the dollar’s value tends to depress the price of commodities to offset the more expensive currency, Mr Vos said. At the same time, interest rate hikes by central banks to curb inflation have increased the risk of a global recession, he said.
On Tuesday, the International Monetary Fund cut its forecast for global growth and raised it for inflation as China’s Covid-19 lockdowns, rampant inflation and the war in Ukraine continue to weigh on the global economy.
One of the worst droughts in Italy in decades is visible in a dry paddy field near Novara in the north of the country.
Photo: Piero Cruciatti/Agence France-Presse/Getty Images
“There are some things that are emerging to me that say we may not be done with higher food prices,” said Scott Brown, an agricultural economist at the University of Missouri.
These include above all war and weather. Hot and dry weather in Spain, Italy and parts of the US will reduce rice production next year, the US Department of Agriculture estimates, which could push up rice prices.
The agency says global wheat and corn production will fall by 1% and 2.6%, respectively, next year. According to the USDA, Ukraine’s wheat production will fall by 41% and its exports by almost half.
“Right now there is just so much uncertainty or unknown that as a consumer I would expect a lot of volatility in food prices,” Mr. Brown said.
write to David Harrison at [email protected]
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