Costs are down from peaks in the war in Ukraine, but still up from last year
For months, shipments of Russian grain sailed from the Novorossiysk docks to customers in Africa and the Middle East. And limited grain shipments from the Ukrainian port of Odessa resumed on August 1 under a United Nations-brokered deal.
Commodity market pressure also eased after Wall Street speculators began selling their holdings in response to Federal Reserve interest rate hikes, making it less safe to bet on the rise in raw material prices.
Wheat is now cheaper than at the beginning of the war. Brent crude oil, the global benchmark, is hovering around its mid-February level of $97 a barrel. And the price of urea fertilizer, which almost doubled in the first weeks of the war, returned to its pre-war level.
Still, markets could reverse course again, and they are likely to remain volatile next year, analysts said.
“The worst has not happened. … But there’s a false sense of security in the markets right now,” said Sanjeev Krishnan, chief investment officer at S2G Ventures, a Chicago-based investment firm specializing in food and agriculture. “This fall could have a lot more volatility.”
Averting a deeper global crisis depends on the interplay between government policies in dozens of countries, the climate, an unpredictable conflict in Europe, and global diplomacy.
Rate hikes aren’t much help for Estonia’s 22% inflation, Europe’s worst
With Russia having already launched a missile at the grain terminals in Odessa, one wonders if the agreement to resume Ukrainian shipments will hold. Extreme weather events, including a multi-year drought in the Horn of Africa, threaten crops on several continents. And a potential embargo on Russian energy deliveries to European customers later this year could add to rising natural gas costs that are already driving up some fertilizer prices.
However, the current situation is an improvement. Earlier this year, the war between Russia and Ukraine, neighboring countries that together account for more than a quarter of all wheat traded globally, sent grain prices soaring by 63% in less than two weeks. At the same time, prices for one type of nitrogen-based fertilizer nearly doubled and oil soared to nearly $128 a barrel.
Subsequent price declines have brought little relief to countries that depend on global markets for key commodities.
A third of the 153 countries monitored by the World Food Program recorded annual food inflation of at least 15% for the three months ending July 31, according to Friederike Greb, an economist at the Rome-based branch of the United Nations.
In Lebanon, food prices soared 332%, while Iranian food bills jumped 87% and Turkish food prices rose 95%.
“The lower prices are certainly good news for global food security,” Greb said. “But we have no reason to be less worried, given what we are seeing happening on the pitch.”
According to the International Monetary Fund, changes in global commodity prices can take 10 to 12 months to trickle down to local markets.
When they do, declines are often overwhelmed by the impact of falling currency values in importing countries. The Fed’s multiple interest rate hikes this year have pushed the dollar higher against most other currencies.
The currencies of Zimbabwe, South Sudan, Turkey, Sri Lanka, Laos and Malawi have lost at least 25% of their value against the greenback. It is, in effect, a price increase for local businesses or governments purchasing global products, which are priced in US dollars.
“We are still in a crisis of gigantic proportions,” Greb said.
A total of 345 million people in 82 countries are at risk of dying from insufficient nutrition, more than double the number before the pandemic, according to the World Food Programme. Despite the recent price easing in commodity markets, food, fuel and fertilizers remain significantly more expensive than a year ago.
“It is too early to say that we are over the worst,” said Ngozi Okonjo-Iweala, director general of the World Trade Organization.
The rise in prices at the start of the year was amplified by the financial bets of speculators. In February, before the war began, fund managers were betting in futures markets that Chicago Board of Trade wheat prices would fall, according to data from the Commodity Futures Trading Corporation.
But by early March, the market herd had shifted to a massive bet on higher prices. The size of this bet peaked in mid-May shortly after the Fed’s second rate hike in three months, which was aimed at bringing inflation down from 8.5% to its target level of 2%.
“When the Fed says we’re going back to 2%, you have to get out” of commodity markets, said economist Dan Basse of AgResource in Chicago.
European Central Bank takes big step to tackle rising inflation
Each commodity market is also shaped by distinct factors. Oil prices saw their biggest drop since early June, on fears of a global recession that would reduce demand for oil.
According to Joseph Glauber, a senior researcher at the International Food Policy Research Institute who approximated the missing export figures by analyzing purchase reports from customers in Moscow.
“They’re showing about the same level of exports from Russia this year as they did last year,” he said. “Russian trade is on the right track.”
These higher than expected Russian exports are one of the reasons wheat prices are falling. Another reason is the agreement reached last month by Russian, Ukrainian and Turkish diplomats, which facilitated shipments of some of the 20 million tonnes of grain trapped in Ukraine by war.
This month, 14 ships carrying corn, sunflower oil and soybeans left Ukrainian ports, according to a UN database. The ships stop in Turkey, where inspectors check that no weapons are hidden among the foodstuffs, before heading to destinations such as Lebanon, China, Italy and South Korea.
There is a balancing act in increasing the flow of Ukrainian grain to the developing world, where it is desperately needed to stave off hunger. If war-trapped grain in Ukraine reaches world markets, wheat prices could plummet just as Ukrainian farmers, who have already paid higher costs for fertilizers and seeds, try to recoup their investment, said Máximo Torero, chief economist for the Food and Agriculture Organization of the United Nations.
UN food officials are in discussions with the International Monetary Fund and others about potential funding to help, he said.
A related deal should allow more Russian ammonia fertilizer exports through a pipeline to the Ukrainian port of Pivdenny, which has been closed since the start of the war, said Chris Lawson, chief fertilizer analyst for CRU Group.
Prices for urea, a widely used nitrogen fertilizer, fell by half from their April high of $940 a tonne. But as natural gas – the main fuel used to produce these nutrients for crops – has become more expensive, prices since mid-June have risen somewhat.
Prices for potash, another fertilizer, fell after Belarus, a Russian ally and a major global producer, resumed limited shipments, Lawson said. About 100,000 tons of Belarusian potash hit world markets each month, well below the pre-war norm of around 1 million tons, but more than analysts expected.
Farmers also responded to the initial post-war price hike by reducing their use of potash and phosphate, he said.
“Things are still really, really tight. But it wasn’t as bad as the Armageddon people were expecting,” Lawson said.
Choose your economy: sizzling job market or blazing growth
In southeast Africa, farmers in Malawi are struggling to get enough fertilizer for the next planting season, and the supplies they get cost more than double what they cost in 2020 , according to Sheila Keino, Malawi country director for the nonprofit African Fertilizer and Agribusiness Partnership.
A 25 percent devaluation of the kwacha, the local currency, has made imports more expensive, straining the household budgets of smallholder farmers who make up the bulk of the country’s labor force.
“It’s going to be tough,” Keino said. “Everything has increased, but no one has any more money in their pocket. So we will see a decrease in the use of fertilizers.
If farmers in the developing world cannot afford to use adequate amounts of fertilizer, next year’s harvest could be depressed, prolonging the food crisis into a second year.