As the rate of food price inflation declines in the United States and Europe, analysts are warning of a new era of volatility in global food prices, ushered in by a series of threats that are compounding the already feasible way.
A combination of disasters — extreme weather, Russia’s targeting of grain supplies to Ukraine and the growing willingness of some countries to erect protectionist barriers to food trade — has left supplies of food that is weaker and less ready to absorb any disruption, analysts say.
“This is the new normal now, with more volatility and unpredictability, whether that’s in commodity prices or food prices,” said Dennis Voznesenski, a commodities analyst at Rabobank in Sydney, Australia.
Even without major delays, food prices can fluctuate, and many factors play into the price of a bushel of wheat or bread.
Last month, Russia pulled out of the Black Sea grain deal that allowed Ukrainian farm exports by sea. The United Nations food price index rose in July, interrupting its months-long downward trend due to a rise in vegetable oil prices, driven in part by concerns over shortages of sunflower seeds. of Ukrainian.
Drought in India, Indonesia and other Asian food exporters has led to smaller harvests. Faced with consumer anger at higher prices, governments have banned exports of critical foodstuffs, causing further disruption. Since late June, the price of an Asian benchmark for rice has jumped 25 percent, according to Thai Rice Exporters Association.
Other factors are pushing up prices on supermarket shelves, including higher labor costs as workers try to keep up with inflation. And food producers find that in an environment of rising prices, they can raise them higher to increase their profits.
Compared to early 2020, consumer food prices rose by about 30 percent in Europe and 23 percent in the United States.
Interruptions had a disproportionate negative impact to small farmers and people living in low-income countries, while leaving the world vulnerable to future turmoil. Last year, more than 700 million people faced hunger and 2.4 billion people lacked year-round access to adequate and nutritious food, according to the United Nations.
“The accumulation of recent shocks over the past few years has put countries in a very, very bad situation,” said Maximo Torero, the chief economist of the United Nations’ Food and Agriculture Organization. “If another shock comes now, I honestly don’t know how they’ll handle it.”
Extreme weather
This year, bad weather has been the main disruptor to food prices, said Hiral Patel, the head of sustainable and thematic research at Barclays in London.
Heat waves broke records in China, wildfires broke out in southern Europe and North Africa, and July is the hottest month in the world recorded.
In Pakistan, where major floods in 2022 washed away most of the country’s crops, the annual rate of food price inflation reached nearly 49 percent in May, according to World Food Program of the United Nations.
Forecasters warn that the world may be entering a multiyear period of exceptional heat brought on by greenhouse gas emissions and the return of El Niño, a cyclical weather pattern.
“There is a higher chance of simultaneous crop loss in different parts of the world,” said Ms. Patel.
The forecast for crop yields in Europeincluding soft wheat and spring barley, was recently revised lower by the European Commission due to “drier than normal conditions” in large parts of the continent.
Reducing food production in a region for a year is usually insignificant in a flexible and dynamic market, said Joseph Glauber, a senior research fellow at the International Food Policy Research Institute. The issue arises when crops have been removed for several years running in many markets – for example, from drought.
“Those could create more volatility in the future – this is one of the uncertainties about climate change,” Mr. Glauber said. Continued drought “could lead to regional shortages and, in poorer countries unable to afford higher prices, food security issues.”
War in Ukraine
Last month, when Russian President Vladimir V. Putin let the Black Sea grain deal expire and then his military attacked grain storage in Ukraine, wheat prices rose, which in turn boosted corn prices and soybeans. Pierre-Olivier Gourinchas, the chief economist of the International Monetary Fund, estimated recently that the end of the deal could lead to an increase in grain prices by 10 to 15 percent.
While that was a significant jump, it was smaller than the sudden increase in prices in the first weeks of the war.
That’s because farmers in Ukraine are growing less now. Ukraine has also increased its ability to export grain by rail and river, but these alternative routes are more expensive, Rabobank’s Mr. Voznesenski said. And these routes are not immune from attacks or bad weather, including drought.
“You can never tell what Putin will do tomorrow,” Mr. Voznesenski said. “You never know when a government is going to put an export restriction in place.” Increased intervention in the food supply by governments “will create more unpredictability,” he added.
Trade protectionism
Fluctuations in food prices have prompted some governments to turn to trade restrictions to keep essential food stores close to home.
Last month, India, the world’s largest rice supplier, issued an export ban on non-basmati white rice. India imposed a 20 percent export duty on that rice last year, but exports have continued to rise due to geopolitical issues and extreme climate conditions in other countries, the Indian government said. . On Friday, the UN Food and Agriculture Organization reported that rice price in July was up nearly 20 percent from a year ago, pushing its rice price index to a 12-year high.
India is not alone in taking such steps. Overall, the number of curbs or tax increases on food exports jumped 62 percent from last year, according to Global Trade Alert, a Switzerland-based nonprofit. Worldwide, 176 export curbs apply to food, feed or fertilizer.
Economists and trade experts warn against these types of policies. While they may protect local consumers from food inflation in the near term, they ultimately compound the kinds of global food shortages that governments are trying to reduce.
At a recent food security summit hosted by the United Nations in Rome, Ngozi Okonjo-Iweala, the director general of the World Trade Organization, urged countries to reject protectionism and turn to more open trade as a way to address food shortages.
For many countries, the problem is exacerbated by the weak value of their currencies compared to the US dollar, leaving them unable to buy as many dollar-denominated goods as they used to.
Invisible costs
As food producers deal with more supply risks, the associated costs also increase. Much of the cost of the food we eat at home comes from transportation and other costs faced by food companies — not just from the commodity cost of growing wheat or sugar. And some of the non-agricultural costs are also rising.
Companies are forced to shell out money for insurance policies to deal with harsh weather and invest in new suppliers to make their business more stable.
The ongoing drought has lowered water levels along key shipping routes, including the Panama Canal and the Rhine River in Europe, requiring shippers to lighten their loads or find other routes.
And then there is the cost of sustainability efforts as countries seek to reach net-zero-emissions targets. Overall, the risks are that food prices will remain high or rise even faster.
“There is a set of new external shocks,” said Ms. Patel of Barclays. “The range of factors makes it harder to predict how volatile it will be.”