FAO food price index fell sharply in July but the respite may not last

Farmers harvest a wheat discipline close to Melitopol in Ukraine. Wheat, soybean, sugar, and corn futures have fallen from their March highs again to costs seen at the begin of 2022.

Olga Maltseva | Afp | Getty Images

Food costs dropped considerably in July from the earlier month, significantly the prices of wheat and vegetable oil, according to the latest figures from the United Nations’ Food and Agriculture Organization.

But the FAO stated that whereas the drop in food costs “from very high levels” is “welcome,” there are doubts over whether or not the excellent news will last.

“Many uncertainties remain, including high fertilizer prices that can impact future production prospects and farmers’ livelihoods, a bleak global economic outlook, and currency movements, all of which pose serious strains for global food security,” FAO chief economist Maximo Torero stated in a press launch.

The FAO food price index, which tracks the month-to-month change in the international costs of a basket of food commodities, fell 8.6% in July from the month earlier than. In June, the index fell simply 2.3% month on month.

However, the index in July was nonetheless 13.1% greater than July 2021.

Prices in the brief time period may fall additional, if futures are something to go by. Wheat, soybean, sugar, and corn futures have fallen from their March highs again to costs seen at the begin of 2022.

For instance, the wheat contracts closed at $775.75 per bushel on Friday, down from a 12-year excessive of $1,294 in March, and round the $758 price set in January.

Why costs fell

Analysts cited a mixture of each demand and provide causes for the slide in food costs: Ukraine and Russia’s carefully watched settlement to renew exports of grain via the Black Sea after months of blockade; better-than-expected crop harvests; a world financial slowdown; and the sturdy U.S. greenback.

Rob Vos, the director of markets, commerce and establishments at the International Food Policy Research Institute, pointed to the information that the United States and Australia are set to ship bumper wheat harvests this year, which can enhance provide since cargo from Ukraine and Russia have been curtailed.

The greater U.S. greenback additionally lowers the price of staples, since commodities are priced in U.S. {dollars}, Vos stated. Traders are likely to ask for decrease nominal greenback costs of commodities when the dollar is dear.

Skepticism over Ukraine-Russia deal

Even with the existing agreement, arable Ukrainian land may continue to be destroyed “for as long as the war continues,” which will result in even less crop yield next year, Carlos Mera, the head of agri commodities market research at Rabobank, told CNBC’s “Street Signs Europe” last week.

“Once this [grain] corridor is over, we might see even more price increases going forward,” Mera said. Consumers could also see further price increases as there is normally a lag of three to nine months before a movement in commodity prices is reflected on supermarket shelves.

Then there is the pressure of exporting enough grain as quickly as possible from a war zone.

“It’s time that we’re working again. I don’t see us exporting two [to] five million tons per month out of these Black Sea ports,” John Rich, the executive chairman of Ukrainian poultry giant Myronivsky Hliboproduct (MHP), told CNBC’s “Capital Connection” on Monday.

“Hungry people, at the end of the day, get hungry very quickly after a week.”

In a note published earlier this month, credit rating agency Fitch Ratings’ analysts wrote {that a} attainable enhance in fertilizer costs, which fell just lately — but that are nonetheless double that of 2020 — may trigger grain costs to leap once more.

Russia’s restriction of gasoline provide has led European pure gasoline costs to spike. Natural gasoline is a key ingredient in nitrogen-based fertilizers. La Nina climate patterns may disrupt grain harvests later this year as nicely, they added.

And the fall in food costs is not all excellent news. Part of the purpose why staples have turn into cheaper is that merchants and buyers are pricing in recessionary fears, the analysts stated.

The international manufacturing buying managers’ index has been in decline, whereas the U.S. Federal Reserve appears bent on elevating rates of interest to curb inflation even when it triggers a recession, the Fitch group wrote.

Food staples

Cereal costs, beneath which wheat falls, fell by 11.5% month on month, the FAO index confirmed. Prices of wheat particularly fell by 14.5%, partly due to the response to the Russia-Ukraine grain deal, and higher harvests in the Northern Hemisphere, the FAO stated.

Vegetable oil costs fell by 19.2% month on month — a 10-month low — in half due to ample palm oil exports from Indonesia, decrease crude oil costs, and lack of demand for sunflower oil.

Sugar costs dipped by 3.8% to a five-month low in mild of shrinking demand, a weaker Brazilian actual in opposition to the dollar, and elevated provide from Brazil and India.

Dairy and meat costs dropped by 2.5% and 0.5% respectively.

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