Food prices eased but risks remain elevated

This blog is the third in a series of 11 blogs on commodity market developments, elaborating on themes discussed in the October 2022 edition of the World Bank’s Commodity Markets Outlook.
 

Food prices eased in 2022Q3 but are expected to remain high by historical standards. The World Bank’s Food Price Index declined 12% in the third quarter of 2022 (q/q) after reaching an all-time high in April. The index remains almost 20% higher than a year ago.  In domestic currency terms, however, food prices remain elevated due to currency deprecations. Food prices are expected to fall 5% in 2023 before stabilizing in 2024. Despite the expected declines, most food prices will remain high by historical norms. The forecasts are also subjected to numerous risks.

Global grain supplies are expected to tighten in 2022-23. While global wheat supplies are expected to increase marginally in the current season that began in August, supplies of maize and rice are projected to decline by 5% and 2%, respectively.  The shortfall reflects lower production in the United States and the European Union (maize) as well as in China and India (rice). By contrast, supplies of edible oils are projected to increase by 4% this season, with most gains coming from palm, rapeseed, and soybean oils.

Global food inventories are expected to decline for a third consecutive season. Lower global grain supplies will push the aggregate stocks-to-use ratio for food commodities (a measure of supply relative to consumption) down to 27%.  Although this is down from its 2017 high of 30.6%, the ratio (which consists of 12 food commodities) is much higher than its 2006-07 record low of 17.2%.

Domestic food price inflation persists in many countries. Supply disruptions, increasing production costs, and appreciation of the U.S. dollar have exerted upward pressure on domestic food price inflation in most countries.  Food price inflation in South Asia averaged 20% in the first three quarters of 2022 (y/y); the average for most other regions was 14%. The exception was the East Asia and the Pacific region where food price inflation averaged just 6%, in part due to stable rice prices, a key staple in the region.

The food price outlook is subjected to numerous risks. A key risk is the likelihood of higher-than-expected input prices or energy supply disruptions. Other risks include further deterioration of the global outlook, which could hamper consumer purchasing power. Further tightening of monetary conditions, along with steeper appreciation of the U.S. dollar, could push domestic prices even higher. Adverse weather patterns (including an emerging La Niña for a third year in a row) and restrictive trade policies could also push food prices higher. Lastly, a key risk to the forecast is an extension of the UN-backed agreement that allows grain exports from the Black Sea.