A spectacular rally in crop prices from wheat to palm oil has increased concerns that food costs are going to get a lot more expensive.
Those fears only got worse on Thursday after Russian forces attacked targets across Ukraine. Both countries are key suppliers of grains and edible oils. The crisis has driven wheat to the highest level since 2012, while drought in South America has dimmed the outlook for soybean supplies. Palm oil, which is used in thousands of products from cookies to shampoo, is on a record breaking run as a labor shortage crimps output in major producer Malaysia.
That could feed through to higher prices at grocery stores as everything from pasta to chocolate becomes more expensive to produce, further squeezing household budgets already strained by rising inflation. A measure of global food costs calculated by the United Nations rose near a record in January.
The Russia-Ukraine crisis “represents a major concern for vegetable oil, wheat and corn,” said Oscar Tjakra, a senior analyst at Rabobank in Singapore. “We started 2022 from a position of low stocks in many agricultural commodities.”
Russian forces hit cities in Ukraine after President Vladimir Putin ordered an operation aimed at demilitarizing the country. That sparked a rally across commodities on Thursday, driving Brent crude oil above $100 a barrel for the first time since 2014 and sending Chicago wheat futures almost 6% higher.
Ukraine and Russia account for about a quarter of the global trade in wheat, a fifth of corn sales, and 80% of worldwide sunflower oil exports. Wheat extended gains from the highest close since 2012 and was 5.4% higher at $9.3475 a bushel at 1:46 p.m. in Singapore. Corn and soybeans also rallied. In Malaysia, palm oil climbed as much as 6.2% to a record 6,351 ringgit a ton.
Exacerbating the inflation outlook is the surging cost of fertilizer. The market is already feeling the pinch due to reduced potash supplies from Belarus after U.S. sanctions, and any reduction of crop-nutrient exports from Russia will fuel the squeeze. With farmers scaling back fertilizer use, this could trigger lower crop yields and push up food prices even higher around the world.
There are signs that China, the world’s top importer of agricultural products, is concerned about the rally. Beijing announced this week that it would sell edible oil and soybeans from state reserves to boost supply on the domestic market. The Dalian exchange will also raise margin requirements for some corn and soybean meal futures contracts in a bid to cool speculation.
“The proportional increase in prices on supermarket shelves will of course be smaller, as commodity prices are usually only a relatively small proportion of the prices of final goods,” said Tjakra.
Dear Reader,
Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.
As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.
Support quality journalism and subscribe to Business Standard.
Digital Editor
RECOMMENDED FOR YOU