Global food price inflation continues to slow as Russia-Ukraine impacts ease

The slowing growth in global food prices is poised to drop further as the supply chain upheaval brought about by Russia’s invasion of Ukraine unwinds.

The price deceleration is expected to continue even though Russia has abandoned the Black Sea Grain Initiative, which was intended to keep Ukrainian food exports flowing.

Food prices are normalizing nearly 1.5 years after the invasion as alternative shipping routes, expectations of dropping logistics costs and strong harvests in other countries mitigate the impacts of the ongoing war.

“At this point, food commodity prices are generally in decline and retail food inflation is slowing,” said Paul Hughes, chief agricultural economist at S&P Global Commodity Insights. “I would expect retail food inflation to continue to slow, provided food commodities continue to trend sideways to lower.”

Exports shaken up

Russia’s February 2022 invasion had an immediate impact on Ukraine’s ability to safely export its goods as shipping routes through the Black Sea were cut off. That added to already existing inflationary pressures and drought that affected harvests across much of the rest of Europe in the summer of 2022.

The United Nations Food and Agriculture Organization’s (FAO) food price index peaked at an all-time high in March 2022 after the invasion of Ukraine. Since then, it has steadily declined.

Grain shipments from the country largely tanked in the months after the invasion, according to data collected by the United Nations’ Comtrade platform. Other countries, including Brazil, stepped up their own exports to fill the gaps.

Ukrainian sunflower oil exports were particularly affected by the war. The country supplies nearly 50% of global sunflower oil exports and shifted to exporting raw seeds that were crushed in other countries.

The Black Sea Grain Initiative, an UN-brokered deal reached in July 2022 that allowed Ukraine to continue commercial food and fertilizer exports through the country’s Black Sea ports, also helped the country’s exports recover, easing some pressure on food prices.

Outlook cautiously optimistic

Russia’s July 17 exit from the deal and subsequent blockade on Ukrainian ports have caused a spike in the price of food commodity futures, which have otherwise trended down from the post-invasion peak in May 2022. Wheat prices, for example, jumped by more than $1 a bushel in a week, hitting nearly $7.80 on July 24. Before the war began, Ukraine was the world’s fifth-largest wheat exporter.

Food supply chains are particularly exposed to the terms of the agreement and the war is likely to continue through at the least the end of the year, according to Chris Rogers, head of supply chain research at S&P Global Market Intelligence.

Still, the United Nations is urging Russia to reenter the Black Sea deal. Export companies have also adapted to working in fewer grain export channels by using alternatives, said Maksym Kharchenko, freight market analyst with UkrAgroConsult.

“Even if the grain agreement is stopped, grain exports will not stop due to the preservation of exports through the ‘solidarity lanes,'” Kharchenko said.

The European Union’s solidarity lanes are efforts intended to facilitate the flow of Ukrainian exports through such methods as alternative shipping routes and expedited customs operations.

Though price volatility and market disruptions immediately followed Russia’s invasion, Hughes with S&P Global Commodity Insights said such stark market reactions were unlikely to be repeated solely due to Russia’s exit from the deal.

“Ukraine has proved to be very resilient in its ability to export via rail, truck, and barge. Where prices go over the next three to six months is likely determined by Northern Hemisphere crop production and military tensions between Russia and Ukraine disrupting exports of either country,” Hughes said. “While we continue to see the export corridor as mostly a non-event, the increased military tension is not.”

Even if the Black Sea Grain Initiative ceases to function in its current form, other factors such as lower yields and lower stocks could prevent a run-up in grain prices, Kharchenko from UkrAgroConsult said.

“The load on grain elevators and export infrastructure will decrease, which will help reduce storage and freight prices,” said Kharchenko. “Thus, there are signs of a decrease in the logistics component in the structure of grain price formation.”

Retail food price inflation is falling

While recent flare-ups in the conflict have stoked fresh concerns about the cost and supply of food, the run-up comes as retail food prices are largely falling. International food commodity prices have retreated from their early 2022 highs, with year-over-year price changes turning negative later in the year into 2023, according to the latest readings of the FAO food price index. Leading inflation indicators in the US and eurozone are also falling on a lagged basis as the impacts of falling global food prices filter down to consumers.

The latest consumer price index for June provided more indication of slowing food price inflation in the US. According to the July 12 release, the overall food index rose by 0.1% in June after a 5.7% increase over last year.

Retail food price inflation in other major economies such as China, India and Brazil is also declining to varying degrees, according to FAO food price data.

However, some more vulnerable regions are still suffering the consequences of the conflict, said William Masters, professor of economics at Tufts University.

“The direct impact of the Russia-Ukraine crisis on food prices, poverty and malnutrition is greatest for those who would otherwise be most reliant on those shipments, especially the poorest people in Africa who have been forced to buy from higher-cost sources,” said Masters. “The single clearest impact is probably on people who need humanitarian aid, because wheat and vegetable oil through the Black Sea had been their fastest and lowest-cost source, so programs with fixed budgets and urgent timelines were often cut off entirely.”

Global reliance on Ukrainian and Russian exports will continue, underlining the need for safe and consistent trade flows out of the region, said Masters.

“We often imagine it would be easy for people at each location to produce what they need and not rely on others, but the persistent damage inflicted by losing access to food from Ukraine and Russia shows how valuable trade between regions really is — we shouldn’t take it for granted or imagine there are easy alternatives,” Masters said.

Tags: Ukraine, UkrAgroConsult, export, grain, prices, food, war, Black Sea Grain Initiative