World market prices for agricultural commodities are at their highest level in over 10 years (1). As of November 2021, the price index for agricultural commodities had increased by 27.3 percent since the same month last year. Cereals in particular have increased significantly – by 3.1 percent compared to October 2021. We already notice this when grocery shopping at the supermarket. Food prices recently rose by 4.8 percent – exceeding the general inflation rate of 4.5 percent.

But what is the cause of this seemingly unstoppable price trend that industry experts have been observing since last year?

Demand exceeds supply

The simple apparent reason is that globally, demand has exceeded supply over an extended period of time, since around 2017/2018. This has reduced stocks around the world that had previously served as a buffer, compensating fluctuations in supply and demand. This discrepancy is initially attributable to a combination of economic growth and lower production in individual regions: Weather-related poorer harvests, particularly in Brazil, Canada, Russia and the USA, led to lower availability of cereals and oilseeds on the markets. At the same time, the economies in the USA and China grew and with them the demand for raw materials. Demand also piled up globally during the first phase of the Corona pandemic, which unloaded through 2021. But other factors are paying into the current trend.

Biofuel quotas drive demand for vegetable oils

For example, the U.S. election in 2020 led to a shift in the country’s environmental policy: More biofuels were to be blended with fossil fuels. These biodiesel mandates briefly increased demand for vegetable oil significantly. Palm, soy, corn and canola, in particular, are used to produce biofuels. In the meantime, the government around Joe Biden has reduced the blending volume again, which could contribute to an easing of the market. This has also been helped by the fall in crude oil prices in the meantime. However, if crude oil prices continue to rise, as they have since the middle of the year, biofuels will become more interesting again and their availability could decline again.

Gas and input prices fuel production costs

Gas has also become steadily more expensive over the past few months, driving up the cost of producing agricultural commodities. However, it is not just agricultural and food production itself that has been affected by the rise in energy prices, but also the production of inputs. Fertilizer production in particular requires a lot of gas as a raw material and energy supplier: In the production of ammonia and nitrogen fertilizers, gas accounts for up to 80 percent of production costs. Current production shortfalls could even impact the 2022 harvest. In addition, major fertilizer exporters, such as Russia and China, have now begun regulating nitrogen fertilizer exports through quotas. This further curbs availability.

In the short term, only higher global production would help against the demand overhang. However, this will be affected by unpredictable factors, such as weather, and limited by external variables, such as energy and input availability. As a result, consumers will still face rising food prices in the coming months.

Photo: Robert Wiedemann / Unsplash

1: FAO = Food and Agriculture Organization of the United Nations

It was 1558: Hamburg merchants obtained the right from the “Honorable Council of the City of Hamburg” to establish a place for themselves at the bridge Trostbrücke in Hamburg’s former harbor area. At that time, it connected the bishop’s old town around the Cathedral and St. Peter’s Church with the count’s new town. Here they met on a daily basis to compare qualities and to trade. This was the hour of birth of the Hamburg Stock Exchange, one of the oldest German stock exchanges. Even then, the Hamburg Stock Exchange was characterized by two ideas: an international orientation combined with a strong sense of community.

Tradition, coupled with a constant willingness to innovate and adapt to the changing market, is still the guiding principle of Hanseatic traders today. And many exchanges have survived from that time to this day: the Hanseatic Securities Exchange, the Coffee Exchange, the exchanges of the insurance industry and house brokers, and so also the Hamburg Grain Exchange. The grain exchange is the last active “commodity exchange” in existence.

The stock exchange serves the trading business

But what is actually the task of a commodity exchange? Originally, it was to promote the economic interests of the members of the exchange. The Hamburg Grain Exchange, for example, provided a forum where traders and brokers initiated and brokered transactions in grain, oilseeds, animal feed, pulses or seeds.

Today, the Hamburg Grain Exchange still serves the agricultural trading business. Among other things, it issues the Hamburg feed contract bill and other form contracts. These are intended to help settle contracts fairly and prevent disputes. They are publicly available and can be downloaded here. Every Tuesday, the grain exchange’s quotation commission also establishes the spot market prices franco Hamburg for several types of grain, feed and pulses and publishes them as price guidance for the industry. The Grain Traders’ Association of the Hamburg Stock Exchange is the responsible body of the Hamburg Grain Exchange. It also manages its business.

The exchange remains alive even in times of digitalization

In the past, grain traders met every day with their samples. Today, market participants come together three times a year for interregional exchanges at the Hamburg Chamber of Commerce: Every January, April and August, up to 700 participants crowd into the exchange hall. They peruse the offerings of exhibiting companies, share market information and discuss it, close deals and network. Today, daily trading is largely done via the Internet, e-mail and telephone – life on the exchanges has changed, but the face-to-face meeting has not lost its value. It still paves the way for smooth business transactions today. We are happy to contribute to this and to keep exchange life in Hamburg alive with all exchange visitors.

International trade helps to reduce poverty. This has been observed where countries have expanded their imports and exports in recent years and thus connected to the world market. But the increasingly ramified, global supply chains bring challenges – and responsibility for all players. Are living and working conditions fair? Are wages appropriate? Who monitors compliance with human rights and environmental standards? The German Supply Chain Due Diligence Act is intended to ensure a transparent and sustainable supply chain in the future.

In 2016, the German government issued the National Action Plan for Human Rights and Business. Many companies had responded to this with individual voluntary commitments. In 2020, the German Federal Ministry of Labor and Social Affairs and the Federal Ministry for Economic Cooperation and Development asked more than 2,000 German companies what measures they had already implemented on a voluntary basis. The results were disappointing – for example, compliance with human rights could often still not be guaranteed, especially among suppliers. As a consequence, the German government announced the Supply Chain Due Diligence Act, which has now been passed by the Bundestag and Bundesrat in June. It is to be published in October and is expected to come into force at the beginning of 2023. Initially, it will only apply to companies that employ at least 3,000 people in Germany. One year later, this threshold is to drop to 1,000 employees.

Many companies are already voluntarily committed to fairness and transparency in their supply chain – with voluntary commitments or certifications. However, they have tended to be at a disadvantage compared with companies that invest less in this area. The law now aims to change this and create equal standards for all in Germany.

The German Federal Republic is thus one of the pioneers among the EU countries, alongside France and the Netherlands, among others. As a logical consequence, however, a law at European level is also essential to create a level playing field beyond national borders. The EU Parliament has already taken the first steps in this direction: A proposal for a so-called EU due diligence law is to be launched before the end of this year.

Foto: Julian Mora / Unsplash