Risks and challenges in global agricultural markets

Agricultural commodity prices continued their downward trend in the second quarter of 2025, with the World Bank’s agricultural price index dropping nearly 7 percent since the start of the year. Food and raw material prices within the index fell by 7 and 1 percent, respectively, while beverage prices fell by 13 percent. The index is projected to decline further in 2025 and 2026, though the outlook remains subject to significant risks. Short term, factors such as macroeconomic conditions, input costs, trade disruptions, geopolitical tensions, and extreme weather events—especially heat waves—could affect price trajectories. Long term influences include changing climate patterns and greater use of food commodities for biofuels, which may reshape global agricultural markets.

Weakening global growth. Global economic growth is projected to slow in 2025, driven by rising trade barriers and ongoing policy uncertainty. Growth in emerging markets and developing economies (EMDEs)—key players in global commodity production and consumption—is expected to average 3.8 percent in 2025 and 2026, marking a downward revision of 0.3 and 0.2 percentage points, respectively, since January 2025. Slower economic activity typically leads to weaker commodity demand, and lower prices, particularly for raw materials and edible oils, which tend to have higher income elasticities than grains. Additionally, broader macroeconomic factors, including changes in the U.S. dollar and interest rates, will continue to influence commodity prices. A weaker dollar typically supports higher commodity prices, while elevated interest rates raise the cost of capital and production.

Input costs, especially energy and fertilizer prices, remain critical risks. Energy prices are projected to decline by 17 percent in 2025 and another 6 percent in 2026, while fertilizer prices are expected to rise by over 7 percent in 2025 before stabilizing in 2026. Geopolitical tensions in the Middle East could lead to renewed volatility in energy markets. A spike in crude oil prices may increase demand for energy-linked feedstocks like maize, palm oil, soybean oil, and sugar, thereby raising their prices. Similarly, a sharper-than-expected rise in natural gas prices—a key input in fertilizer manufacturing—could further drive up fertilizer costs, increase production expenses for farmers, and influence food prices globally.

Geopolitical tensions and trade disruptions could induce price volatility. Geopolitical risk has reached its highest level since 2022, while trade policy uncertainty has climbed to a record high. Escalating conflict in the Middle East and potential disruption of the Strait of Hormuz—which handles about 40 percent of global urea fertilizer and 20 percent of liquefied natural gas trade—could exert upward pressure on both fertilizer and food prices. Russia’s invasion of Ukraine continues to pose risks to commodity flows from the Black Sea region, a key source of agricultural exports. Rising trade barriers, including tariffs on agricultural commodities, may shift price differentials and trigger trade diversion across markets. With the ongoing bilateral trade negotiations, uncertainty about future trade policy remains a key risk for commodity markets.

Extreme weather events, particularly heat waves, could affect the short-term crop outlook. These events are becoming more frequent, intense, and prolonged. In the United States, for example, the average number of heat waves per year has tripled—from two in the 1960s to more than six in the 2020s. Their average duration has increased, and the heat wave season has lengthened from 24 to 70 days. This pattern reflects a broader global trend. If heat waves strike during critical crop growth stages—especially in major exporting countries—they could trigger sharp spikes in commodity prices.

Changing long-term climate patterns could reshape commodity markets. Beyond isolated heat waves, broader shifts in weather conditions could have long-term effects on agricultural commodities. Prices of several tree crops have surged to record highs. Cocoa, Arabica coffee, and Robusta coffee prices have averaged significantly higher than in the same period in 2023. These commodities are vulnerable due to their geographic concentration, lengthy investment horizons, and lack of substitutability. Unlike annual crops, tree crops are locked into producing a single output. Heightened price volatility in tree crops could signal broader instability across other agricultural markets.

Biofuel policies could alter demand for food commodities. Diverting crops like maize, oilseeds, and sugar toward biofuel production can increase prices, particularly over the long term. Biofuels currently account for a small percentage of global liquid energy consumption but utilize a notable portion of land allocated to food crops. Recent dynamics, including rising prices of palm and seed oils alongside falling crude oil prices, have led to delays or suspensions of planned blending mandate increases in countries like Brazil and Indonesia. These developments have introduced uncertainty around biofuel mandates and contributed to recent stabilization in biofuel production. If mandates resume as planned, they could support feedstock prices. Further uncertainty surrounds U.S. policies toward existing biofuel programs, which could affect feedstock prices.

Navigating an uncertain outlook. Although agricultural commodity prices are easing, significant uncertainties persist. Prices are projected to decline in 2025 and stabilize in 2026, but the outlook remains highly uncertain and challenging. The sector continues to grapple with risks, including extreme weather events, volatile input costs, trade disruptions, climate change, and shifting biofuel policies. In this complex environment, it is essential for policymakers, industry stakeholders, and global institutions to prioritize strategies that build resilience, support market stability, and promote long-term sustainability in the agricultural sector.