Expensive Basket: What Will Happen to Stores Food Prices

Europe is reaping the consequences of spring rains and summer droughts. "Reaping" quite literally, as countries are completing their harvests and assessing their modest yields. A smaller-than-expected harvest is just part of the story. In addition to this, there are restrictions on the import of agricultural products from one of the world's largest agricultural producers, Ukraine. Consumers in the EU and the UK will soon feel the effects of this "combo".

September, like August, is a period of seasonal food price reductions. Northern hemisphere countries are finishing their harvests, agricultural product supply peaks in the markets, consumers marvel at falling prices, and central banks, without much joy, record deflation.

The year 2023 is no exception.

For example, in the UK, food inflation has decreased from 13.4% from the beginning of the year to July to 11.5% in August. This has helped reduce overall inflation from 7.6% in July to 6.9%. Even in war-torn Ukraine, consumer prices have been falling for the second consecutive month.

However, this brief period of "buyer's market" is just the calm before the storm. By the end of autumn, supply and demand balances come to a fair denominator, and it rarely pleases consumers. In the agricultural season of 2023-2024, the price rollback may occur even earlier. The main reason for this is the weather.

Dry, Hot, Costly

NASA's Institute for Space Studies officially declared July of this year as the hottest month on Earth in recorded history. Record droughts, totaling four heatwaves, were concentrated in Southern Europe - Portugal, Spain, Italy, and Greece. But in addition to the heatwaves, the overall food supply situation in the entire continent worsened. According to the European Drought Observatory, droughts have affected 40.1% of the EU's territory to some extent. Even now, 18% of the EU's territory is still affected by droughts.

The geography of the drought and its concentration in Southern EU countries determined the most affected categories of products.

First and foremost are vegetables, fruits, and olive oil. Approximately 60% of Spain's territory in the summer of 2023 was affected by drought, with corresponding consequences for local agriculture. This country is also the main supplier of vegetables and fruits to the EU, so any problems for such a large producer will affect European consumers in the coming months.

Spain also accounts for 45% of the world's olive production. Over the last five years, the average harvest here was around 1.3 million tons per year. In 2023, as predicted by the International Olive Oil Council, barely 800-850 thousand tons will be collected. And this is after prices for olive oil have already risen by 47% over the past year and a half.

It's almost comical: in Spain, due to the rise in the price of oil, which has literally become "liquid gold," there has been a series of oil mill thefts. For example, on August 30th, thieves stole 50,000 litres of cold-pressed olive oil worth over half a million euros from a plant in Cordoba.

The same scorching weather was observed in Italy and Portugal all summer. In Italy, the heat destroyed a fifth of the tomato crop. This will affect the production of tomato paste, ketchup, and fresh tomatoes. Of course, prices for all of these will soar.

Let's not forget Italy's contribution to driving consumer inflation. There, grape harvests have been poor due to drought. This means that in a couple of months, wine prices will start to rise. Italian winemakers have had a tough year due to adverse weather and fungal vine diseases like Plasmopara Viticola.

Wine production in Italy in 2023 will decrease by 12%, to 44 million hectolitres. For the first time in 9 years, this country will lose its status as the world's largest wine producer, ceding the top spot to France. The only, albeit weak consolation is that Italian wine production has usually been close to the limitations set for grape cultivation in various regions. Therefore, while wine will become more expensive, it won't increase as much as, for example, olive oil.

Photo: Prime Minister of Poland Mateusz Morawiecki: "We will extend this ban, despite their disagreement, despite the disagreement of the European Commission... We will extend the ban on the import of Ukrainian grain. We will not listen to Berlin, we will not listen to von der Leyen, Tusk, or Weber." Source: Mateusz Morawiecki Twitter

Grain of Truth

The rising cost of vegetables, fruits, vegetable oil, and wine is undoubtedly unwelcome news. Yet, even more concerning is the decrease in the harvest of essential grain crops, primarily wheat. In a September report, analysts at the FAO (a UN agency responsible for monitoring agricultural markets) lowered their forecast for global grain production in the 2023/24 marketing year by 4 million tonnes compared to their July report, now estimating it at 2.81 billion tonnes. Notably, the world's wheat harvest forecast for the current season has been reduced by 2.2 million tonnes to 781.1 million tonnes (-2.6% year-on-year) due to downward revisions for Canada and the EU, attributed to drought, and China, due to excessive rainfall.

In Europe, the decline in grain production is most pronounced in Italy, Spain, Portugal, and Romania. Regular consumers will feel this impact on their wallets within a couple of months, particularly in the prices of bread and various types of pasta. Even in Italy, an average half-kilogram packet of pasta is likely to increase by at least 50 euro cents.

Of course, it's not just pasta and bread that will become more expensive. Cheap and quality Ukrainian corn allowed European farmers to reduce their expenses for livestock and poultry feed last season. This year, animal and poultry feed is expected to increase in price. This will affect supermarket prices for meat, dairy products, and eggs.

Meanwhile, Ukraine, despite the ongoing conflict, is finishing the agricultural season quite successfully. The current forecast for grain and oilseed production stands at 76.8 million tonnes, which is 3 million tonnes more than in 2022, even though less land was sown with these crops. With a domestic market need of only 30-35 million tonnes, Ukrainian exporters can offer at least 40 million tonnes of grain and oilseeds to external markets.

However, the challenge lies in sending these millions of tonnes to external markets and thereby stabilising global prices. On September 15, 2023, restrictions on the import of Ukrainian rapeseed, corn, wheat, and sunflower seeds into five European countries - Bulgaria, Slovakia, Romania, Poland, and Hungary - expired. The European Commission officially declared the problem of Ukrainian produce saturation to be resolved. However, Hungary, Slovakia, and Poland have extended restrictions on grain supplies from Ukraine at a national level. This means that while the transit through bordering territories with Ukraine remains formally open, it will be subject to additional bureaucratic complexities and control procedures.

Photo: Hungarian Minister of Agriculture István Nagy: "Hungary continues the ban on the import of Ukrainian agricultural products within its national competence. The ban includes cereals, sunflower seeds, flour, oil, honey, some types of meat, and eggs." Source: István Nagy Facebook

European restrictions wouldn't be as painful if Ukraine still had access to sea exports. However, on July 17, 2023, exactly a year after the launch of the Black Sea Grain Initiative, this route was blocked due to Russia's actions. Vladimir Putin is using the world's dependency on Ukrainian grain to push for sanctions relief against the aggressor country, Russia. Simultaneously, the Russian military fleet is attempting to block any attempts by grain-carrying trade ships to reach Ukrainian ports.

The market is a connected ecosystem, and the partial absence of Ukrainian products will be compensated for by deliveries from other producers. For example, according to The Rural Bank, Australian agricultural product exports in the 2022-2023 season, in light of Ukraine's limited presence, increased by $12 billion to $80 billion. For the second consecutive year, China remains the largest sales market for Australian farmers, which was, and still is, one of the key markets for Ukrainian food products.

Photo: The Turkish bulk carrier Aroyat (pictured) under the flag of Palau arrived in the Ukrainian Black Sea port of Chornomorsk on the same day as the bulk carrier Resilient Africa, for loading nearly 20,000 tonnes of wheat. Aroyat arrived from the Turkish port of Diliskelesi on September 16. Resilient Africa arrived from Constanța, Romania. Source: marinetraffic

And for Europe, there's some good news too. On September 16, the cargo ships Resilient Africa and Aroyat, sailing under the flag of Palau, entered the waters of the Black Sea port of Chornomorsk. These are the first two civilian vessels to reach Ukrainian ports near Odesa since the start of Russia's invasion of Ukraine, outside the grain corridor. According to the Ukrainian Sea Ports Authority, the ships Aroyat and Resilient Africa have docked at the port of Chornomorsk to load nearly 20,000 tonnes of wheat. Their journey to Ukrainian ports took them along the coastlines of Turkey, Bulgaria, and Romania within their territorial waters.