Countless different factors drive the agricultural commodities market, from simply the principles of supply and demand to gas prices, they all take part in the final price. Urbanization, population growth, and rising income levels have been significant drivers of food prices in the long term. Currently, we are witnessing a long rally in global food prices that moves at a massively greater pace than expected. Although at the time of writing this report (1 July, 2022), there have been signs of recovery in the markets, prices are still at record highs surpassing some of the previous food crises.
The evolution of the agricultural commodities market in 2022
The agricultural commodities are under heavy pressure as we have not yet recovered fully from the recent pandemic. With the pandemic came supply bottlenecks, restrictions, and decreases in the workforce which caused a noticeable decrease in exports.
Next came the Ukrainian war which further exacerbated the situation that the market was already suffering from. Russia and Ukraine are highly significant suppliers of food at the global level. Russia is a top exporter of wheat and fertilizers, and Ukraine is the largest exporter of sunflower oil and the fourth-largest corn exporter in the world. Combined, these two countries make up 28% of wheat, 15% of corn, 66% of sunflower oil, and 16% of fertilizer exports worldwide.
Other than these 2 major events, there have been many smaller happenings that tightened the market. Since the beginning of the year, the weather conditions were not very favorable for agriculture, especially in the Northern hemisphere. Extreme heat, drought, sudden rains, landslides, floods, hurricanes, and many more disasters have been witnessed all over the globe.
Energy is another major factor in the price of agricultural commodities. Many machineries in the industry are fueled by energy commodities thus there is a direct relationship. On top of that, with globalization reshaping the industry, commodities are now traveling very long distances by railways, trucks, ships, or planes which increases the share of energy prices contributing to agricultural commodity trades. The surge in energy prices is clearly reflected in the soft commodities on top of all the other factors.
Fertilizers are also adding up on the pile of price drivers. Since the beginning of this year, fertilizer prices have gone up 30%, however, last year, the prices had increased by approximately 80%. The reasons for this increase vary from input costs to supply disruptions and export restrictions (Russia and Belarus). With all these pieces factoring in, the prices have surged incredibly. Over the last year and a half, wheat prices rose by 110%, vegetable oil and corn prices were up by 140%, and soybean prices rose by 90% aside from the rest of the commodities.
Supply and demand outlook for the summer of 2022
We are entering a very critical time concerning the agricultural commodities market. Although forecasted weather conditions are expected to ease supply levels, it is extremely uncertain in the short term. Countries such as India has banned exports of wheat to protect their own supplies and is not the first to do so, many other may follow the same path to tighten the supplies even further in the coming months.
Generally, commodities that Russia and Ukraine play a major role in are expected to have short supplies in the coming months (see figure on page 2).
Wheat outlooks are not looking good as strong consumption growth and a 1.5% decrease in global wheat supply are expected in 2022-23 which is the second consecutive decline. This shortfall reflects the lower projected crop yields in Australia, Argentina, and Ukraine. In the case of maize, reduced supplies from Ukraine and the United States suggest a tightened supply is ahead.
It is the corn-planting season which makes it a turning point in the year for the commodity. Unfortunately, Ukraine is again a key player in the corn market. As their agricultural infrastructure has taken excessive damage, the supply from Ukraine will be the bare minimum.
Edible oils are also looking to increase in price as Ukraine and Russia are significant producers. Indonesia has recently announced a ban on palm oil and further export restrictions can cause a further tightening of the supply. Below you can see the top exporters of edible oils and wheat. The graph highlights the importance the Indonesian ban has on the market.
For rice and soybeans, however, the forecasts are looking relatively good. The supplies of these commodities are expected to increase in 2022-23, rice supplies have forecasted an increase by 0.6%, and soybeans by 3.5%, relative to 2021-22.
There are expectations of other countries to make up for the insufficiency. For example, Brazil is forecasted to be increasing its exports, aiming to fill, to an extent,3 the gap left by Russia and Ukraine. Increased prices act as an incentive to plant and motivate further investment. Thus, an increase in supplies can be ahead, driven by the surging market.
What to expect further in the agricultural commodities market?
We have mentioned globalization before, it is perhaps the greatest driver of the commodities world, however, it has many disadvantages such as logistical costs, packaging costs, commissions, wastages, insurance costs, and shelf-life limitations. But other than these factors, it makes regions very exposed to market prices. The more dependence regions have on imported goods, the more they suffer in times like these. Below you can see a graph (by FAO, The State of Agricultural Commodity Markets 2022) that shows the average closeness connectivity by country groups, indicating how much globalization has improved over the years in all kinds of economies.
There is a very spot-on example from Turkey and Canada. Turkey was a major producer and exporter of lentil towards the end of the 20th century according to data from FAO, Canada’s first production came in 1973 (some academic resources state it to be 1969) and the government paid much importance to the development and increase of lentil production capacity. At the time, their production levels were extremely low, and in part of the research mission, a scout team was sent to Turkey (and to many more countries and regions) to research the Turkish production (4th largest in the world) in order to develop Canadian productions. Ironically enough, Canada is currently the largest lentil producer in the world and exports them to Turkey. Over 50% of Turkey’s lentil imports come from Canada today.
Turkey is a very fruitful region when it comes to agriculture, however, for a very long time. The lack of investment from the Turkish government and the private sector in the agricultural industry has caused the nation to be too dependent on exported goods. Currently, the country is suffering from extreme food inflation and facing a potential crisis.
In particular, competitive international trade mechanisms and global food systems are essential for managing crises and mitigating the risks of food shortages. That way, exports from one exporting location can make up for interruptions in another which is the greatest advantage that globalization brings to this world. However, doing so calls for improved cooperation in global trade in order to make markets functions smoother and compensate for regional disruptions in the long term.
It is important to mention the speculative effect that the investment world currently has on agricultural commodities. This factor creates greater uncertainty in the markets making it relatively harder to predict. Rising prices are a major incentive for private and institutional investors to enter the market and create greater surreal demand for the commodity.
Finally, rising food prices are cause for great concern to the world as it is directly linked to world hunger. We are currently facing extremely high hunger levels around the globe and the reach to needed food in many regions is under pressure, you can check the link to our report on the Global Food Crisis 2022.
References
- Baffes, J., & Temaj, K. (2022, May 25). Food prices continued their two-year-long upward trajectory. Blogs.worldbank.org. https://blogs.worldbank.org/opendata/food-prices-continued-their-two-year-long-upward-trajectory
- Chang, K. (2022, May 16). Russia-Ukraine war roiling global wheat and corn markets: A hard look at soft commodity ETFs. CNBC. https://www.cnbc.com/2022/05/16/russia-ukraine-war-roils-markets-a-hard-look-at-soft-commodity-etfs.html
- Commodity Markets Book 2022. (2022, May 12). World Bank. https://www.worldbank.org/en/news/press-release/2022/05/12/Commodity-markets-crises-regulatory-frameworks-economic-diversification
- Commodity Markets: Evolution, Challenges, and Policies. (n.d.). World Bank. https://www.worldbank.org/en/research/publication/commodity-markets
- Oller, S. (2022, June 30). Why the recent drop in wheat prices may not reflect the longer-term trend. Food Dive. https://www.fooddive.com/news/why-the-recent-drop-in-wheat-prices-may-not-reflect-the-longer-term-trend/626253/
- The Ukraine Conflict and Other Factors Contributing to High Commodity Prices and Food Insecurity. (2022, April 6). USDA Foreign Agricultural Service. https://www.fas.usda.gov/data/ukraine-conflict-and-other-factors-contributing-high-commodity-prices-and-food-insecurity
