What is causing the unexpected drop in global food prices?

Six months after Russia's invasion of Ukraine, the inflationary shock is still causing a "headache" for markets, government staff and households, with the price of natural gas hitting new record levels yesterday.

The paradox is that in one area there was some relief. Cereal, grain and oil prices have returned to pre-war levels.

Russia and Ukraine are agricultural superpowers – until recently they were respectively the first and fifth largest exporters of wheat and the two largest exporters of sunflower oil in the world. Fearing war-related export disruptions, food prices were next to rise in February and March.

Ultimately, the worst seems to have been avoided. Last week, Chicago wheat contracts for December delivery fell to $7.70 a bushel. This is a price at February levels, well below $12.79 where it was three months ago.

The price of corn has also returned to pre-war levels. At the same time, palm oil has fallen even lower than it was before Russia invaded Ukraine.

The grain deal

This drop in prices is partly due to the grain agreement which now allows ships to safely sail from Odessa.

Mainly, of course, it is due to the strength of Russian grain exports. According to the US Department of Agriculture, Russia does not face any problems with its exports. Instead, for 2022-2023 it will reach a record 38 million tons in grain exports, almost 2 million tons more than last year.

This year's crop has performed better than expected, thanks to good weather conditions, while there is a high demand from traditional importers in North Africa, the Middle East and Asia.

In fact, some go so far as to say that the concerns initially expressed about possible shortages were...exaggerated. In the markets, these predictions translated into extremely high global prices and speculation.

However, the drop in prices will not be immediately felt by consumers. This is because prices have returned to pre-war levels in dollars, but not in other currencies.

The dollar has climbed this year as the Fed has been raising interest rates at a rapid pace. This is having an impact on poorer countries: the Turkish lira has fallen 25% against the dollar this year and the Egyptian pound 18%. These two countries are among the three largest importers of wheat in the world.

Moreover, food prices were at historic highs before the war anyway, and no one knows when they will rise again.

Large parts of the world have been affected by drought, which in turn affects crops.

At the same time, fertilizers remain very expensive. For example, the price of urea, a material used in nitrate fertilizers, is at $680 per ton, while last year it cost $400.

This increase is due to the "climbing" of the price of natural gas, which is a component of many fertilizers.

With fuel prices in Europe breaking one record after another, there are likely to be many more unpleasant surprises in the future.

With information from The Economist

[This article was translated from its Greek original]