Costs have come down from their Ukraine war highs but are still up compared to last year
August 13, 2022 at 6:00 p.m. EDT
A bombed grain silo with grain still burning in Zasilya, Ukraine in July. (Wojciech Grzedzinski/For The Washington Post) Placeholders when loading article actions
Many of the world’s food, fuel and fertilizer prices, which skyrocketed after Russia’s invasion of Ukraine, have returned to their pre-war levels and are defying the direst forecasts, even as policymakers wary of the ongoing risk of famine and financial crisis warning developing countries.
Russia’s February 24 attack on Ukraine sent a shockwave through commodity markets. However, fears that the war would cut off all Black Sea exports have since proved unfounded.
Russian grain shipments have been sailing from the Novorossiysk docks to customers in Africa and the Middle East for months. And limited grain shipments from Ukraine’s port of Odessa resumed on August 1 under a United Nations-brokered deal.
Commodity market pressures also eased after Wall Street speculators began selling their holdings in response to US Federal Reserve rate hikes, making bets on rising commodity prices less certain.
Wheat is cheaper now than when the war started. Brent crude, the global benchmark, is hovering around the mid-February level of $97 a barrel. And the price of urea fertilizer, which had almost doubled in the first weeks of the war, is back to pre-war levels.
Still, markets could reverse course again and are likely to remain volatile into next year, analysts say.
“The worst didn’t happen. …But right now there’s a false sense of security in the markets,” said Sanjeev Krishnan, chief investment officer at S2G Ventures, a Chicago-based investment firm specializing in food and agriculture. “This fall could have a lot more volatility.”
Averting a deeper global crisis depends on the interaction between government policies in many countries, the climate, an unpredictable conflict in Europe and global diplomacy.
With Russia already firing a missile at grain terminals in Odessa, the question is whether the deal to resume Ukrainian supplies will stand. Extreme weather events, including a multi-year drought in the Horn of Africa, are threatening crops on several continents. And a potential embargo on Russian energy supplies to European customers later this year could exacerbate rising natural gas costs, which are already pushing up some fertilizer prices.
Nevertheless, the current situation is an improvement. Earlier this year, the war between Russia and Ukraine, neighboring countries that together account for more than a quarter of the world’s traded wheat, sent grain prices up 63 percent in less than two weeks. At the same time, prices for a type of nitrogen-based fertilizer nearly doubled, and oil soared to nearly $128 a barrel.
Subsequent price declines have brought little relief to countries that depend on global markets for key commodities.
A third of the 153 countries tracked by the World Food Program experienced annual food inflation of at least 15 percent in the three months ended July 31, according to Friederike Greb, an economist at the Rome-based United Nations branch.
In Lebanon, food prices rose 332 percent, while Iranian food bills rose 87 percent and Turkish food prices rose 95 percent.
“Lower prices are definitely good news for global food security,” Greb said. “But we have no reason to be any less concerned given what is happening on the ground.”
According to the International Monetary Fund, it can take 10 to 12 months for changes in global commodity prices to be reflected in local markets.
When this is the case, the declines are often overwhelmed by the impact of falling currency values in the importing countries. The Fed’s multiple rate hikes this year have boosted the dollar against most other currencies.
The currencies of Zimbabwe, South Sudan, Turkey, Sri Lanka, Laos and Malawi have lost at least 25 percent against the greenback. This is effectively a price hike for local companies or governments buying global commodities priced in US dollars.
“We are still in a crisis of mega proportions,” said Greb.
According to the World Food Program, a total of 345 million people in 82 countries are at risk of dying from inadequate nutrition, more than twice as many as before the pandemic. Despite the recent calming of prices on the commodity markets, food, fuel and fertilizers remain significantly more expensive than a year ago.
“It’s too early to say we’re through the worst,” said Ngozi Okonjo-Iweala, director-general of the World Trade Organization.
The price surge earlier this year was fueled by speculators’ financial bets. In February, before the war began, money managers were betting on the futures markets that Chicago Board of Trade wheat prices would fall, according to data from the Commodity Futures Trading Corporation.
But by early March, the market herd had turned to a massive bet on rising prices. The size of this bet peaked in mid-May, shortly after the Fed raised interest rates for the second time in three months, which should bring inflation down from 8.5 percent to its target level of 2 percent.
“If the Fed says we’re going back to 2 percent, you have to get out of commodity markets,” said AgResource economist Dan Basse in Chicago.
Each commodity market is also shaped by different factors. Oil prices have seen their sharpest drop since early June on fears of a global recession that would reduce demand for oil.
The outlook for wheat prices became particularly bleak in the early months of the war after Russia stopped routinely sending export data to the United Nations Comtrade database, according to Joseph Faith, a senior researcher at the International Food Policy Research Institute, who did so approximated the missing export figures by analyzing purchase reports from Moscow’s customers.
“They show about the same level of exports from Russia this year as last year,” he said. “Russian trade is on track.”
These higher-than-expected Russian exports are one reason why wheat prices have fallen. Another reason is the deal reached last month between Russian, Ukrainian and Turkish diplomats that allowed the movement of some of the 20 million tons of grain trapped by the war in Ukraine.
According to a UN database, 14 ships carrying corn, sunflower oil and soybeans left Ukrainian ports this month. The ships stop in Turkey, where inspectors check there are no weapons hidden among the food before continuing on to destinations including Lebanon, China, Italy and South Korea.
It’s a balancing act to increase the flow of Ukrainian grain to developing countries, where it’s badly needed to stave off hunger. As grain trapped by the war in Ukraine rushes to world markets, wheat prices could fall, as Ukrainian farmers, who have already paid higher fertilizer and seed costs, try to recoup their investments, Máximo Torero said , Chief Economist for the Food and Agriculture Organization of the United Nations.
UN food officials are in talks with the International Monetary Fund and others about possible funding to help, he said.
A related deal should allow more exports of Russian ammonia fertilizer via a pipeline to Ukraine’s Pivdenny port, which has been closed since the early days of the war, said Chris Lawson, the CRU Group’s senior fertilizer analyst.
Prices for urea, a widely used nitrogen fertilizer, fell by half from their April peak of $940 a tonne. But as natural gas — the main fuel used to make such fertilizers — has become more expensive, prices have edged up again since mid-June.
Prices for potash, another fertilizer, fell after Belarus, a Russian ally and large global producer, resumed limited supplies, Lawson said. About 100,000 tons of Belarusian potash reaches global markets each month, well below the pre-war norm of about 1 million tons but more than analysts had expected.
Farmers also responded to the initial post-war price increase by reducing their consumption of both potash and phosphate, he said.
“Things are still very, very tight. But it wasn’t as bad as the Armageddon people were expecting,” Lawson said.
In southeastern Africa, farmers in Malawi are struggling to source enough fertilizer for the next planting season, and the supplies they receive cost more than double what they were in 2020, according to Sheila Keino, the country director for Malawi for the nonprofit African Fertilizer and Agribusiness Partnership .
A 25 percent devaluation of the kwacha, the local currency, has made imports more expensive and strained the budgets of small farmers, who make up most of the country’s workforce.
“It will be difficult,” said Keino. “Everything has gone up, but no one has any more money in their pockets. So we will see a reduction in fertilizer use.”
If farmers in developing countries cannot afford to use adequate amounts of fertilizer, next year’s harvests could decline, extending the food crisis into a second year.
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