Costs of production could hinge on energy supplies as concerns grow about winter gas rationing in Europe

As 2021 wound down, the outlook for the world’s food commodity markets was grim. Over a year of soaring input costs, from fuel to fertiliser to shipping, had jacked most of them up to their highest levels since the 2010-12 global food price rises.

In tandem with 18 months of pandemic restrictions, 2021 global commodity price surges fed into what was by December the UK’s highest consumer inflation in three decades.

Prices of food commodities were expected to stay high throughout 2022, Hubertus Gay, senior agriculture economist at the Organisation for Economic Co-operation and Development (OECD), said around the time.

Six months on and the prognosis is worse still, with Gay admitting last week that food commodity price increases “have been much more than we expected”.

The FAO’s global food commodities prices index hit a new record in March and has stayed close to that level since, with a slight dip in May nonetheless leaving it 22.8% higher than a year earlier.

The Grocer takes a look at the areas where most pressure has been coming from since our December overview of commodity prices.

The late-February invasion of Ukraine by Russia led to further price rises and shortages in grains, cereals and edible oils in particular.

“Grain and vegetable oil prices have risen by the most, given the importance of Russia and Ukraine to global supply – the two together ordinarily account for around 28% of the world’s wheat exports and 55% of the world’s sunflower oil exports,” Capital Economics explained in a recent report, saying it expected global food commodity prices to stay high all year, close to the overall March peak.

Latest figures from the ONS this week pointed to rising food and drink prices as the biggest driver of UK inflation as it struck a fresh 40-year high of 9.1% in the 12 months to May, up slightly from 9% in April.

So the rate of the rise has at least slowed. But last week, there were predictions from IGD that food price inflation could peak at 15% over the summer.

It’s a vicious circle. Wider inflation can feed back into food and agri commodity markets through input cost pressures such as increased labour costs, as workers demand higher wages, the OECD’s Gay says.

A wave of industrial action to follow this week’s rail strikes has also been predicted.

Meanwhile, markets for grains and vegetable oils are set to remain “extremely tight”, says Carlos Mera, head of agri commodities markets at Dutch lender Rabobank.

Sunflower oil supplies from Ukraine have been the worst-hit of all food commodities since the start of the war, forcing the UK’s KTC to halt sales in March. “We lost almost half the world’s exported sunflower oil, out of Ukraine,” Mera says.

European vegetable oil prices were by March more than twice those seen in June last year, according to Mintec.

The global edible oils market was given a further jolt when Indonesia banned exports of palm oil, the world’s most-used edible oil – of which it is the world’s biggest supplier.

While Jakarta has since rescinded the ban, supply remained down overall.

And though some Ukrainian sunflower oil is again reaching international markets, mostly by rail, capacity is down by an estimated 80% due to Russia’s blockade of Ukraine’s Black Sea ports.

While Moscow says it would consider ending the blockade in return for the lifting of sanctions, the will-they-won’t-they saga has led to “volatility over the last few weeks” for global grains prices, says Mintec analyst Zanna Aleksahhina. 

Mintec European cereals data shows prices up around 25% compared with the start of the year and more than double those of mid-2021, while Argentinian, French and Romanian wheat prices are also continuing to track upwards, according to numbers from S&P’s IHS Markit.

The knock-on effect on other commodities is also profound. “Dairy and meat depend on prices of soybean and maize, and those are directly linked to what is going on in grain markets,” says John Baffes, senior economist at the World Bank.

Mintec prices for UK meat & poultry show high volatility, spiking around a year ago before dipping in October and then surging again to top last year’s high by April.

China’s huge stockpile of wheat, estimated at around half of global inventories, could provide another source to potentially offset supply and price concerns.

But there is as yet no sign of any supplier riding to the rescue, with India limiting wheat exports, the US looking set for a reduced crop and Russia likely to remain the world’s biggest wheat exporter, according to USDA projections. Countries across Africa, Asia and the Middle East remain reliant on its supplies.

“I believe wheat prices will stay high year on year, but we could see a seasonal decline in Q3 2022,” says Aleksahhina.

If grain prices are high or supplies are tight, it doesn’t take long for this to affect other food commodities. But it is price rises in other primary commodity sectors, the so-called ‘hard’ commodities and energy in particular, which could be key to how food commodity prices and supplies look later in the year.

Gas, oil, fertiliser

An estimated 40%-60% of world food production is dependent on fertiliser, and supplies were already under pressure before the war.

With major producers China and Russia curbing exports of fertiliser since last year, global prices had already doubled by late 2021, the IMF’s global price indices show.

Could it get any worse? Yes. A month after Russia’s invasion of Ukraine, Yara International, one of Europe’s biggest suppliers, temporarily stopped production at two factories. In June, CF Industries, another major producer of fertiliser, closed one of two UK factories, citing cost pressures.

Meanwhile, so-called ‘demand destruction’, caused by high prices and shortages, making it difficult for farmers to get hold of fertiliser, saw some global prices fall back in May. But the outlook is for a rebound later in the year, not least as the war in Ukraine has contributed to further jumps in oil and gas prices, adding to cost pressures.

“The share of energy prices in overall agriculture costs is high compared to some other sectors,” Gay says.

The IMF’s indices show oil up by about 80% year on year by May 2022, with natural gas nearly three times more expensive than a year before. By mid-June, Brent crude was over $120 a barrel and rising, while gas supplies to Europe looked in jeopardy as Russia’s westward flows fell to their lowest on record, says Henning Gloystein, director of energy, climate & resources at Eurasia Group, a political and economic risk consultancy.

For global oil and gas prices, “the risk is to the upside”, Gloystein believes.

While the mid-June supply hitch was attributed by Russia’s Gazprom to pipeline maintenance, the German government says the cut is “politically motivated”.

It adds to European concerns Russia is gearing up to cut gas exports to Europe in retaliation for EU sanctions, including on Russian oil, imposed as punishment for the invasion of Ukraine.

Those measures were already seen as likely to add to inflationary pressures, the OECD says, while a “forthcoming embargo on coal and seaborne oil imports from Russia in Europe adds to the challenges”.

Russia has in the meantime sought to cut dependence on European buyers of its mammoth resources, with Asia, which in the main has ignored calls by western nations to impose sanctions, offering an increasingly lucrative alternative.

“Russian crude oil has seen a switch in flow from its traditional market of Europe to Asia,” according to Rystad Energy’s Wei Cheong Ho, who puts the eastbound volume increase since the start of the war at 347%. S&P Global says Russia’s global oil exports hit a three-year high in June.

The turmoil has left the energy market situation “totally uncertain”, Gloystein says, warning that if Russia turns off its taps in Europe, it could see gas prices bursting “through the roof”, followed by rationing come winter.

Baffes says the impact of another gas price rise would mean “further increases” in fertiliser prices, which would “in turn put more pressure on food commodity prices”, leaving policymakers “squeezed between addressing the food price issue and the energy price issue”.

The danger of course, as is often the way, is they end up failing to address neither.