Is food inflation about to spike again?

G. Samdani Avatar



The last few years have been incredibly tough for consumers
of all stripes. Since the onset of the Covid-19 pandemic, prices have risen

At first, disruptions in the supply chain were felt,
followed by an energy crisis. And on the food side, soaring fertilizer prices
and natural disasters have played a significant role.

Although countries seem to have addressed the first three
negative factors, the last one is gaining momentum. According to scientists,
climate change is the cause of it.

The latest unpleasant surprise has come from Russia’s frosts, which have destroyed
cereal, legume, oilseed, and grain crops.

And why does it matter?

If it were a problem unique to Russia, it would not be so
severe, but in reality, it could affect the whole world. After all, the country
is still the world’s leading wheat exporter.

So it’s no wonder that wheat futures for July delivery
experienced a 3.54% rise on May 10, reaching $6.6 per bushel, the highest level
since August 2023.

On top of that, a rainy spring has hit northwestern Europe.
Excess moisture could affect the quality of winter crops, determining whether
the wheat ends up for human or animal consumption.

Finally, the hot, dry summer in parts of Australia dried
out the soil during the planting season, while in the U.S., drought has
affected much of the winter wheat-growing regions.

What are the consequences?

Although the downward trend in wheat supply has been in
place for some time, unfavorable conditions could exacerbate the situation. In
2020, supply amounted to almost 300 million tons, falling to 271 million tons
last year.

Analysts forecast a further decline to 257 million tons for
each of the years 2024-2025. The main culprits? Unfavorable weather conditions
and geopolitical tensions. The latter has not only sparked a surge in food
prices but has also significantly impacted the prices of commodities such as
oil, gas, gold (XAUUSD), and silver (XAGUSD).

Any prolonged rise in wheat prices could push up bread and
pasta costs, intensifying inflationary pressure on central banks.

As for how bad the situation will be this year, only time
will tell. It is worth noting that the harvest season will begin in the
northern hemisphere in about four weeks.

What lies ahead?

The current year may see record prices for major food
commodities, which could trigger a new wave of global inflation. And with each passing
day, the signs are becoming more evident.

In addition to wheat, robusta coffee prices have soared to
their highest level in 45 years due to poor harvests in Vietnam, the world’s
largest producer of this variety.

To make matters worse, cocoa prices remain three times
higher than a year ago. Cocoa supply is expected to fall short
of demand by 8.5% of world production.

In summary, although inflation is gradually approaching
central bank targets, it is premature to declare victory on high prices. There
are still too many variables at play.

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