Food prices up again? Everything will depend on these factors

Luc Williams

The global food market he may get into trouble again. Bad weather is destroying crops around the world, from waterlogged fields in Western Europe to parched land in Australia. Moreover, Moscow's invasion of neighboring Ukraine interrupts Ukrainian grain supplies.

According to analysts, this means that global inventories will remain at their lowest level in almost a decade.

Wheat stocks lowest in almost a decade / Bloomberg

Exceptionally good harvests in the Black Sea regions have long kept prices stable. Wheat has reached half of the record price set in 2022. However, supply uncertainty is growing again, which is clearly visible on the market. Futures contracts rebounded to the highest level since August. At the same time, the funds are limiting bearish bets (i.e. short positions that predict a decline in the underlying instrument, e.g. wheat), which they have maintained for almost two years.

That's a worrying sign for consumers who have finally found relief from rising prices after the shock of 2022 food prices. Any prolonged price rise could increase the cost of bread and pasta and put renewed inflationary pressure on central banks, especially as prices of other major crops such as cocoa and coffee have risen sharply this year.

“Demand has increased, global stocks remain low and new crop problems are increasing,” said James Bolesworth, managing director at CRM AgriCommodities.

Wheat market signals supply concerns. Prices reached the highest level since August, and funds slowed down on bearish bets / Bloomberg

As the Northern Hemisphere harvest approaches, the next few weeks will be critical for crop development, so there is still time for the situation to improve or worsen.

Here are the conditions in the main markets that could influence the situation:

Drought in the Black Sea region

The largest grain exporter, Russia, may be struggling with the problem of drought. Weeks of hot weather and insufficient rainfall in the south of the country prompted analysts to lower harvest estimates.

On Wednesday, the Commodity Weather Group said half of Russia's winter wheat will remain too dry over the next two weeks. Despite this, Russia is still expected to harvest a large crop, but its dominance means that any local price shocks are passed on to other markets, and the country's wheat has recently become more expensive.

War in Ukraine

Drought has also hampered wheat farming in Ukraine in recent weeks, but the war is fueling other problems. Attacks on agricultural infrastructure threaten exports, and the labor force has been depleted as men serve in the military.

Grain production may decline by 6% in the coming season. compared to the previous year. Additionally, farmers expect to redirect hectares previously devoted to cereal cultivation to more profitable crops, such as rapeseed.

Wet Western Europe

A wet spring has damaged crop development in northwestern Europe. The quality of winter crops – which determines whether stocks are used for food or animal feed – may also suffer.

In France, the share of wheat and barley in the best conditions remains well below last year's level. The rain also slowed spring plantings in the UK, Germany and France.

Dry Australia

A dry, hot summer in parts of Australia has caused soil to dry out as farmers sow crops. While recent rains have provided some relief in some areas of the key state of Western Australia, farmers remain cautious. The reason for this concern is the risk of frying the crop if rainfall stops after germination.

Drought in the USA is not that dangerous

Drought has affected most of the U.S. winter wheat fields since early April, creating a problem for spring plantings even though the latest forecast shows scattered rain showers.

However, the situation in the U.S. is not so bad, because most of the American winter wheat is growing better than usual at this time of year, and spring plantings remain at a rate higher than the five-year average rate.

But things could change before the first harvest begins in the northern hemisphere in about four weeks.


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