Why high food prices aren’t going to go away
HIGH food prices aren’t going away, according to Felix Odey, a portfolio manager for global resource equities at Schroders.
South African’s wallets are increasingly under pressure at till points as the cost of living soars.
Schroders believes food prices are likely to stay around these high levels for the foreseeable future, Odey said yesterday.
“Demand is set to remain high across the globe, while supply will remain constrained this year and next.
“This tightness in supply and demand may even worsen in 2023 and beyond. That’s because unpredictable weather patterns are adding to supply uncertainty, alongside the possibility of continued disruption to production in Ukraine,” he said.
Global price moves for some agricultural commodities have been dramatic since Russia invaded Ukraine at the end of February.
African countries including South Africa have been intensely affected by the growing crisis, which has sent the prices of grains, cooking oils, fuel and fertiliser soaring.
South Africa’s largest food redistribution organisation, FoodForward SA, recently conducted a price comparison review between 2021 and 2022 which showed that basic food prices had increased by 12.9 percent in the past year alone.
In July the household affordability index by the Pietermaritzburg Economic Justice & Dignity group recorded the average cost of its household food basket at R4 748, up R60.06 – or 1.3 percent– from R4 688 in June.
Meanwhile, Odey said crops would likely be produced with lower levels of fertiliser, following significant price rises and supply disruption in fertiliser markets as a result of the war.
He explained that Ukraine and Russia are important commodity exporters
“The reason for the price rises is clear when we consider how important Ukraine and Russia are as exporters of food and other commodities. Sunflower oil and grains (corn, wheat and barley) have been most impacted on the agricultural side,” he said.
Potash, at 40 percent of global exports when Belarus was included, had seen the most disruption on the fertiliser side.
The long-term supply disruption for Ukraine was still unclear.
The disruption to commodity exports from Ukraine and Russia would have price repercussions on other commodities too. Prices of palm oil looked set to rise as it is increasingly used as a substitute for sunflower oil, for example.
“Rising prices across a broad range of commodities also reduce the incentive for farmers elsewhere to shift into wheat, which would address some of the supply constraints, because they can get decent prices for other crops anyway,” Odey said.
Another limitation on other regions’ ability to fill project shortfalls was the disruption to inputs such as fertiliser. The cost of fertiliser for US farmers had increased from 14 percent of revenue in 2020 to around 23 percent in 2022.
Odey said given the disruption to both crop and fertiliser exports, it was no surprise that various countries were taking steps to protect their food supply. Currently around 17 percent of the world market in calories is under food restrictions.
“As the market tightens, supply becomes more dependent on marginal producers – that is, those who produce a relatively small amount. This increases the risk of food price volatility from extreme weather events. We can see that West Africa is particularly at risk, with 70 percent of cropland exposed to drought,” he said.
In the near term, it was likely that food security will be the priority of governments. Higher fertiliser prices, tight agricultural equipment markets and disrupted value chains for things like pesticides, means that global yields across the agricultural commodity complex could fall both this year and next, he said.