Global Food Price Inflation to Fall Sharply in 2023 - Fitch

Global Food Price Inflation to Fall Sharply in 2023 – Fitch

World grain prices have fallen sharply in recent weeks, raising the prospect of a sharp drop in annual consumer price index (CPI) food inflation next year, says Fitch Ratings in its latest Economics dashboard.

Grain prices surged at the start of the Ukraine war on supply concerns but there is renewed optimism that other countries will step up production. This week’s shipment by Ukraine could add some 20 million tonnes of grains to global supply, a significant share of the 45 million tonnes of grain that Ukraine exported last year.

Australia is forecast to produce another bumper wheat harvest this year. Global macro factors are also driving grain prices lower. Hawkish policy tightening moves by the Fed have raised fears of recession and a marked global economic slowdown next year.

The Fed’s stance has lifted the US dollar index to a two-decade high. Fitch said given the inverse relationship with commodities, a rise in the US dollar has contributed to a large fall in agricultural commodities. The slowdown in global industrial production is also consistent with softer commodity prices ahead.

However, we see some upward risks to food prices. While prices of fertilisers have moderated, the surge in European natural gas prices (used in the making of fertilisers) to all-time highs could reverse that trend and affect crop yields. La Niña’s return later this year could also disrupt harvests.

Nevertheless, the UN’s FAO food price index has already started to stabilise. READ Dollar Trades Strong as U.S Treasury Yields Rise Sharply “If we assume that the UN index remains unchanged at its June level and project this into next year, the resulting slowdown in UN food inflation would be consistent with a sharp fall back in annual food CPI in inflation in 2023”, Fitch said.

“Some 20 million tonnes of grain are currently stored in Ukrainian port silos, a substantial amount given that 45 million tonnes were exported in 2021 (11% of world exports).

“Fertilizer prices have also fallen and could boost grain harvests by increasing crop yields. Agricultural commodity prices have also been driven lower by financial market concern that the Fed will tighten monetary policy to above “neutral” rates even if that risks a recession.

“The Fed’s more hawkish monetary policy stance in recent months has resulted in a rapid appreciation of the US dollar (index) to a 20-year high.

“There is an inverse relationship between the dollar and commodities since the value of the dollar influences commodities prices given the currency’s use as a benchmark pricing mechanism for most commodities”, according to the report. #Global Food Price Inflation to Fall Sharply in 2023 – Fitch