‘Flying with one engine’: why global food supplies are at risk despite falling crop prices

‘Flying with one engine’: why world meals provides are in danger regardless of falling crop costs

Fertilizer and crop costs have fallen sharply since their peak after final yr’s Russian assault on Ukraine. Nonetheless, agricultural specialists and analysts have warned that world meals provides are nonetheless in danger.

Meals costs had been already elevated earlier than Russia’s large-scale invasion of Ukraine early final yr attributable to drought and hoarding by governments and companies within the wake of the coronavirus pandemic. Then, crop nutrient costs surged attributable to Moscow’s standing because the world’s largest fertilizer exporter, whereas a spike in pure gasoline costs, a essential element of nitrogen fertilizers, additionally put strain on agricultural markets.

Final yr’s Black Sea grain deal between Moscow and Kyiv performed a key function in suppressing costs, together with considerable provides from Russia, whereas decrease pure gasoline costs calmed fertilizer markets. However analysts warn the grain deal may collapse, whereas fluctuating power costs and local weather change additionally threaten crop manufacturing.

“It is like flying with one engine,” stated John Baffes, the World Financial institution’s chief agricultural economist. “So long as the engine is operating, it is fantastic, but when the engine stops, you are in bother. . . If any of [these risks] materialize, we’ll see and [rise in prices] very, in a short time.”

The two-axis chart shows how internationally traded food prices have steadily declined

Probably the most quick hazard is the UN-backed grain deal, attributable to be renewed in March. Any non-extension would block Ukrainian grain exports, shipments prices skyrocket once more.

Whereas many crops, together with meals fertilizers, are exempt from sanctions imposed on Russia by Ukraine’s allies, many banks, insurance coverage corporations and logistics teams have been reluctant to deal with their farmers’ produce. Russian and European officials. Geopolitical tensions may disrupt provides.

Local weather is one other risk. Final yr’s document temperatures in Europe and different elements of the world occurred regardless of the La Niña climate phenomenon. La Niña includes the cooling of the floor of the Pacific Ocean. After three straight years of La Niña situations, many meteorologists had been warning about them increasing odds the other – the El Niño phenomenon, which has a warming impact – that occurred this yr.

The shift from La Niña to El Niño is “prone to result in world temperatures in 2023 being hotter than 2022”, the UK’s Met Workplace warned late final yr.

Line chart of the CRU Fertilizer Price Index (January 2006=100) showing international fertilizer prices falling

Regionally, El Niño situations have beforehand precipitated drought in South and Southeast Asia and Australia and flooding in Latin America, together with Brazil and Argentina.

“We have had three sturdy La Niñas in a row, which in itself is unprecedented. However a possible El Niño subsequent quarter. . . it might probably wreak havoc on climate all over the world,” stated Kona Haque, head of analysis at commodities dealer EDF Man. “Tropical growing international locations have the potential to be most affected, with Asia turning into drier beneath El Niño situations, whereas South America might expertise extra rainfall.”

Comparatively low grain shares added to analysts’ issues about world meals provides.

Illustrative for wheat is the stock-to-use ratio, a measure utilized by grain market members and agricultural economists to evaluate commodity availability. It exhibits projected year-end shares in June are forecast at 58 days, the bottom degree since 2008, when worldwide meals costs surged following drought and better world power costs.

“Given the low world inventory state of affairs, costs will stay risky and will rise sharply if drought or extreme climate happens this spring,” stated Joseph Glauber, senior analysis fellow at meals safety suppose tank IFPRI and former chief economist on the US Division of Agriculture.

Bar chart of stock-to-use ratio excluding China (days of use) showing available wheat stocks are low

Forex actions are additionally vital for meals provides in lots of growing international locations. Regardless of the current decline in meals costs on worldwide markets, the energy of the greenback may maintain prices excessive in native currencies.

Because of this shopper meals inflation is prone to persist for a number of quarters attributable to a lag of a few yr earlier than internationally traded costs work their manner into retail provide chains.

“Meals inflation as measured by the Shopper Worth Index of Meals stays in double digits in most areas of the world. I count on the meals CPI to say no as total inflation eases, however it’ll decline slowly,” Glauber stated.

Nonetheless, there are some indicators of enchancment.

The Meals and Agriculture Group of the United Nations’ Meals Worth Index of Internationally Traded Agricultural Commodities has posted month-to-month declines for 9 consecutive months. Certainly, costs of key vitamins and wheat are down greater than 40 p.c from final yr’s highs.

A document wheat crop in Russia and bumper corn and soybean harvests in Brazil have eased tensions in worldwide grain and vegetable oil markets, whereas the current drop within the value of pure gasoline, a feedstock, has boosted manufacturing of nitrogen vitamins for crops.

Decrease internationally traded costs, together with fertilizer costs, will take a number of the strain off growers.

“We’re very a lot at an inflection level. Entry [costs] and margin strain for farmers seems to be easing considerably,” stated Michael Magdovitz, grains and oilseeds analyst at Rabobank.


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