Food prices set to remain volatile as the war continues and fertilizer costs remain high

Food price inflation has become a topic of mainstream interest, as forecast here a year ago:

“Sharply higher prices for staples and supply shortages are increasing pressure on households worldwide and pushing millions more into poverty. The threat is highest for the poorest countries with a large share of consumption from food imports, but vulnerability is increasing rapidly in middle-income countries.”

The war is the main reason, as discussed here in April 2022, as it led to:

“Fertiliser costs spiralling along with natural gas prices”.

Fertilizers are critically important for food production – directly for crops such as wheat, and indirectly for crops to be eaten by livestock. As Our World in Data report, half the world’s population depends on nitrogen fertilizer for its food.

The charts from Index Mundi tell the story:

  • DAP prices trebled between 2020-22, and are still double 2020 levels
  • Urea prices followed the same pattern, having peaked as farmers switched from ammonium nitrate
  • Phosphate rock prices, where Morocco has 75% of global reserves,  have doubled since the war began

And as the World Bank warns, the situation remains very fragile:

“Fertilizer prices have eased from their early 2022 peaks but they remain at historically elevated levels. The price easing partly reflects weak demand as farmers cut back fertilizer field applications due to affordability and availability issues. The industry is also affected by supply-side issues, including a production crunch in Europe, disruptions due to sanctions on Russia and Belarus, and trade restrictions in China.”

As ICIS has reported, around 70% of European ammonia supply was shutdown for most of last year due to the shortage of natural gas and its high price. And output is only now starting to come back online with companies such as Grupa Azoty raising production.

Consumer demand patterns are also seeing major impacts.  Lower-income and younger consumers are being forced to focus on “needs” rather than “wants”. And many major retailers are reporting that consumers have cut back on buying durable goods to focus on food and other essentials.

And as the chart shows, the problems haven’t gone away. Prices are still much higher than before the war started:

  • US, European and Japanese food price indices are all still increasing, albeit at slower rates
  • The Food & Agricultural Organisation Index is well above 2020 levels

Looking ahead, of course, major uncertainties remain as the World Bank warned last month:

“Geopolitics. The ongoing Russian invasion of Ukraine poses a significant risk to wheat, maize, oilseeds, and fertilizer markets, potentially leading to price increases.

“Weather conditions. The likelihood of the El Niño phenomenon forming in the next two months has increased to over 90%.  Commodities such as coffee, rice, palm oil, and natural rubber are particularly sensitive to El Niño effects.

“Macroeconomic conditions. Recent interest rate hikes by central banks to combat inflation have raised the cost of capital, which may constrain borrowing and investments in agricultural production and exports.”  

Plus, of course, volatile energy prices and exchange rates have the potential to create further chaos in global and local food markets.

As noted here in March, it therefore seems likely that we are now approaching another ‘Minsky Moment’:

“Hyman Minsky’s insight was that a long period of stability, such as that experienced over the past decade, eventually leads to major instability.”