High food prices are here to stay for quite a while

High food prices are expected to stick around for some time as demand remains high and supply constrained into next year and even worsen in 2023 and beyond as unpredictable weather patterns add to supply uncertainty alongside the possibility of continued disruption to production in Ukraine.

The global prices of some agricultural commodities are unstable since Russia invaded Ukraine at the end of February, affecting African countries, including South Africa, by sending the prices of grains, cooking oils, fuel and fertiliser soaring.

“We believe these prices are likely stay around these high levels for the foreseeable future,” says Felix Odey, portfolio manager of global resource equities at management firm Schroders. “Meanwhile, crops will likely be produced with lower levels of fertiliser, following significant price increases and supply disruption in fertiliser markets as a result of the war.”

Ukraine and Russia are important commodity exporters, especially where sunflower oil and grains, such as corn, wheat and barley are concerned. Odey says the long-term supply disruption for Ukraine is still unclear, but there is not much hope with fierce fighting in the most crucial agricultural regions and farmland destroyed by landmines on a large scale, as well as destruction of agricultural equipment.

“The disruption of commodity exports from Ukraine and Russia will have price repercussions on other commodities too. For example, the price of palm oil is expected to increase as it is increasingly used as a substitute for sunflower oil.”

These increasing prices across a broad range of commodities also reduces the incentive for farmers elsewhere to move to wheat, which would resolve some of the supply constraints, because they can get decent prices for other crops in any way, he says.

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Disrupted fertiliser supply means less food is produced elsewhere

Disrupted fertiliser supply could also reduce crop yields because 40% of potash comes from Russia, Ukraine and Belarus. The cost of fertiliser for US farmers increased from 14% of revenue in 2020 to around 23% in 2022.

Plating behaviour has already changed as a result, with US farmers, for example, planning to plant record levels of soybeans which require relatively less fertiliser and less spring wheat and corn, according to the USDA’s most recent survey.

“Farmers are not buying fertilisers where possible, hoping that prices will come back down over the course of the year. This has proven to be a fairly self-fulfilling prophecy, with US prices 35% below their March peak,” Odey says.

According to fertiliser manufacturer Omnia, prices of fertiliser input materials increased by between 200% and 400%, reaching their highest level since 2010. Omnia also supplies fertiliser to both commercial and smallholder farmers in several sub-Saharan African countries, including South Africa, Zimbabwe, Zambia, Mozambique, Kenya and Tanzania.

Fertiliser is used fairly early in the season for wheat, with the peak application in late-June to mid-August in the northern hemisphere and the extent of the demand destruction should, therefore, be seen in the next few weeks according to Odey.

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Some countries limiting food exports

Several countries are now limiting food exports due to the disruption to crop and fertiliser exports to protect their food supply, with around 17% of the world market in calories under food restrictions. Reliance on food imports varies but is as high as 100% in some countries in the Middle East and North Africa region.

“As the market tightens, supply depends more on marginal producers and this increases the risk of food price volatility from extreme weather events. West Africa is particularly at risk, with 70% of cropland exposed to drought.”

Around 20% of the world’s wheat is used for animal feed and we can expect to see substitutes introduced to preserve wheat for human consumption.

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Production of biofuel also affected

The situation does not only affect food supply, but also the transition to biofuels as another response to tight agricultural commodity markets might be shifts in flows and usage. About 10% of the world’s wheat is used for biofuel and biofuel companies that use edible foods rather than waste may feel some policy pressure if governments pause or unwind subsidies.

Supply constraints and reputational damage are other risks.

“We have recently seen a debate among the G7 countries to postpone in order to try to alleviate food shortages. The mandates call for biofuels to be blended with ordinary petrol and diesel in order to reduce emissions.

“If a postponement is enacted, it will be very difficult for countries like Germany to meet their carbon commitments around transport. The fact that this is considered shows the extent of the inflation dilemma of the policymakers.”

Food security remains a long-term concern now that the Ukraine crisis brought food security into focus, with the longer-term narrative around food supply also changing. Population growth means that global food and water production is expected to need to increase by 70% by 2050 compared to 2010 levels.

Therefore, climate and wider environmental factors mean that resource intensity needs to be reduced by about two-thirds at the same time.

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Food security

Odey says that food security will likely be the priority of governments in the near term.

“Higher fertiliser prices, tight agricultural equipment markets and disrupted value chains for items such as pesticides, means that global yields across the agricultural commodity complex could fall both this year and next.”

He says looking further ahead, the system needs to be made more sustainable, or it will be subject to increasingly detrimental negative feedback loops, such as extreme weather and ecosystem degradation.

“Even under a scenario of 2 degrees of global warming, wheat and corn yields are projected to fall by 14% and 12% respectively. All of this paints a picture of elevated agricultural prices in the foreseeable future.”