Strategy Note /

Food prices are back to pre Russia-Ukraine war levels

  • Food prices down 2% mom in August (5th consecutive small monthly decline). Still up 8% yoy and 51% from May 2020 trough

  • Mix of global slowdown, lower crude oil, re-opening of Ukraine's Black Sea grain ports, Indonesia palm oil export pickup

  • High household spend on (and high imports of) food in Bangladesh, Egypt, Jordan, Lebanon, Nigeria, Pakistan, Philippines

Food prices are back to pre Russia-Ukraine war levels
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
4 September 2022
Published byTellimer Research

The latest UN FAO World Food Price index (published on 2 September) declined again from the March 2022 all-time high, which followed Russia’s invasion of Ukraine. The cumulative drop since that peak is close to 15%.

The index was down 1.9% in August, following 0.3%, 0.8%, 2.3%, and 8.6% declines in April, May, June, and July respectively, but it is still up 8% yoy, and up 51% from the May 2020 trough.

The continuation of monthly declines occurred amid the following factors:

  • Global growth slowdown (demand destruction) concerns.

  • A 7% drop in the average Brent crude oil price compared to the prior month.

  • Russia and Ukraine's deal to reopen Ukraine's Black Sea ports – Ukraine has an 11% share in global wheat exports, for example.

  • Indonesia palm oil export pickup.

Prior to the declines of the past five months, the index had reached a new all-time high in March: the move up in the overall food index over the past two years is much greater than that seen prior to the 'Arab Spring' of 2011 (when the index increased by c40% in a year).

Any deal concerning the sustainable reopening of Ukraine's Black Sea ports is likely to be very fragile. The first ship with Ukrainian grain exports left Odessa on 1 August but the monthly run-rate is less than a quarter of the pre-war average, according to Ukragroconsult.

This latest reading confirms that conditions have taken a turn, but they remain acutely difficult for countries with high household spending on food and high dependency on imports of food – for example, Bangladesh, Egypt, Jordan, Lebanon, Nigeria, Pakistan and the Philippines.

And within this subset – excluding Egypt and Nigeria – there is also net import exposure to what remain high crude oil imports, and the 46% increase in average Brent ytd, compared to the full 2021 year average, is clearly very unfavourable for them.

The emerging market beneficiaries from high commodity food prices, at least from a trade perspective, are the following:

  • Asia: Indonesia, Malaysia, Thailand,Vietnam

  • Africa: Ghana, Ivory Coast, Zimbabwe

  • Europe: Iceland, Poland, (Ukraine prior to the Russian invasion)

  • LatAm: Argentina, Brazil, Chile, Peru

Among the components of the food index, vegetable oil and cereals were down, whereas sugar, meat and dairy were up.

  • Vegetable oils – down 3% mom and up 1% yoy, driven by the full resumption of palm oil exports from Indonesia (due to lower export taxes), resumption of Ukraine sunflower exports, and the knock-on effect of lower crude oil prices. Palm oil is a key export for Indonesia and Malaysia.

  • Cereals – down 1% mom and up 11% yoy, driven by the agreement between Russia and Ukraine to reopen Ukraine's Black Sea ports, and improved harvest prospects in North America and Russia. Wheat, a key food import for Egypt, was down 5% mom, although still up 11% yoy.

  • Sugar – down 2% mom and down 8% yoy, driven mainly by an increase in the export cap in India and lower ethanol prices in Brazil offsetting concerns on weather-related hits to production in Brazil, as well as currency appreciation in Europe and Brazil. The main emerging market sugar exporters are Brazil, Thailand and India.

  • Meat – down 2% mom and up 8% yoy, mainly driven by weaker global demand. The main emerging market exporters include Brazil, India and Argentina.

  • Dairy – down 2% mom and up 24% yoy, with expectations of improved output in New Zealand offsetting those of weaker output in the US and Europe. Developed markets are the main exporters of dairy.

The next update of this index is due on 7 October.

Global food prices back to pre-Russia-Ukraine War levels

When determining interest rates, policymakers tend to focus on core inflation and treat some of the variation in food items as seasonal or temporary. However, for governments that subsidise food items, this food price spike creates fiscal stress and, for countries reliant on food imports, it drives a deterioration in the trade balance.

Furthermore, for the mass, poorer segment of the population, food inflation is generally an acute concern – the 'Arab Spring' coincided with a c40% increase in 2010-11 – and this translates into risk for governments facing re-election or attempting to implement structural reforms that challenge vested interests. Recent protests in Tunisia, for example, are as much about frustration with cost of living increases, in the absence of employment growth, as they are about Covid management and corruption.

Countries with both a high proportion of household expenditure on food and a significant net import bill for food include Bangladesh, Pakistan and the Philippines in Asia, Egypt and Nigeria in Africa, and almost all of the Middle East (particularly Jordan and Lebanon).

Food accounts for a large proportion of household expenditure in countries such as Argentina, Ghana, Ivory Coast, Kazakhstan, Kenya, Morocco and Ukraine but, at the macroeconomic level, this is offset by net exports of food. That, of course, does not mitigate the risk of social unrest from the poorer segments of these countries if the bump in export revenues does not trickle down.

Food exposure in EM

Food security in emerging markets

Emerging market consumption exposure to food prices

Emerging market trade exposure to food prices

Cheapest commodity exporter equity markets

Emerging market trade exposure to food prices

Our Country Index in this context

Exposure to net fuel and food imports are factors incorporated into our EM Country Index, where the weight attached to these factors can be customised.

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Food security in EM in the time of inflation, disruption, and now protectionism, May 2022

Food protectionism and inflation: India's wheat export ban the latest example, May 2022

Indonesia Palm Oil export ban cannot last, April 2022

MENA’s reliance on Russian/Ukrainian wheat imports raises risk of hunger (Curran), March 2022

OPEC+ decision suits Saudi, US, Russia but no oil price relief for importers, June 2022

Dividend protection in EM for hawks: Emerging-Frontier Equity Monthly, August 2022