July saw a dramatic decline in food costs, but this relief may not stay.

Key Points

• In July compared to June, food costs decreased by 8.6 percent, primarily due to lower prices for wheat and vegetable oils.
• Prices are declining as a result of a U.N.-backed export pact, better-than-anticipated crop harvests, a slowdown in the world economy, and a strong dollar, among other factors.
• Analysts, however, are sceptical that prices will continue to decline, particularly given the uncertainty surrounding the agreement between Russia and Ukraine.

July saw a dramatic decline in food costs, but this relief may not stay. According to the most recent data from the United Nations Food and Agriculture Organization, food prices decreased dramatically in July compared to the prior month, especially the costs of wheat and vegetable oil.

But despite the fact that food prices have dropped from very high levels, according to the FAO, there are concerns about whether the good news will endure.

According to a press release from the FAO, chief economist Maximo Torero, many uncertainties remain, including high fertiliser prices that can affect future production prospects and farmers' livelihoods, a gloomy global economic outlook, and currency movements, all of which pose serious strains for global food security.

The FAO food price index, which analyses the monthly change in a basket of food commodity prices globally, decreased 8.6 percent in July compared to June. The indicator only decreased by 2.3 percent from month to month in June.

The July index was still 13.1% higher than July 2021, though.

Prices could decrease even more in the near future, if futures are any indication. Futures prices for corn, wheat, soybeans, and sugar have dropped from their March highs to levels last seen in the beginning of 2022.

For instance, the price of wheat contracts, which finished on Friday at $775.75 a bushel, was below the $758 price set in January and below the $1,294 price in March, which was a 12-year high.

Why prices dropped

Analysts attributed the decline in food prices to a combination of supply and demand factors, including the closely watched agreement between Ukraine and Russia to resume grain exports through the Black Sea after months of blockade; better-than-expected crop harvests; a slowdown in the global economy; and the strong U.S. dollar.

The International Food Policy Research Institute's Rob Vos, the director of markets, trade, and institutions, cited the information that the United States and Australia are expected to produce bumper wheat harvests this year, which will increase supply since shipment from Ukraine and Russia has been restricted.

Given that commodities are valued in U.S. dollars, the stronger the dollar is, the more affordable basic goods become, according to Vos. When the dollar is expensive, traders frequently demand lower nominal dollar prices for their goods.

Additionally, the market was cooled by the widely publicised, U.N.-backed agreement between Russia and Ukraine. According to the United Nations, Ukraine was the sixth-largest wheat exporter in the world in 2021, with a 10% market share.

Last Monday, 26,000 tonnes of maize, the first grain cargo from Ukraine since the invasion, departed from the port city of Odesa in the southwest of the nation.

Deal between Ukraine and Russia is disputed

There is widespread pessimism about whether Russia will uphold its half of the arrangement.

Just hours after the late-July agreement struck by the U.N., Russia launched a missile against Odesa.

Additionally, according to Vos, freight and insurance firms may still believe it is too risky to carry grain out of a war zone. He also noted that food prices are still unstable and that any fresh shock could result in further price increases.

It will take at least 30 or 40 shipments every month to get the current grains stockpiled in Ukraine as well as the harvest's produce out in order to make a difference, according to Vos.

Since the second half of the year is when Ukraine conducts the majority of its exports, the arrangement will need to hold in full during that time in order to aid in stabilising markets.

According to Carlos Mera, head of agro commodities market research at Rabobank, fertile Ukrainian land may continue to be damaged for as long as the war continues, even with the current agreement, which will lead to an even lower crop production in 2019.

We can see even more price rises moving forward once this [grain] corridor is done, Mera said. Further price rises may also be experienced by consumers because it typically takes three to nine months for a change in commodity prices to be reflected on store shelves.

The urge to export enough grain from a conflict area as rapidly as possible is another factor.

It's time for us to resume working. According to John Rich, executive chairman of Ukrainian poultry major Myronivsky Hliboproduct (MHP), I don't see us shipping two [to] five million tonnes per month out of these Black Sea ports.

At the end of the week, hungry people get hungry pretty rapidly.

The experts at credit rating agency Fitch Ratings stated in a note released earlier this month that a potential increase in fertiliser prices, which have lately decreased but are still double those of 2020, could lead grain prices to increase once more.

Russian gas supply restrictions have caused prices for natural gas in Europe to soar. A crucial component of nitrogen-based fertilisers is natural gas. Later this year, La Nina weather trends may also interfere with crop harvests, they added.

It's not all good news that food costs are dropping, either. According to the analysts, the price reduction of staples is partially due to traders and investors factoring in recessionary fears.

Staple foods

According to the FAO index, the price of cereals, which includes wheat, decreased by 11.5 percent from month to month. According to the FAO, the reaction to the Russia-Ukraine grain deal and stronger harvests in the Northern Hemisphere contributed to the 14.5 percent decline in wheat prices.

Due in part to Indonesia's large exports of palm oil, the decline in the price of crude oil, and the low demand for sunflower oil, vegetable oil prices decreased by 19.2 percent month over month and reached a 10-month low.

In light of declining demand, a lower Brazilian real relative to the US dollar, and greater supply from Brazil and India, sugar prices fell by 3.8 percent to a five-month low.

Dairy costs fell by 2.5 percent.