A more volatile normal for food and agricultural commodities

Inflation has been the central economic story of the last year, with food prices perhaps drawing the most attention. Many consumers in the US and Europe are encountering fast-rising food prices at supermarkets and there is no shortage of articles and op-eds (and blog posts) wondering when consumers will ultimately see relief. Food companies and retailers are also facing increased public pressure as commodity prices, which were pointed to as the key driver of inflation, have fallen from their peaks last year.

Commodity prices, however, are not the sole driver of inflation. The return of high global inflation has prompted numerous comparisons to the 1970s — the last time food price inflation saw similar levels — notably because of the similarities in food and energy supply shocks. However, taking a longer-term view, periods of high food and energy commodity prices have not always triggered widespread global inflation, instead sometimes only having short-lived or regional effects.

Since the Great Inflation of the 1970s, there have been several surges in commodity prices, generally in response to consecutive years of weaker output of wheat or other staple foodstuffs. The most notable surges occurred in the mid-1990s, late 2000s and early 2010s, all of which varied in their magnitude, duration and impacts. The 1990s saw food commodity prices surge as Asian countries experienced robust economic growth, but the pressure on prices was mitigated by a financial crisis in 1997. Food commodity prices surged again in 2007-08 and 2010-11 as tight global supplies met rising demand for both animal feed and biofuel feedstocks. These had limited effects on the overall level of consumer food prices in high-income countries but produced a food crisis in the developing world. High food prices as a driving force in the Arab Spring, with protestors in Egypt famously chanting: “bread, freedom, social justice.”

In the current inflationary environment, pressures on food prices were becoming apparent before Russia invaded Ukraine and in some areas even prior to the COVID-19 pandemic. The recovery of mainland China’s pig herd after widespread outbreaks of African swine fever in 2018 and 2019 caused a rapid resurgence in animal feed demand. And biofuel production ramped up between 2015 and 2019 after slower growth earlier in the decade. As demand rose, stocks tightened, commodity prices started rising, and the stage was set for the inflation pressures that became apparent in the US in late 2020 as both COVID-19 lockdowns and fiscal stimulus measures increased consumer food demand.

The differences in these various surges in food commodity prices highlights several structural shifts in the food system, which in part explain why our experience today is very different from the 1970s. On the supply side, increased global trade has allowed markets to respond much better to supply challenges, mitigating the duration of price spikes compared with 40 years ago.

There are two notable shifts in demand. First the rise in animal protein consumption in Asia over the last 30 years, particularly pork consumption in mainland China, has driven higher demand for grains and oilseed meals for animal feed. Second, the growth of renewable fuel production over roughly the last 20 years has become a significant consumer of vegetable oils, corn and sugar, and more closely intertwined food prices with energy prices. With these additional pressures, supply and demand for food commodities has increasingly tightened over the long term, though increased trade has also helped to keep supply and demand aligned. Also, on top of everything, commodity markets have become more financialized in the last 20 years, with a larger presence of investment funds holding net-long or short positions, often creating bigger short-term price swings.

Despite the increasing pressures on the food system, food prices have actually been declining over the long term when adjusted for inflation. Rather, the result of these trends is instead that food commodity prices are getting more volatile. Chicago corn, wheat, cattle and lean hog futures have all seen volatility measures trend upward over the long term. Soybean futures, interestingly, are an exception due to the severe levels of volatility in the 1970s and the disproportionately stronger demand pressure in recent years which has driven prices more steadily higher. Rising volatility for food commodities has significant implications for consumers in the developing world where consumers spend a larger share of their income on food.

In high-income countries, price swings in commodity markets have more limited impacts on prices in absolute terms, but still have impacts on relative food prices. In the 1990s, meat prices in the US became comparatively cheaper after the Asian financial crisis as global meat demand fell. In 2008, cereal and bakery products became comparatively more expensive due to the surge in wheat prices, though there was only a modest impact on food prices overall. In recent months, processed foods have become comparatively more expensive in Europe due to the lagged effects of high energy prices last autumn.

Inflation for consumer food prices is a complex phenomenon, often with effects felt over the longer-term than any one spike in commodity prices. We are hopefully out of the woods for the worst inflationary episode in 40 years, recent food price spikes should not solely be attributed to black swan events like the war in Ukraine. Rather, there is a broader trend towards an increasingly complex and increasingly volatile landscape for food and agricultural commodities.
Source: Platts