As we welcome the new year, how will climate, labour and fuel pressures affect prices of the likes of coffee, palm oil, sugar, meat, rice and dairy?
November and December saw the UK battered by storms Arwen and Barra, which knocked out power grids and disrupted transport in a fitting curtain call to a squally year for food and drink supply chains.
And the simultaneous emergence of the Omicron coronavirus variant suggests this year’s tempestuousness will roll over into 2022, with Mintec’s commodities experts highlighting “fears over further Covid-19 lockdowns in key consuming markets”. It could see reduced demand for some commodities, in keeping with the impact of previous rounds of restrictions, which also saw curbs in producer or exporter countries cutting supply and contributing to increased prices.
This all comes after world food commodity prices in November reached highs not seen since mid-2011, according to the UN Food and Agriculture Organization’s monthly update.
Rabobank managing board member Berry Marttin said agricultural commodity prices increased by an average of about 28% in 2021, taking them to 40% above pre-pandemic levels.
So what exactly is in store for commodity prices in 2022, and how much higher will they climb?
A return to the status quo ante – to before the coronavirus pandemic – seemed a long way off by late 2021.
Rabobank said in its recently published yearly commodities review that it was “highly unlikely” food prices would drop to something like a pre-Covid “five- or 10-year average” over the coming 12 months, while the Paris-based secretariat of the Organisation for Economic Co-operation and Development (OECD) warned overall inflationary pressures “risk lasting longer than was expected a few months ago”.
“Prices are expected to stay at high levels throughout 2022,” says Stephan Hubertus Gay, senior agricultural policy analyst at the OECD.
Paul Hughes, chief agricultural economist and director of research at IHS Markit’s Agri-Business Intelligence wing, adds he expects “inflationary pressures in overall food prices” even if these are unlikely to reach “the same level” as 2021.
“I don’t see us coming out of this any time soon,” says Abdolreza Abbassian, senior economist at the UN FAO.
Not only are prices set to remain high, but a Gordian knot of factors, that since mid-2020 have been pushing prices up, could defy unpicking.
Food commodities are “now supported by inflation in the general economy”, according to Rabobank, and reinforced by “astronomical” shipping container costs, rising energy and fertiliser prices, and labour shortages in ports and factories.
The impact of the above, according to Hughes, has been “more severe than most anticipated”.
By late 2021, global container prices were almost 600% higher than two years before, back when the coronavirus was a but a rumour.
Congestion and delays at major ports, such as Los Angeles, and along key routes, such as the Suez Canal, have added to this year’s soaring shipping costs.
Analysts at S&P Global Platts believe that congestion and delays at ports will “remain a pain point” likely to persist through the first half of 2022.
Delays mean trouble for perishable food commodities needing snappy delivery to intermediaries or producers. Meanwhile, the rising costs of shipping and containers, which in part were down to increased demand from sectors such as pharmaceuticals and electronics – demand stemming from the pandemic and related restrictions – have left commodity exporters struggling to compete for space onboard. It is a rat race that in turn has added to imbalances between supply and demand and pushed food commodity prices up.
By the OECD’s account, “the surge in demand for goods has met bottlenecks in production chains” and caused “disruptions in energy, food and commodity markets” that have pushed up prices.
“I do not recall a situation like this in terms of uncertainties,” says the FAO’s Abbassian.
Food retailers have already faced the dilemma, in some cases, of either absorbing some of the price rises themselves or passing them on to consumers.
How much a shopper ends up paying depends on myriad factors that can dilute or exacerbate the through-put of commodity prices, such as shipping costs, the processing, marketing and packaging of food, the cost of final delivery.
“On average”, the International Monetary Fund reports, “the pass-through from producer to consumer prices is only about 20%”.
Economists at the IMF estimate that when it comes to food, it “takes at least 6 to 12 months before consumer prices reflect changes in producer prices”.
So while the lag varies depending on the commodity and type of food, the IMF’s timing range suggests that further rises are likely – something many UK food businesses have been warning of during the last quarter of 2021.
Although intermediaries such as traders, processor and retailers often “buffer some of the price variation of agricultural commodity markets”, according to Hubertus Gay, the latest commodity prices mean it is inevitable “consumer prices of food will increase in the coming months”.
“This share differs and for products like fruits, vegetables, milk and to lesser extent meat it is higher and thus the price transmission to consumers will be more direct,” he says.
With “something like coffee, where the product to the consumer is simply the raw coffee beans, some processing and packaging, prices tend to get passed on quickly during sharply rising prices,” according to IHS Markit’s Hughes.
World Bank economist John Baffes adds that “changes in the prices of maize, wheat, and other grains take more time to transmit to consumers since these commodities go through a substantial amount of transformation”.
Prices in 2022 could also be affected by unpredictable weather, while environmental policies are likely to force hard-pressed shoppers to part with even more of their cash.
Rabobank warned in December that a resurgent La Niña weather system could continue to hamper key grower countries in the Americas and Australasia, which would likely keep many food commodity prices high – though the World Bank said recently the same weather phenomenon could lead to increased winter yields of maize and wheat in the Northern Hemisphere, with the increased supply potentially dampening inflation.
But the bank then warned that “global food prices could come under further upward pressure” in the wake of plans announced by countries “to divert food commodities to the production of biofuels”.
“In the worst-case scenario, rising food costs combined with surging energy prices have the potential to imperil the livelihoods of millions of people around the globe,” it said. According to the OECD, “rising food and energy prices are hitting low-income households in particular”.
The delays and complications are set to roll on with Britain preparing to impose border controls on most EU-sourced food and drink imports next year.
More paperwork and new checks could further add to food price inflation. “Although we have not analysed Brexit in the context of commodity markets,” Baffes says, “it is typically the case that more border controls tend to be associated with higher costs and hence, prices at the consumer level”.
In the UK, according to AHDB market specialist Chris Gooderham, “the underlying pressure on prices is upwards”.
“The impact of rising energy costs, fuel prices and labour costs are all putting margins under pressure for farmers and processors, and if the supply chain is to remain sustainable, prices will need to react to support the additional costs,” he says.
After mounting warnings, it looks like 2022 will be the year that commodity price volatility finally spills over into full-blown retail price inflation.
Predictions for 2022:
After a 10-year price high in December, 2022 could see more of the same – for arabica at least, according to Rabobank, and particularly if demand peaks “as economies recover from the pandemic”. Such a scenario could be made worse if production cannot keep up due to increasingly pricey fertiliser – a crucial input, the price of which is contingent on the state of the oil and gas markets – and if more bad weather undermines harvests in Brazil. “High arabica prices could continue to play out for the next year, particularly if global demand peaks,” according to Mintec, which says the market is “braced for a large year-on-year shortfall from Brazil”. A caveat could be arise from Omicron or other variants of coronavirus resulting in cafés being shuttered again, which would see a reduction in demand.
After 2021 saw what the OECD and FAO said were “production shortfalls in some major producing countries for a third consecutive year, resulting in a tight global sugar balance and an upward pressure on prices”, next year seems likely to bring more of the same, albeit with slightly less pressure. “High Brazilian and Indian fuel ethanol prices are providing further impetus, as more domestic sugarcane is diverted away from sugar production towards ethanol,” according to Mintec. “Like other commodities with long supply chains, there are many uncertainties in estimating supply and demand,” Rabobank says. The waters are further mudded by what Rabobank says is a shift in procurement priorities from from ‘just in time’ to ‘just in case’, to hedge against supply chain hassles.
Another sector where fortunes in 2022 could depend on China, where the “ongoing recovery” of the pig herd could be “the largest single driver of growth in global markets in 2022”, according to Rabobank. But while exporters banned by Beijing over health concerns could hope to regain some lost market access to the world’s second-biggest economy, it is likely “China has very quickly ramped up herds and become more self-sufficient,” according to a British Meat Processors’ Association spokeswoman. Such an outcome would likely push prices elsewhere down, adding to the UK pork sector’s recent woes, unless output slows in producer nations such as Germany that had grown to depend on access to China. According to Mintec, the first half of 2022 should see UK pork prices “trending down” due to “a huge backlog of pigs on the farm”.
There is no reason to be “especially bearish or bullish [on] meat prices as a whole”, according to IHS’ Markit. But might more expensive cuts suffer as consumers tighten belts in the face of rising energy costs? Rabobank says “long-term supply-side inflationary pressures and slow economic growth” could result in lower demand for meat. Over at the OECD, Hubertus Gay says it is most likely that “upward price movements will be higher for meat than for other products” as “feed prices and other costs have increased considerably”. And the crisis in shipping makes it less likely that the UK will see any major influx of lamb dispatched from Australia and New Zealand, according to Mintec.
Going by the FAO’s November food price index, “tightening markets” seem to be on the horizon and China will play a big role. Rabobank believes “exceptional Chinese demand” – which soared by 35% year on year from Q1 to Q3 in 2021 - is about to slow. Though dairy is overall “probably not as connected [as other food commodity sectors] to other factors, such as energy”, according to the FAO’s Abbassian, Rabobank warns that any logistical disruption could lead to stock-building and could add pressure on prices. Increases have already been passed on to the consumer in the UK where prices are likely to remain high until at least peak collection season in the spring, according to Mintec.
Oil, Gas, Coal ↑
The World Bank says in its latest commodities outlook that overall energy prices will rise by 2% next year as coal and gas prices “fall slightly”. Dutch Bank ING says it expects oil prices “to ease from the high levels that we’ve become used to” with ICE Brent averaging $76/bbl. “The uncertainty the impact of the new [Omicron] variant is driving the price for Brent crude oil downwards,” according to Mintec. Falling gas and coal prices could see fertiliser production edge back up, in turn increasing supply and cutting costs for farmers and growers, and last year’s high oil prices “have clearly been a bullish influence” on sugar and vegetable oils, says IHS Markit’s Hughes, as they are turned into motor fuels.
In December, the US Department of Agriculture forecast “higher supplies, greater consumption, increased trade, and higher ending stocks” in the global wheat market due to “upward production revisions for Australia, Russia, and Canada”. The FAO said earlier in the month global wheat trade could expand by 2.2% in the year to July 2022, though Rabobank suggests it could be second half of next year before its “base case” of “a small surplus in the global balance sheet after two years of deficits” materialises. In the UK, according to Mintec, “supply bottlenecks should improve in Q1-Q2 2022, which should see prices edge lower from current levels”.
A slight rise of less than 1% in global supply seems likely, going by the FAO’s latest, which cited bigger than-expected crops in Pakistan and the US, where the USDA separately forecast an increase in exports from violence-wracked Myanmar. That could possibly offset less rosy production outlooks across the border, in Bangladesh and Thailand, and overall “lower supplies, lower consumption, fractionally larger trade” at least until mid-2022. According to Mintec, farmers are warning that production costs “could rise as much as by 30% because of skyrocketing diesel and fertiliser prices”.
Palm oil ↑
With production likely to stay flat in Malaysia, the world’s second-biggest source, due to a labour shortage caused by the government’s strict pandemic border shutdown, market behemoth Indonesia was set to expand its plantation area. Prices are likely to increase by 7% from 2021, according to Rabobank, though if crude oil prices fall, this could have a knock-on impact in the same direction. But either way, the market was facing a supply shortage, in large part due to Malaysia needing to fill about 70,000 plantation vacancies, according to industry representatives speaking at a recent S&P Global Platts event. Mintec says it expects the labour shortage to ease by mid-year.
Other vegetable oils →
According to the OECD’s Huburtus Gay, “markets remain tight and a harvest shortfall or adverse weather in any major producing country could lead to increasing prices”. Rabobank has global vegetable oil usage for the year up to mid-2022 increasing by 1% to 308.2MMT, with USDA seeing jumps in Australian rapeseed and Ukrainian soybean outputs. But overall prices “could go one way or the other”, depending on market demand for energy and animal feed, which some oils or oilseeds are used for, according to the FAO’s Abdolreza Abbassian.