Food inflation relief within sight as crops and crude pull back

NEW YORK (BLOOMBERG) – Runaway food inflation may be tamed soon – at least temporarily – as farm commodities tumble after a surge that pushed up prices of everything from bread to chicken wings.

Four months after Russia’s invasion of Ukraine upended trade flows and sent futures soaring, fear of grain shortages is giving way to optimism that key producers will reap harvests large enough to help replenish war-pinched reserves.

That is critical for the wheat needed to feed the world; the corn to nourish hogs, chicken and cattle; and the oilseeds to process food.

“Supply may not be as impaired as we think because other areas will compensate for any losses from Ukraine, and it is happening across the board,” said global strategist Marc Ostwald at ADM Investor Services in London.

Australia, one of the biggest wheat exporters, is forecast to produce another huge crop this year, while Brazil’s biggest-growing area has so much corn it is piling up outside bins. Nervousness in North America that spring weather woes would significantly cut grain and soya bean acreage has abated.

The Bloomberg Agriculture Spot Subindex is on track for its biggest monthly drop since 2011. Along with easing concerns about dwindling grain and oilseed reserves, worries that an economic slump could slash demand also knocked soaring crop futures down from recent highs.

While such changes can take time to reach grocery shelves, chicken and beef prices are cooling a bit, according to Darden Restaurants, owner of the Olive Garden and LongHorn Steakhouse chains. Fuel pump prices will also play a big part in determining the course of food inflation for the rest of this year.

Supermarket bills are expected to “moderate over the next six months, particularly if energy prices fall”, said Dr Joe Glauber, former chief economist at the US Department of Agriculture.

As at June 24, the average US daily price of a gallon of petrol had declined for 10 straight days after climbing to some of the highest on record. Crude oil futures are down more than 10 per cent from a near all-time high in the days following Russia’s late February attack on Ukraine, one of the world’s top grain and vegetable oil shippers. Fertiliser, a key expense for farmers, has retreated after surging to records.

The United Nations’ food price index pulled back from a record high in March after the war choked exports from Ukraine and triggered a raft of sanctions on Russia.

Still, even if reduced rates of increase continue, high prices for food will likely continue pressuring the needy. A US government forecast released last week estimates that food prices across the board will climb as much as 8.5 per cent this year, though the report did not account for the recent drop in agriculture futures.

Goldman Sachs Group, among the more bullish commodity watchers, also said prices have not topped out yet, even with Bloomberg’s broad index of spot commodities declining about 13 per cent from a record.

“We agree that when the economy is in a recession for long enough, commodity demand falls and hence prices fall,” analysts, including Mr Jeffrey Currie, wrote in a note. “We are not yet at that state, with economic growth and end-user demand simply slowing, not falling outright.”

Darden Restaurants is taking an optimistic view. The Orlando, Florida-based company says it is not passing higher prices for meat, dairy and wheat on to customers because it does not expect elevated costs to stick around long term. Meat is beginning to “come down a little bit”, and upcoming grain harvests should help curb wheat costs, chief financial officer Rajesh Vennam told analysts last week.

Wheat and soya bean futures have fallen about 15 per cent this month, while corn has dropped 13 per cent. Coffee, sugar and cocoa have also pulled back. High dairy prices probably peaked in the second quarter and will start to retreat through the rest of the year, according to a Rabobank report.

In China, food is more of a national security issue than an inflation concern. As grain and cooking oil costs cool off, June consumer price growth there is expected to be less than 2.5 per cent from last year, said Shanghai-based senior China strategist Zhaopeng Xing at ANZ Bank China.