Lower Food Prices Despite End of Black Sea Route and El Nino

Economists and fund managers are still worried about food prices, but what is the impact of the end of the Black Sea grain deal and El Nino?

Figure 1: FAO World Food Price Index 

Source: FAO 

Food prices have been an issue driving headline inflation in DM and a number of EM countries over the last 18 months. However, despite the end to the Black Sea grain deal over the summer and El Nino, FAO World food prices have actually continued to fall over the summer (Figure 1) for a number of reasons.

• Great corn harvest. The international grains council is forecasting that total global grains production will be the 2^nd highest on record (here), with a great corn harvest standing out. Harvests in the U.S. and Brazil are forecast to be good and we have previously noted the big upside surprises to Brazil GDP from agriculture (here). Inventories are also reasonable, which also means that stocks can be rundown when consumption outstrips supplies e.g., for wheat where inventory rundown can offset the impact of the end of the Black Sea grain deal. Thus corn/wheat and soybean prices have moved lower in 2023. 
• Lower veg oil to meat prices. Healthy production and supplies and only modest increase in demand has helped to bring down prices for most other food groups such as vegetable oil/diary/meats. The exceptions are sugars, which have moved higher on El Nino (e.g., India sugarcane production). 
• Firm USD. The rebound in the USD in 2023 has also helped push raw material food prices lower, given the inverse correlation with the USD. We now see the USD consolidating at high levels, before falling in 2024 with reductions in the Fed Funds rate and this could boost raw material prices before other factors impact.
• El Nino early days. It is also worth noting that the effects of El Nino are only now starting to feedthrough. Concerns over rice supply have already prompted India to ban Indica white rice exports and other Asian countries to take a cautious approach on stock/supplies. This has caused a sharp rise for rice prices in recent months (Figure 2). Meanwhile, El Nino can impact food production through the next 12 months and produce some upside risks for country level food prices.

Figure 2: Thai White Rice 5% Price ($ Metric Tonnes)

Source: Bloomberg/Continuum Economics 

Overall, healthy supply ex Rice is helping to push raw material food prices lower, which can feedthrough to help food inflation within CPI baskets and appears to be underestimated by DM central banks. Though processing and labor costs are also key issues in food prices within the CPI baskets, the ongoing decline in the FAO food price index is good news for disinflation. Political sensitivity over cost of living problems also means that politicians will likely pressure food companies and supermarkets to take account of falling raw material prices. 

The picture in Asia is more complex due to El Nino and concerns that it will impact the crucial rice production outlook, this can mean that Asia does not get the same disinflationary benefit as Europe/U.S.