The FAO food price index fell sharply in July, but the break may not last long


Farmers harvest a wheat field near Melitopol in Ukraine. Wheat, soybean, sugar and corn futures fell from their March highs back to prices seen in early 2022.

Olga Maltseva | Afp | Getty Images

Food prices fell significantly in July from the previous month, especially wheat and vegetable oil prices, according to the latest data from the UN’s Food and Agriculture Organization.

But the FAO said that while the drop in food prices “from very high levels” was “welcome”, there were doubts whether the good news would continue.

“Many uncertainties remain, including high fertilizer prices that could affect future production prospects and farmers’ livelihoods, a gloomy global economic outlook and currency movements, all of which pose serious strains on global food security,” said FAO’s chief economist Maximo Torero in a press release.

The FAO food price index, which tracks the monthly change in global prices of a basket of food commodities, fell 8.6% in July from the previous month. In June, the index fell by just 2.3% on a monthly basis.

However, the July index is still 13.1% higher than July 2021.

Prices may fall further in the near term if futures are anything to go by. Wheat, soybean, sugar and corn futures fell from their March highs back to prices seen in early 2022.

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

Why did the prices fall?

Analysts pointed to a combination of supply and demand reasons for the drop in food prices: the closely watched agreement by Ukraine and Russia to resume grain exports via the Black Sea after months of a blockade; better than expected harvests; global economic slowdown; and the strong US dollar.

Rob Voss, director of markets, trade and institutions at the International Food Policy Research Institute, pointed to news that the United States and Australia are set to deliver large wheat crops this year, which will boost supply as supplies from Ukraine and Russia are is abbreviated.

A higher U.S. dollar also lowers the price of basic commodities because commodities are priced in U.S. dollars, Voss said. Traders tend to ask for lower nominal dollar prices on goods when the greenback is expensive.

The widely publicized, UN-backed agreement between Ukraine and Russia also helped cool the market. Ukraine was the world’s sixth largest wheat exporter in 2021, accounting for 10% of the world’s wheat market share, according to the United Nations.

The first shipment of Ukrainian grain – 26,000 tons of corn – since the invasion left the country’s southwestern port of Odessa last Monday.

Skepticism about the Ukraine-Russia deal

Global skepticism about whether Russia will keep its end of the bargain hangs in the air.

Russia fired a missile at Odessa just hours after the UN-brokered deal in late July.

And trucking companies and insurance companies may still think it’s too risky to ship grain from a war zone, Voss said, adding that food prices remain volatile and any new shock could cause more price spikes.

“To make a difference, it will not be enough to take out a few shipments, but at least 30 or 40 a month to take out the existing grains stored in Ukraine, as well as the production of the upcoming harvest,” said Voss.

“To help stabilize markets, the deal will need to be kept in full for the second half of the year as well, as this is when Ukraine makes most of its exports.”

Even with the existing agreement, Ukraine’s arable land could continue to be destroyed “as long as the war continues,” leading to an even smaller harvest next year, Carlos Mera, head of agricultural commodity market research at Rabobank, told CNBC . “Street Signs Europe” last week.

“Once this [grain] the corridor is over, we may see even bigger price increases going forward,” Mera said. Consumers may also see further price increases as there is typically a lag of three to nine months before commodity price movements reflected on supermarket shelves.

Then there is pressure to export enough grain as quickly as possible from a war zone.

“It’s time to work again. I don’t see us exporting two [to] five million tons per month from these Black Sea ports,” John Rich, 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, analysts at credit rating agency Fitch Ratings wrote that a possible increase in fertilizer prices, which have fallen recently – but are still double their 2020 levels – could lead to another spike in grain prices.

The restriction of gas supplies from Russia has led to a spike in natural gas prices in Europe. Natural gas is a major ingredient in nitrogen fertilizers. La Nina weather patterns could hamper the grain harvest later this year as well, they added.

And the drop in food prices isn’t just good news. Part of the reason major commodities have fallen is that traders and investors are pricing in fears of a recession, analysts said.

The global manufacturing purchasing managers’ index is in decline, while the US Federal Reserve appears determined to raise interest rates to curb inflation, even if it triggers a recession, the Fitch team wrote.

Basic food items

Cereal prices, which includes wheat, fell by 11.5% on a monthly basis, the FAO index showed. In particular, wheat prices fell 14.5 percent, partly due to the reaction to the grain deal between Russia and Ukraine and better harvests in the Northern Hemisphere, the FAO said.

Vegetable oil prices fell 19.2% month-on-month – a 10-month low – due in part to large palm oil exports from Indonesia, lower crude prices and a lack of demand for sunflower oil.

Sugar prices fell 3.8 percent to a five-month low in light of shrinking demand, a weaker Brazilian real against the greenback and increased supply from Brazil and India.

The prices of dairy products and meat decreased by 2.5% and 0.5%, respectively.

Share is Love^^