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Food inflation: Sticky or not?

Global food prices have risen by around 65% since the beginning of the pandemic.

Inflation has, understandably, been the most talked about topic in financial circles due to its effect, via corporate profits and policy actions, on stock and portfolio returns. The largest contributor to the rise in prices is undoubtedly energy, in particular oil and gas prices, as these filter through to every part of the economy. However, today we will be talking broadly about food inflation and whether it is likely to remain elevated.

Global food prices have risen by around 65% since the beginning of the pandemic for a variety of reasons, including:

1. Post-Covid recovery

When the pandemic started, food prices were hit hard as demand fell off a cliff. However, as global economic growth and demand recovered, commodity prices were boosted. Couple this with the fact that supply chains were also disrupted (and still are to a large extent) and it is no surprise that food prices have trended higher.

2. Freight costs

Freight costs have risen dramatically due to logistical disruptions and restrictions brought about by Covid. On top of this, fuel prices have also jumped, which has only added to the already elevated freight costs.

3. Fertiliser prices

This factor cannot be understated as it has played a big role in the rise of food prices globally. The increase can be attributed to both supply- and demand-side factors. On the supply side, we have a significant rise in gas prices (a key ingredient in the production of nitrogen fertilisers) as well as the above-mentioned jump in freight costs. Additionally, Russia produces 9% of global nitrogen fertiliser, 10% of global phosphate fertiliser, and 20% of global potash fertiliser. Thus, the ongoing war has essentially taken this offline. Looking at demand, farmers have been incentivised to apply more fertiliser per acre due to the rise in crop prices. As can be seen below, these factors have caused a sharp rise in fertiliser prices, which in turn increases the cost of growing crops and filters down into end-products.

Chart: Green Markets Weekly North America Fertiliser Price Index

Source: Green Markets, FertilizerPricing.com © Bloomberg L.P.

4. Energy prices

As we all know, energy prices have soared due to fundamental supply issues as well as the sanctions that Western nations have put on Russian oil and gas. This has further exacerbated the problem with food prices by increasing production and transportation costs triggered by the pandemic.

5. The war in Ukraine

Russia and Ukraine are very important to the global food market because they are major exporters of wheat, accounting for around 30% of global exports. Due to the war, the world is now facing a wheat shortage, which has resulted in prices rising dramatically. This makes it more expensive to process key ingredients, such as flour and starch, which causes food producers to increase prices for end-products. Ukraine also accounts for over 25% of the world’s sunflower seed production (the ingredient for sunflower oil), and thus prices for this have also risen sharply. The war has also had secondary effects on the price of food by increasing energy, fuel, and fertiliser costs.

To begin our discussion, it is worth looking at the prices of key food commodities: wheat, corn, and soybean.

As you can see from the above chart, while prices are still elevated, they have recently decreased off recent highs. The drop in soybean futures can be attributed to weaker demand, as the latest data shows that China, the world’s largest soybean buyer, imported 23% less than a year ago in June. Weather models have also predicted stronger rains in parts of the US, which should bolster soybean yields and increase supply.

Looking at corn, prices have also been helped by improving conditions on the supply side, which have eased concerns over global supply shortages. Helping alleviate the pressure on the price of wheat has been the removal of some key export bans, including the deal signed by Russia and Ukraine to allow the latter to resume grain exports. The deal would allow Ukraine to sell over 20 million tonnes of grain reported to be accumulated in port silos since the war started. Ukraine is a large player in the global grain and oilseed export markets, which are key inputs to many food supply chains. Thus, if Russia sticks to the deal, much needed relief would be provided for importing countries globally.

Despite the recent drop in key commodity prices, there are still a lot of factors holding up food prices. The two biggest factors would have to be the war in Ukraine and energy prices. Antonio Guterres, the UN Secretary-General, recently stated that we are unlikely to resolve the problems with global food security until Ukraine’s agricultural production and Russian food and fertiliser production are brought back online.

As we have seen, fertiliser prices are still at very elevated levels, which raises the cost for farmers. On top of this, with no clear end to the war in sight there are growing fears that Ukraine will not be able to sow crops later this year, which will weigh on the production of global wheat, sunflower, barley, and more. Additionally, most of the factors that caused food inflation (stated above) are still ongoing with no clear end in sight. Energy prices remain elevated, supply chain issues are not resolved (especially when looking at China), and the war is still ongoing.

With all this in mind, it is hard to say whether food prices will come down, as it depends on many factors that are simply out of our control. While there have been some positive developments, we will need to continuously monitor the above factors to get a better understanding of the longer-term implications.

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Mauro Forlin

Global & Local Asset Management

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