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