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

Fertilizer and crop prices have plummeted from their peaks since last year’s Russian attack on Ukraine. However, agricultural experts and analysts warn that global food supplies are still under threat.

Food prices had already been raised prior to Russia’s full-scale invasion of Ukraine early last year due to drought and coronavirus pandemic-related hoarding by governments and businesses. Nutrient prices then surged as Moscow became the world’s largest exporter of fertilizers, and a surge in the price of natural gas, a key component of nitrogen fertilizers, also put pressure on agricultural markets.

Last year’s Black Sea grain deal between Moscow and Kyiv played a pivotal role in lowering prices, along with abundant supplies from Russia, while lower natural gas prices calmed fertilizer markets. However, analysts warn that the grain deal could collapse, while volatile energy prices and climate change also threaten to undermine the crop.

“It’s like flying with one engine,” said John Buffes, senior agricultural economist at the World Bank. “As long as this engine is running, everything is fine, but if the engine stops, you will be in trouble. . . If any of [these risks] materialize, we’ll see [rise in prices] very, very quickly.”

The most immediate danger comes from a UN-backed grain deal due to be reopened in March. If it is not extended, it will block the export of Ukrainian grain, which will lead to another rise in prices.

While many crops, along with food fertilizers, are exempt from sanctions imposed on Russia by Ukraine’s allies, many banks, insurance companies and logistics groups are reluctant to handle their farmers’ produce, according to Russian and European officials. Geopolitical tensions could disrupt supplies.

Another threat is the climate. Last year’s record temperatures in Europe and other parts of the world occurred despite the La Niña weather event. La Niña is associated with the cooling of the surface of the Pacific Ocean. After three consecutive years of La Niña, many meteorologists are warning of an increase in the likelihood of the opposite – an El Niño event that has a warming effect – occurring this year.

The UK Met Office warned late last year that the shift from La Niña to El Niño “is likely to result in global temperatures warmer in 2023 than in 2022.”

Regionally, El Niño conditions have previously caused droughts in South and Southeast Asia and Australia and floods in Latin America, including Brazil and Argentina.

“We have had three strong La Niñas in a row, which in itself is unprecedented. But a potential El Niño in the next quarter. . . could wreak havoc on global weather,” said Kona Hak, head of research at commodities trader EDF Man. “Tropical developing countries could be hit the hardest, with Asia getting drier under El Niño conditions and South America could see heavy rainfall.”

Relatively low levels of grain stocks added to analysts’ concerns about global food stocks.

For wheat, the stock-to-use ratio is indicative, used by grain market participants and agricultural economists to assess the availability of commodities. It shows that crop year-end stocks in June are projected to be 58 days, the lowest level since 2008, when global food prices soared following a drought and rising global energy prices.

“Due to the low global stock situation, prices will remain volatile and could rise sharply if there is a drought or a severe weather event this spring,” said Joseph Glauber, Senior Fellow at the IFPRI Food Security Think Tank and former Chief Economist at the Department of Agriculture. USA.

Currency fluctuations are also important to the food supply in many developing countries. Despite the recent drop in food prices in international markets, a strong dollar may support high prices in local currencies.

This means that food inflation for consumers is likely to persist for several quarters due to lagging about a year behind internationally traded prices in order to reach retail supply chains.

“Food inflation, as measured by the Consumer Price Index for Food, remains in double digits in most parts of the world. I expect the consumer food price index to decline as headline inflation declines, but it will decline slowly,” Glauber said.

However, there are some signs of improvement.

The food price index for internationally traded agricultural commodities, published by the Food and Agriculture Organization of the United Nations, has been declining monthly for nine consecutive months. Indeed, prices for key nutrients and wheat are more than 40 percent below last year’s highs.

A record wheat harvest in Russia and strong maize and soybean yields in Brazil have eased tensions in international markets for grains and vegetable oil, while the recent fall in feedstock prices for natural gas has boosted production of nitrogen fertilizers for crops.

Lower prices on world markets, including for fertilizers, will relieve some pressure on producers.

“We are at a critical point. Entrance [costs] and the pressure on margins for the farmer appears to be substantially easing,” said Michael Magdowitz, grains and oilseeds analyst at Rabobank.