After rising in late 2019 on production concerns and retreating earlier this year on news of abundant supplies in the upcoming season, food commodity prices were broadly stable in April and May, despite the spread of the pandemic. The World Bank' s Food price Index is expected to remain stable for 2020, followed by a slight increase in 2021.
Supplies are abundant. The global assessment for next season, which begins in September 2020, points to abundant supplies. According to the U.S. Department of Agriculture's May update, global production of the three main grains—wheat, maize, and rice—is projected to increase 3.6% this growing season (September 2020 to August 2021). Although consumption is set to increase at the same pace, the stocks to-use ratios for most grains and oilseeds (an approximate measure of supply relative to demand) are expected to reach historically high levels.
Price risks introduce a complicated scenario for 2020. There are numerous risks arising from the global downturn in economic activity due to the coronavirus pandemic: the direction of energy prices; future biofuel consumption; currency movements; trade and domestic support policies; and possible disruptions to supply chains.
The historic decline in energy prices due to coronavirus is expected to directly impact food commodity markets. Energy is a key input to grains and oilseeds, affecting production directly through fuel costs and indirectly through fertilizers and other chemical inputs. Extended weakness in energy and fertilizer prices could depress food commodity prices, especially grains and oilseeds. Energy prices are expected to average 45% lower in 2020 compared to 2019. Similarly, fertilizer prices, which are also closely linked to energy prices, are projected to drop 10% in 2020. Although both energy and fertilizer prices are expected to recover (albeit, modestly) in 2021, most of the price risks of these two inputs, especially the former, are on the downside (see earlier blogs on Oil and Coal and Gas.)
Projected declines in biofuel production could result in subdued demand for certain food commodities. Biofuels have been a key source of demand growth for some food commodities, especially during 2005-15. In fact, biofuels have often been cited as one of the drivers of the 2007-08 and 2010-11 food price spikes. However, the collapse in the transport sector as a result of the pandemic implies less use of fuel and, hence, biofuels. Depending on the stringency of travel restrictions, the decline in biofuel consumption could exert further downward pressure on some food commodities, especially maize, edible oils, and sugar.
Macroeconomic conditions exacerbate downward price risks. A further strengthening of the U.S. dollar could depress commodity prices further. Indeed, the weakness in some commodity prices during the first quarter of 2020 can, in part, be attributed to a stronger dollar. Research has shown that a 10% appreciation of the dollar against major currencies is associated with a 5% decline in prices of internationally traded commodities. Similarly, the price outlook will be affected by currency depreciations of countries that account for a large share of global trade in individual commodities.
Disruptions to supply chains as a result of the pandemic constitute another risk to commodity markets. Travel restrictions have already affected numerous commodity markets, especially for fresh fruits, vegetables, and flowers. For example, Kenya's overall exports of fresh flowers dropped by nearly 80% while its shipments to Western European markets fell by three-quarters. A more important risk, however, stems from possible disruptions in supplies of key inputs (e.g., chemicals, fertilizers, and seeds) and labor that could negatively affect next season's crop.
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