Sharp Decline in Food Prices in July

Food prices have significantly decreased in July on a monthly basis, particularly for wheat and vegetable oil, according to the latest data from the Food and Agriculture Organization of the United Nations. The reasons for this are primarily the Ukraine-Russia agreement on grain exports via the Black Sea and better-than-expected harvests in the Northern Hemisphere.

However, the FAO reported that although the decline in food prices 'from very high levels is welcome', there are certain doubts about whether this good news will last.

– Many uncertainties remain, including high fertilizer prices that may affect future production prospects and the livelihoods of farmers, gloomy global economic outlooks, and currency movements, all of which seriously impact global food security – stated FAO's chief economist Maximo Torero.

The FAO Food Price Index, which tracks monthly changes in global prices of a basket of food products, fell by 8.6 percent in July compared to the previous month. This accelerated the decline after it weakened by 2.3 percent in June on a monthly basis. Nevertheless, on an annual basis, this index was still 13.1 percent higher in July than in the same month in 2021.

Food prices could continue to decline in the short term, judging by the movement of futures prices. Specifically, futures prices for wheat, soybeans, sugar, and corn have dropped from record levels achieved in March and are now at levels seen at the beginning of 2022. For instance, wheat was traded at $775.75 per bushel on Friday, a significant drop compared to March when the price was $1,294 – the highest in the last 12 years. In January, the price of wheat was around $758.

Why Have Prices Fallen?

Analysts point out that the decline in food prices has been driven by a combination of supply and demand factors, primarily the Ukraine-Russia agreement to resume grain exports via the Black Sea after a months-long blockade, followed by better-than-expected yields, global economic slowdown, and a strong U.S. dollar.

Rob Vos, Director of Markets, Trade, and Institutions at the International Food Policy Research Institute, points to the announcement that the U.S. and Australia will have an excellent wheat harvest this year, which will improve supply given that shipments from Ukraine and Russia are limited.

A higher exchange rate of the U.S. dollar also lowers the prices of basic commodities, as the prices of these goods are expressed in U.S. currency, Vos explained, clarifying that traders seek lower nominal prices for goods when the dollar is strong.

The food market has also calmed with the achievement of an agreement between Ukraine and Russia, supported by the United Nations (UN) and with the help of Turkey. Ukraine was the sixth largest global exporter of wheat in 2021, with a 10 percent share of the global wheat market, according to UN data. The first shipment of Ukrainian grains since the start of the war, 26,000 tons of corn, left the port of Odesa last Monday.

However, skepticism remains worldwide about whether Russia will uphold its part of the agreement regarding grain exports via the Black Sea, as it fired a missile at Odesa just hours after the UN negotiated the agreement at the end of July.

– To make a difference, it will not be enough to have a few shipments by sea, but at least 30 or 40 per month to extract the existing grains stored in Ukraine, as well as products from the upcoming harvest. To help stabilize the market, this work will need to be carried out fully during the second half of the year, as that is the period when Ukraine exports the most – emphasized Vos.

Part of the reason why basic food prices have decreased is that traders and buyers are factoring in fears of recession into their prices, analysts state. The largest economy in the world, the U.S., is already in a technical recession after recording two quarters of slight activity decline.

Price of Vegetable Oil Lowest in Last 10 Months, Sugar in Five Months

The FAO index showed that cereal prices fell by 11.5 percent in July on a monthly basis, with wheat prices down by 14.5 percent, primarily influenced by the Russia-Ukraine agreement on maritime exports, but also by better harvests in the Northern Hemisphere.

Vegetable oil prices fell by 19.2 percent on a monthly basis, reaching their lowest levels in 10 months, partly due to abundant palm oil exports from Indonesia, lower crude oil prices, and reduced demand for sunflower oil, the FAO noted.

Sugar prices, on the other hand, fell by 3.8 percent, reaching their lowest level in five months due to reduced demand, a weaker Brazilian real against the dollar, and increased supply from Brazil and India, they further stated.

At the same time, dairy prices fell by 2.5 percent, and meat prices by 0.5 percent.