A decrease in the prices of commodities such as wheat or corn is expected to slow down the increase in food prices for consumers, and ease the pressure on one of the main engines of inflation in the world.
But economists warn that it is still too early to declare victory. Agricultural markets remain volatile, and the continuation of the war in Ukraine combined with an especially hot and dry summer in Europe and parts of the US may cause new disruptions to food supplies.
“We will definitely see a change in prices in the near future,” said Rob Voss, an economist at the International Food Policy Research Institute. “I would be very careful to make big predictions about everything stabilizing and improving, because we are still in a rather complicated situation.”
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Inventory problems caused by the corona epidemic caused food prices to soar last year. The Russian invasion of Ukraine in February this year added additional pressure. These two countries – Russia and Ukraine – were together last year responsible for 28% of the world’s wheat exports and 15% of corn exports. Russia is also a major exporter of fertilizer for agriculture, and Ukraine is the world leader in sunflower oil exports.
The start of the war raised world food prices by 13% in March compared to the month before, according to data from the Food and Agriculture Organization of the United Nations.
Since then, prices have fallen slightly, and in June they were about 3% lower than their level in March, but still more expensive than they were before the start of the war, according to the organization.
Futures markets indicate that prices will continue to fall. Wheat futures are now at about the level they were before February 24, the date the Russian invasion of Ukraine began. Corn prices are at their lowest level so far this year.
A recent agreement between Russia and Ukraine, which allows the export of Ukrainian wheat, may help to cool the prices in the world. After the agreement was signed, Russia attacked two of Ukraine’s most important ports, Odesa and Mykolaiv, which are responsible for the transit of a large part of Ukrainian food exports, and the attacks raised questions about how serious Moscow is in adhering to the agreement.
In some countries there is already an effect on prices
The recent decline in commodity prices has already begun to affect consumer prices in some countries, and economists expect further declines in the coming months.
Colombia’s annual food inflation has fallen from its peak in April, although it remains historically high, government statistics show. In Egypt, food prices fell on a monthly basis in June, the government reported.
In the US, Wingstop Inc, a restaurant chain, announced that it has begun to notice a decrease in chicken prices. “We are benefiting from a significant deflation in wing prices,” said the chain’s CEO, Michael Skipworth, in an earnings call.
Economists at J.P. Morgan are now predicting that global food inflation levels will halve, to about 5.5% or 6% in the fourth quarter of this year, compared to 13% in the second quarter.
In developing markets this change will be significant, where food constitutes a larger part of consumer spending compared to developed countries. Easing inflation in food can lower inflation by 1.5% globally and by 2% in emerging markets, according to JPI Morgan. That could take some of the pressure off central banks, many of which are raising interest rates to fight inflation.
The U.S. may also see food prices fall. Economists focused on agriculture, however, say the impact of any of this on U.S. grocery store prices will be minor. Commodities account for only about 15 percent of the final product price, and labor, transportation, packaging, advertising and profit margins account for the rest, said Jason Lusk, an agricultural economist at Purdue University.
“positive sign”
A drop in commodity prices is “definitely not harmful,” he said. “From the point of view of the consumers, this is a positive sign that we may see some downward pressure or at least a break in the price increase.”
Food prices for US consumers, both in grocery stores and in restaurants, rose 10.4% in June compared to the previous year, the highest increase in more than 40 years, according to Labor Department data. Food inflation was responsible for about 1.4% of general inflation at a height of 9.1% in June, according to data from the Ministry of Employment.
More expensive prices cause some consumers to avoid purchases or switch to cheaper brands. Unilever and Kraft Heinz, two companies that own many food brands, both reported last week that high commodity prices have forced them to raise prices, even though they risk losing customers because of it.
Voss said food commodity prices are falling for the wrong reasons. Rather than indicating an easing of supply constraints, the price declines reflect a stronger dollar and an expectation that demand will decline while global growth is in decline, he said.
Because commodity prices are denominated in U.S. dollars, an increase in the value of the dollar tends to lower commodity prices, to balance out the currency’s higher value, Voss said. At the same time, the Federal Reserve’s rate hikes to fight inflation raised the danger of a global recession, he added.
On Tuesday, the International Monetary Fund lowered its forecast for global growth and raised its inflation forecast, due to continued lockdowns in China, runaway inflation and the war in Ukraine, factors that continue to weigh on the global economy.
“There are some things I see on the horizon right now that tell me we’re not done with high food prices yet,” said Scott Brown, an agricultural research economist at the University of Missouri.
The first among them is the war and the weather. Hot and dry weather in Spain, Italy and parts of the USA will harm rice production next year, according to the US Department of Agriculture, and this may lead to an increase in the price of rice.
The ministry estimates that world wheat and corn production will decrease by 1% and 2.6% respectively next year. Ukraine will experience a 41% drop in wheat production, and its exports will be cut almost in half, according to estimates by the US Department of Agriculture.
“There are just so many uncertainties or unknowns right now that if I were a consumer, I would expect a lot of volatility in food prices for the foreseeable future,” Brown said.