The latest UN FAO World Food Price index (published on 5 August) declined again from the March 2022 all-time high: down 8.6% in July, following 0.3%, 0.8% and 2.3% declines in April, May and June, respectively, but still up 13% yoy, and up 55% from the May 2020 trough.
The index is back to the level seen prior to Russia's invasion of Ukraine.
The acceleration in monthly decline — the largest monthly drop since October 2008 — occurred amid the following factors:
Global growth slowdown (demand destruction) concerns.
A c15% drop in the Brent crude oil price.
Russia and Ukraine deal to reopen Ukraine's Black Sea ports — Ukraine has 11% wheat export share, for example.
Indonesia palm oil export pick up.
Prior to the declines of the past four 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) but yoy increases are decelerating.
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 and three more left on 5 August.
This latest reading suggests 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 48% 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 19% mom and up 10% yoy, driven by the full resumption of exports from Indonesia and the knock-on effect of lower crude oil prices. Palm oil is a key export for Indonesia and Malaysia.
Cereals – down 11% mom and up 17% yoy, driven by the agreement between Russia and Ukraine to reopen Ukraine's Black Sea ports, and seasonal harvest supply. Wheat, a key food import for Egypt, was down 15% mom, although still up 25% yoy.
Sugar – down 4% mom and up 3% yoy, driven mainly by global demand concerns, currency depreciation and lower ethanol prices in Brazil, and expectations of greater exports from India. The main emerging market sugar exporters are Brazil, Thailand and India.
Dairy – down 3% mom and up 25% yoy, driven by global demand weakness and seasonally lower demand in Europe. Developed markets are the main exporters of dairy.
Meat – down 1% mom and up 9% yoy, driven by the tension between, on the one hand, weaker global demand and increases in poultry supply from Ukraine, and on the other hand, avian flu outbreaks. The main emerging market exporters include Brazil, India and Argentina.
The next update of this index is due on 2 September.
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
Cheapest commodity equity markets
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.
Commodity exposure in EM: Stick or twist, June 2022
MENA’s reliance on Russian/Ukrainian wheat imports raises risk of hunger (Curran), Mar 2022