By: Ian Sheldon, Professor and Andersons Chair of Agricultural Marketing, Trade, and Policy, Agricultural, Environmental, and Development Economics, Ohio State University and Chris Zoller, Associate Professor and Extension Educator, Agriculture & Natural Resources, Ohio State University Extension – Tuscarawas County
The Current Forecast
Recent forecasts by the International Monetary Fund (IMF) (World Economic Outlook, October 2022) and others (Bloomberg News, November 15, 2022) suggest the rate of food price inflation will continue to decline as we head into 2023. As already well-documented, global food commodity prices surged after Russia’s invasion of Ukraine, reaching a record high in March, prices then correcting to their pre-war levels in June and July. This correction has been driven by improved supply conditions, partly due to the UN-Turkish brokered agreement to allow Ukrainian grain exports from the Black Sea, as well as macroeconomic factors, including rising interest rates and expectations of a global recession.
The IMF estimates food commodity prices added 5 percentage points to the average country’s food price inflation in 2021 and are forecast to add 6 percentage points in 2022, declining to 2 percentage points in 2023. The upward trajectory in food prices between April 2020 and May 2022 was driven by a combination of supply-side factors: the 2020-22 La Nińa weather event, food trade restrictions, grain demand by China, low interest rates, and of course the Russian invasion of Ukraine.
Despite the more positive outlook on food prices, there are still upside risks, including continued use of commodity export restrictions, weather events, higher fertilizer prices, and uncertainty due to the war in Ukraine. Worldwide, consumers have been affected by higher food and energy prices, but the impact has been particularly acute in emerging economies. For example, the average household in Ghana is paying two-thirds more than it did last year for diesel, flour, and other necessities, with other countries such as Sri Lanka, Pakistan, and Egypt seeing comparable increases (New York Times, October 5, 2002). To put this in context, food prices facing US consumers are currently 11 percent higher than they were a year ago (USDA, Economic Research Service, Food Price Outlook, October 2022), although this increase has been driven more by increased food spending at home and supply chain costs than rising commodity prices (Federal Reserve Bank of Kansas City, Economic Bulletin, September 23, 2022).
These price increases have been exacerbated by appreciation of the US dollar, which is the strongest it has been for two decades, globally traded commodities such as wheat and oil being priced in dollars (New York Times, October 5, 2022). In addition, with a large proportion of emerging economy debt being denominated in dollars, there is real concern about the possibility of a sovereign debt crisis, countries such as Egypt and Kenya being pushed closer to default, while others such as Sri Lanka have already defaulted (New York Times, September 26, 2022).
The Black Sea Grain Export Deal
Key to reducing pressure on food prices is continuation of the grain export deal signed by Ukraine, Turkey, Russia, and the United Nations (UN) on July 22 (USDA, Foreign Agricultural Service, Grain: World Markets and Trade, August 2022). The deal, due to expire on November 19, has been extended for an additional four months, with Turkey and the UN remaining as guarantors of the initiative (Reuters, November 17, 2022) (see figure).
Announcement of the deal provoked immediate 2.75 and 1.3 percent price declines in wheat and corn futures prices respectively on the Chicago Board of Trade (Reuters, November 17, 2022). However, Russia’s temporary withdrawal from and subsequent rejoining of the agreement in late-October/early-November led to sharp changes in wheat prices, underlying the ongoing potential for price volatility in grain markets. Russia initially stated it was abandoning the deal on October 29 (Financial Times, October 29, 2022), but then rejoined on November 2 (Financial Times, November 2), wheat futures prices rising to $9.00 per bushel, and then reversing to $8.53 per bushel (Bloomberg, November 2, 2022).
The possibility of Russia leaving the agreement was being discussed throughout October, official statements indicating that extension of the deal was dependent on the West easing constraints on Russian exports of grain and fertilizers (Reuters, October 17, 2022). While extension of the deal is a positive move, it is less than the one-year sought by Ukraine, plus they had also requested the deal be expanded to include additional ports in the Mykolayiv region (Financial Times, November 17, 2022). It should be noted that, even with the deal in place, Ukrainian grain exports remain below their 2021 levels (see figure).
Looking Forward
Looking forward, the IMF argues it will be important for appropriate policies to be targeted at minimizing food price volatility, including targeted food aid to vulnerable consumers, and incentives for building up global grain stocks (World Economic Outlook, October 2022). USDA reports global ending wheat stocks for 2022/23 will be their tightest since 2016/17 but given China accounts for more than 50 percent of these stocks, and their stocks are typically unavailable to the world market, global stocks are currently the lowest since 2007/08 (USDA/Economic Research Service, Wheat Outlook, November 14, 2022). With stocks at such low levels, there will be continuing pressure on global supplies and prices (Bloomberg, November 15, 2022).
With the grain and oilseed harvest in the United States being close to completion, much will depend on the extent of planting and harvests in Argentina and Brazil (Bloomberg, November 15, 2022). However, there is a growing need to solve an increasing gap between growth in global consumption and grain and oilseed yields (Zulauf, farmdocdaily, November 16, 2022). There are two possible responses to this gap: either more land in production or increased yield growth. Global harvested land has increased by only 0.9 percent since 2002, 22 million acres being currently needed per year, while stability of yield growth since 1980 suggests a significant increase is very unlikely (Fuglie, Applied Economic Perspectives and Policy, 2018). Economic logic suggests only higher food prices can curb consumption growth and ration existing food supply, with obvious implications for low-income consumers.
The situations described above reinforce the fact that agriculture functions in a global market, with many factors influencing income and expenses. Ohio farmers must remain aware of global forces impacting markets, analyze their financial position, and develop plans and alternatives to those plans to be positioned to act accordingly.
Farmers are encouraged to meet with their lender, input suppliers, Extension professional, and other trusted advisors to analyze and plan. The following OSU Extension resources can assist in the process:
Farm Office: https://farmoffice.osu.edu/
Ohio Farm Business Analysis & Benchmarking Program: https://farmprofitability.osu.edu/
Ohio Farm Enterprise Budgets: https://farmoffice.osu.edu/farm-management/enterprise-budgets
Ohio Ag Manager: https://u.osu.edu/ohioagmanager/