High High High

High energy costs risk aggravating food price rises

Ole Hansen

Head of Commodity Strategy

Summary:  World food prices rebounded in January with the widely watched UN FAO food price index reaching an 11-year high, and while seeing the year-on-year growth slow to 19.5% the underlying support for the agriculture sector remains firm. Adding to the basket of drivers which includes a post-pandemic growth sprint, crop challenging weather, supply chain disruptions and labour shortages, we can also increasingly add the impact of surging energy prices with elevated crude oil and gas levels both impacting the cost and availability


World food prices rebounded in January following a small dip in December according to the UN FAO’s food price index, which tracks a basket of 95 globally traded food commodities divided into five categories. The index hit an 11-year high thereby moving closer to the record from February 2011 when surging prices of cereals helped trigger the Arab Spring.

Higher food prices during the past year have been driven by a combination of a post-pandemic economic recovery raising demand, a troubled weather year, and the prospect for another season’s production being interrupted by La Ninã developments, covid outbreaks challenging supply chains, labour shortages and more recently, rising production costs via surging fertilizer prices and rising cost of fuels, such as diesel.

However, from a global inflationary perspective, the base effect helped reduce the year-on-year rise to 19.5% from the 40% recorded last May.

As can be seen in the FAO chart above and in the year-to-date performance of the major futures contracts below, the recent price strength has been driven by vegetable oils and dairy products while a period of selling has reduced sugars impact on the index. The cereal category meanwhile held steady with world wheat prices easing last month despite elevated concerns about the impact on supplies from the Black Sea region should Russian aggression on the Ukraine border escalate to a conflict. Instead, a large seasonal increase from the harvest in Australia and Argentina has helped offset continued price support from strong demand amidst tight global availability of higher-quality wheat.

Source: Saxo Group

The food commodities receiving a great deal of attention these past few months, however, has been vegetable oils, with the soybean oil future in Chicago and Palm oil futures traded in Malaysia both seeing strong rallies driving both to the top of the performance table.

Soybean oil futures (ZLH2) and CFD’s (SOYBEANOILMAR22) has led the soybean complex higher with the overall support coming from a continued downgrade to Brazilian crop estimates due to adverse weather. From a starting point around 145 million tons of expected production during the 2021/22 season, analysts are now talking about an eventual outcome closer to 125 million tons. In addition, political unrest in Argentina, the world’s largest exporter of soybean products, and increased demand for plant-based fuels as crude oil continues to rally has also played a role.

However, with the growing risk of a (temporary) correction in crude oil and palm oil reaching a price that could see shipments start to slow, the short-term direction in soybeans could be lower as traders book some profit after the price of the first month soybeans contract in Chicago (Futures ticker: ZSH2) reached a seven-month high.

Other markets like Arabica coffee which has doubled in value during the past year is following two months of sideways trading gearing up for a major break. The triangle pattern on the chart, however, is not giving much away, but looking at the underlying fundamentals and a continued drop in stocks at ICE exchange monitored warehouses, the risk of an upside break is currently the greatest.

Next big challenge: Surging cost of fertilizer.

While the prospect of elevated and even higher crude oil prices over the coming quarters will support demand for plant-based fuels, the impact of elevated gas prices in Europe on the availability and prices of fertilizer could be the next major challenge farmers, and eventually consumers may face in 2022.

The price of ammonium nitrate has seen a four-fold increase in price during the past year amid surging natural gas, commonly used as feedstock to produce two nitrogen-based fertilizers – ammonia and urea. In fact somewhere between 75% and 90% of the cost of producing these types of fertilizers stems from natural gas. Surging EU TTF benchmark gas prices have led to several producer in Europe announcing cutbacks.

In addition, Russia this week, as expected, announced two months ban on ammonium nitrate exports in order to ensure a successful domestic sowing season with ample supply. Being one of the world’s largest exporters of around 40% of its annual production of around 11 million tons, the impact will be felt. Not only in Europe but also in Ukraine, a major producer of high-quality wheat, corn and edible oils.

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