Risks in global food markets

Global food prices have retreated from their April highs, but significant multiple risks exist that continue to threaten the downward trend in prices . The decline has been caused by larger-than-expected edible and oilseed global supplies during the ongoing season, the UN-brokered agreement that allowed Ukrainian grains to reach the global market and deteriorating global growth prospects. Following a projected 18 percent increase this year, the World Bank’s food price index is expected to ease 6 percent in 2023 before stabilizing in 2024. The price outlook, however, is subject to multiple risks in a highly uncertain environment. They include worsening global growth prospects; macroeconomic uncertainties; a prolonged and deeper conflict in Ukraine; higher input costs (especially energy and fertilizers); the ongoing La Niña weather pattern; and, in the longer term, trade and biofuel policies. The rest of this blog looks at these risks in some detail. 

Global growth prospects

The global growth slowdown and the possibility of a recession in several economies raise concerns about sharply lower household incomes. In addition, an appreciation of the U.S. dollar against most currencies has made food commodities in emerging markets and developing economies more expensive, further eroding the purchasing power of households in low-income countries. Along with inflationary pressures, these would reduce the affordability of, and access to, food. Low-income countries are especially vulnerable as consumers spend a large portion of their disposable income on food—in some countries exceeding 50 percent. Many of these countries have limited fiscal space to support vulnerable households  after having spent considerable resources during the pandemic. 

Macroeconomic uncertainties

Elevated inflation and interest rate hikes also pose risks to commodity prices. Persistently high inflation could exert further upward pressure on the cost of labor and the intermediate materials used to produce, store, and transport commodities . Interest rate hikes by major central banks to combat high inflation are expected to continue in 2023 and will increase the global cost of borrowing. This could constrain investment in increasing the production of agricultural commodities, as well as in the supply chains that caused bottlenecks during the pandemic. 

The war in Ukraine

Russia’s invasion of Ukraine delivered a fresh blow to global commodity markets . Initially, the war led to significant disruptions to the production and trade of commodities in which Russia (energy and grains), Ukraine (grains and oilseeds), and Belarus (fertilizer) were key exporters. Although food prices have retreated from their 2022Q2 peaks, they are still high compared to the past five years. An escalation of the war could quickly reverse the expected easing of food commodity prices in 2023 and 2024. Moreover, failure to extend the UN-backed deal allowing exports of grains from the Black Sea could result in food import disruptions in low-income countries, especially in the Middle East and North Africa which depend heavily on grain imports from the Black Sea region. 

Input costs

Energy is a key input to most food commodities, with both direct channels (fuel) and indirect channels (chemicals, fertilizers, electricity). Prices at the three main natural gas hubs – Europe, the United States, and Asia – are projected to average 148, 71, and 71 percent higher, respectively, in 2022 than in 2021. Skyrocketing energy prices have taken a toll on fertilizer markets since 2021, as fertilizers are the most energy-intensive commodity group. Several companies, especially in Europe, temporarily shut production facilities due to surging input prices and/or the unavailability of feedstocks. The already tight market could be further destabilized by the continuation of restrictions on fertilizer exports from the Black Sea region, sanctions on exports from Belarus, and China’s fertilizer export ban. If energy and fertilizer prices do not moderate in 2023 and 2024 as expected, food prices could be subject to significant upward pressure . 

La Niña

The El Niño-Southern Oscillation is currently in a La Niña phase. According to the October assessment of the U.S. National Oceanic and Atmospheric Administration, La Niña conditions will likely continue into early 2023, with a 75 percent chance during the Northern Hemisphere winter (December-February). La Niña is likely to cause droughts in the Horn of Africa and heavy rainfall and flooding in Australia and Southeast Asia. However, it could improve growing conditions in other regions, including parts of North America. Historically, La Niña’s impact on agriculture is milder and more mixed than that of El Niño. However, there is concern that La Niña conditions occurring for the third year in a row (a rare occurrence) could add further rainfall and flooding to already deluged areas. 

Trade policies

Trade policies have played an important role in commodity price movements during the pandemic and the war in Ukraine. Several countries have imposed export bans and other trade restrictions to keep domestic prices in check. So far, export restrictions during 2022 (both as an absolute number and as a share of calorific intake) have been comparable with restrictions imposed during the food price spike of 2008. However, because the recent restrictions have been applied to a broad set of lesser-traded commodities, they have not affected global markets as much as the 2008 restrictions (which were applied to key commodities, such as rice and wheat, by major producers and consumers). In 2008, for example, export bans and aggressive buying in the rice market caused rice prices to almost triple within a four-month period. 

Biofuels

Land diversion to biofuels is projected to increase modestly during the next three years, notably for sugarcane and maize (for ethanol production) and edible oils (for biodiesel production) . While advanced economies account for most biofuel production, the share from emerging markets and developing economies has been growing. In view of the recent energy price surge and supply disruptions, the production of biofuels could increase more than anticipated as policymakers try to address energy security concerns. Furthermore, several transport industries are actively responding to sustainability concerns. The transport sector (notably airlines) is addressing environmental, social, and governance issues by increasingly turning to biofuels as a key source for sustainable fuel. However, the impact of these energy security and environmental policies could have important implications for food commodity markets. Currently, biofuels account for 3-4 percent of global land but only 0.7 percent of global energy consumption. 

To get more context on how the food markets are looking globally read the fall 2022 edition of the Commodity Markets Outlook.
It highlights how the shrinking value of the currencies of most developing economies is driving up food and fuel prices in ways that could deepen the food and energy crises that many of them already face.