The FAO Food Price Index fell sharply in July, but the respite may not last

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

Olga Maltseva | AFP | Getty Images

According to the latest figures from the Food and Agriculture Organization of the United Nations, food prices fell significantly in July compared to the previous month, in particular wheat and vegetable oil prices.

But the FAO said that while the fall in food prices “from very high levels” is “welcome”, doubts remain about how long this good news will last.

“Many uncertainties remain, including high fertilizer prices which may impact future production prospects and farmers’ livelihoods, a bleak global economic outlook and currency movements, all of which are straining security. world food supply,” FAO chief economist Maximo Torero said in a statement. Press release.

The FAO Food Price Index, which tracks the monthly change in world prices of a basket of foodstuffs, fell 8.6% in July from the previous month. In June, the index fell only 2.3% month on month.

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

Short-term prices could fall further, if futures are any indication. Wheat, soybean, sugar and corn futures have fallen from their March highs 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 prices have fallen

Analysts have cited a mix of both demand and supply reasons for the fall in food prices: the closely watched deal between Ukraine and Russia to resume grain exports via the Black Sea after months of blockade; better than expected harvests; a global economic downturn; and the strong US dollar.

Rob Vos, director of markets, trade and institutions at the International Food Policy Research Institute, highlighted the news that the United States and Australia are poised to deliver bumper wheat crops this year. , which will improve supply since shipments from Ukraine and Russia were cut short.

The rising U.S. dollar also lowers commodity prices, since commodity prices are denominated in U.S. dollars, Vos said. Traders tend to ask for lower nominal dollar commodity prices when the greenback is expensive.

The widely advertised and UN-backed deal 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 global wheat market share, according to the United Nations.

The first shipment of Ukrainian grain – 26,000 tonnes of maize – since the invasion left the port of Odessa in the south-west of the country last Monday.

Skepticism over Ukraine-Russia deal

Global skepticism about whether Russia will hold 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 freight and insurance companies may still think it’s too risky to ship grain out of a war zone, Vos said, adding that food prices remain volatile and any further shocks can trigger new price spikes.

“To make a difference, it will not be enough to release a few shipments, but at least 30 or 40 per month to release existing grain stored in Ukraine, as well as produce from the upcoming harvest,” Vos said.

“To help stabilize markets, the deal will also need to fully hold in the second half of the year, as that is when Ukraine does most of its exports.”

Even with the existing deal, Ukraine’s arable land could continue to be destroyed “as long as the war continues,” leading to even lower crop yields next year, research manager Carlos Mera told CNBC. in the agricultural products market at Rabobank. “Street Signs Europe” last week.

“Once that [grain] corridor is over, we may see even more price increases in the future,” 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 to export enough grain as quickly as possible from a war zone.

“It’s time for us to work again. I don’t see us exporting two [to] five million tonnes a month from these Black Sea ports,” John Rich, executive chairman of Ukrainian poultry giant Myronivsky Hliboproduct (MHP), told CNBC’s “Capital Connection” on Monday.

“People who are hungry, at the end of the day, get hungry very quickly after a week.”

In a note released 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 those of 2020 – could cause grain prices to jump again.

The restriction of gas supplies from Russia has led to a spike in natural gas prices in Europe. Natural gas is a key ingredient in nitrogen fertilizers. La Nina weather could also disrupt grain harvests later this year, they added.

And the fall in food prices is not good news. Part of the reason commodities have become cheaper is that traders and investors are heeding recession fears, analysts said.

The global manufacturing PMI is down as the US Federal Reserve appears determined to raise interest rates to curb inflation even if it triggers a recession, the Fitch team wrote.

Staple foods

Grain prices, below which wheat falls, fell 11.5% month-on-month, according to the FAO index. Wheat prices specifically fell 14.5%, partly due to the reaction to the Russian-Ukrainian grain deal and better harvests in the northern hemisphere, the FAO said.

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

Sugar prices fell 3.8% to their lowest level in five months due to weaker demand, a weaker Brazilian real against the greenback and increased supply from Brazil and from India.

Dairy and meat prices fell 2.5% and 0.5% respectively.

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