Grain prices fell sharply from last year’s highs following the Russian attack on Ukraine, providing a respite for global agricultural production. The United Nations’ Food and Agriculture Organization (FAO) grain price index averaged 147.3 points in February, just two points higher than the same month in 2022, when war broke out in Ukraine and prices soared.
The current level is well below the peak reached in May last year when it surpassed 173 points. According to analysts, this drop can be attributed to three main factors: improved production forecasts, reduced costs for fertilizers and fuel, and the agreement signed between Moscow and Kiev to export grain under the Black Sea Grain Initiative.
The UN estimates that since the initiative was signed in July last year, around 25 million tons of grain have been exported to 45 countries and global food prices have fallen by around 18%. Last week the contract was extended by a further 120 days until July 18th, which ensures a short-term supply.
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Global production forecasts are also relieving the market. The FAO forecast for 2023 is that global wheat production will be the second highest on record at 784 million tonnes. The outlook for coarse grains such as corn is also favorable thanks to record sowings in Brazil and a good rainy season in Argentina.
At the same time, fertilizer prices have fallen sharply. The Green Markets Weekly North America Fertilizer Price Index has fallen to $533 a short ton after peaking at $1,270 in March last year. Despite this data, agricultural analysts warn that this is a truce that is still in jeopardy as the Black Sea Grains Agreement could crumble and energy volatility and climate change could also erode crop production.
John Baffes, senior economist at the World Bank’s Prospects Group, has even conceded that these conditions mean the economy is “flying on one motor” so there will be another rapid recovery in prices if any of these risks materialise.
The most pressing danger is that the export deal between Russia and Ukraine could collapse. A failure of the negotiations would block grain supplies for half the planet. There is also a possibility that geopolitical tensions could cause supply disruptions, although many crops and fertilizers are exempt from European sanctions imposed on Moscow. If so, wheat and corn, the top two commodities benefiting from the grain deal, could return to record highs.
Looking ahead to the rest of the year, US officials expect prices to remain relatively high as global supplies of these foods are still low, according to a document released by the US Department of Agriculture in February. The FAO also expects global grain stocks to fall by 1.2% at the end of 2023 compared to January, due to lower production of coarse grains (corn, barley and sorghum) and rice, offsetting the increase in wheat production.
Grain shortages were the driving force behind price increases even before the war. The first blow came from previous droughts and from government and corporate stockpiling during the Covid pandemic.
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