Food Prices Dropped on the Exchanges? Why Don't We Feel It in Supermarkets?
The shock of soaring prices in supermarkets seems to be fading away from last year. However, the prices of food are not rushing to return to their previous levels, despite significant declines in global food commodity prices. The reason for last year's shock might still be lingering - Russia's invasion of Ukraine.
For the past twelve months, the United Nations' Food and Agriculture Organization (FAO) has been recording a decline in prices for major food commodities. Though prices occasionally fluctuate, overall, everything has been gradually getting cheaper.
According to the FAO's June report, the Food Price Index, which reflects the fluctuations in the cost of major agricultural commodities, was 1.4% lower than in May and a significant 23.4% below the peak levels reached in March 2022. The world experienced a shock in March 2022 due to Russia's invasion of Ukraine, resulting in the temporary elimination of Ukrainian goods from the global food market. The blockade of the Black Sea ports halted the export of Ukrainian grain and other commodities.
When agricultural exports from Ukraine resumed through the Grain Corridor, although in a limited capacity, the price rally was halted. The average prices for wheat stabilized at around $260 per ton, compared to the hysterical $500 per ton seen in May 2022. The return of sunflower oil, soybeans, and corn from Ukraine to the international food market also had a positive impact, as the FAO consistently records a decrease in the prices of these food commodities.
Who Ate the Profit from Bread, Eggs, and Yogurt?
In May 2023, global food prices hit their lowest point in the last two years. But here comes the paradox: the price tags on food products in supermarkets don't seem to reflect this decline in the prices of agricultural raw materials. Yes, raw materials and resources for their production have become cheaper. Gas, which is heavily consumed by food manufacturers, has also become cheaper. However, the final food products prices stay strong.
Remember the seemingly outrageous prices for eggs a year ago? The current prices are not far from last year's.
Even the International Monetary Fund (IMF) acknowledges this. According to its review in the "Budgetary Journal," despite the decline in global food prices compared to the peak levels in mid-2022, internal prices continue to rise. The IMF further warns that food production risks will continue to threaten price stability.
Photo: The price tags on food products in supermarkets don't seem to reflect this decline in the prices of agricultural raw materials. Prices in euro, South Italy, 2023, August. Source: The Gaze
Why Are Breakfasts, Lunches, and Dinners Getting More Expensive?
First and foremost, it's essential to understand that this is a global trend. Food prices are rising in all countries, regardless of their prosperity.
Undoubtedly, the poorest regions, such as Africa, feel this impact more intensely. However, even European consumers are sensing it in their own wallets. A vivid example is the UK, where food prices are rising at the fastest pace since 1977. According to the National Statistics Office, prices have risen by 13% from the beginning of the year to March 2023. The staple British dish, Fish and Chips, has increased by 20% over the past 12 months to £9 per portion.
The situation is so threatening that the UK Prime Minister, Rishi Sunak, stated that weekly shopping bills "have grown too much over the past few months," prompting the government to consider price controls on food products.
In France, the government struck a deal with retailers to limit prices on essential products like bread, milk, and oil.
So, what do Lagos, Yemen, London, and Paris have in common? Why will price tags continue to sizzle?
Heading in One Direction
First and foremost, after the shocking and hysterical surge in prices, they never fully revert to their previous levels. Prices can skyrocket within a day, but they decrease much more slowly. As market participants say, "inflation is very hard to eliminate from agriculture."
The rise in prices for energy resources and supply chain disruptions caused by the invasion of Ukraine remain the primary reasons for price hikes. Although commodity prices have declined on the exchanges, large corporations – major producers – work with long-term contracts. These contracts are based on last period's prices, and there is a time lag before the changes in the cost of food raw materials become noticeable to consumers and reflect in supermarket prices.
Another reason is the increase in labor costs. In the post-COVID world, more spending on consumption is required, leading to higher staff wages. Workers sometimes demand pay raises in an ultimative manner because "everything has become more expensive." Additionally, increased costs for processing, packaging, and logistics have contributed to the rise in prices.
It's a One-Way Road – Inflation is easy to allow but extremely difficult to stop. There is also what's called the "greed theory." Producers use inflation as an excuse to increase their profits. They seek to compensate for last year's financial setbacks. In the UK, this version seems to be fundamental. Recently, a cross-party committee in the UK investigating "fair food prices" announced this.
Undoubtedly, seasonal difficulties also play a role in maintaining high prices. For example, sugar prices, which hit record highs last year, remain elevated this season due to extremely modest harvest forecasts in Europe and Latin America.
It's not just sugar facing challenges. Record-breaking heat is impacting harvest predictions in major food-producing countries.
Even China, the largest consumer and importer of food, is experiencing hardships. The Chinese National Meteorological Center has warned about approaching hot weather in the northern regions of the country, which could damage corn and wheat fields. In contrast, the southern regions expect heavy rains, which may harm rice plantations.
In the US, droughts are on the rise, threatening agrarian states, including the "corn belt."
Europe is going through its second consecutive year of record drought. The European Drought Observatory is tracking droughts on a quarter of the territories of the 27 European Union countries.
Every Nation for Itself
In their efforts to protect domestic markets, countries impose restrictions on food exports, further boosting global prices. For example, India controls up to 40% of the world's rice supply. If India decides to ban rice exports, except for the expensive Basmati variety, this decision from New Delhi could lead to a 20% price increase for this crop worldwide.
Ukraine, besides the forced reduction in grain exports, also resorts to administrative restrictions on certain goods where it sees the risk of price increases. For example, quotas on sugar exports were introduced.
Russia Keeps Prices Up
Tensions in the Black Sea region are putting logistics at risk, including that of oil tankers. "Russian bombardment of Ukrainian ports in the Black Sea could have far-reaching consequences for global food security," said Rosemary DiCarlo, head of the UN's political affairs.