The Strategist

Food is Falling in Price at the World Market

09/16/2015 - 15:52

Experts have registered the sharpest drop in food prices since the 2008 crisis. They explain this not only by the excess supply due to good harvests.

Bad for farmers, good for consumers: food got cheaper on the world market. The trend to lower prices has been observed since 2011, as evidenced by the monthly index of food prices, FAO (Food and Agriculture Organization of the United Nations). However, at the end of August, its experts have recorded the sharpest drop since December 2008, when worldwide financial and economic crisis erupted.

In just a month the index fell by 5.2 percent, according to the Roman headquarters of FAO. The comparable figure of the Hamburg Institute for International Economics (HWWI), calculated in a slightly different methodology, fell in August by 5.7 percent. Dropped four of five major commodity groups monitored by UN experts: cereals, dairy products, vegetable oils and sugar. So far, only meat has kept the price steady, yet they are now 18 percent lower than in August 2014.

Hamburg Institute indicates that wheat fell by 11 percent for the month, corn by 9.6 percent, and palm oil - even 14.3 per cent. "If we take the three-year period, compared with September 2012, the grain has fallen in price by an average of 51 percent and oilseeds - by 42 percent," - said in an interview with DW expert on commodity markets HWWI Lars Ehrlich.

On the question of what caused this collapse in prices, he said that "demand and supply play a key role in pricing on the global market of agricultural products, and it is largely dependent on weather conditions." In the past three years, there were no major droughts and other natural disasters, so crop area and yields increased.  

All this led to an oversupply of agricultural products. "For example, global stocks of wheat in the fall may reach its highest level in 29 years" - said Lars Ehrlich. It is not surprising that wheat, cheapened by half in three years, continues losing in price.

According to FAO, food is getting cheaper at the moment in the world market because of full warehouses and drop in oil prices, what allowed farmers to reduce the cost of fuel. In addition, there were concerns about "a possible economic downturn in China". Lars Ehrlich agrees: "Right now, demand for food is not as high as it was expected so long ago in China and other large developing countries." Exactly because of these expectations, Europe expanded acreage and increased production, for example, milk.

Specific factors associated with major producers and consumers of a particular agricultural products play a role too. For example, in FAO statistics in August compared with July, sugar was one of tjose goods that fell the most - by as much as 10 percent. In Rome, this is explained by "the continued depreciation of the Brazilian real against the US dollar", as well as growing confidence in the fact that India, world's second largest producer of sugar, will become a net exporter in the 2015-2016 season.

In turn, in Hamburg, a collapse in prices for palm oil is associated with the continued growth of its production in two key countries - Malaysia and Indonesia, along with falling demand. FAO experts clarify: particularly, it falls in India and China.
At the same time, the organization states, China, the Middle East and North Africa reduced demand for milk powder, cheese and butter in recent years, which resulted" in a significant decline in prices" for these products in August. And they already fell because of the Russian embargo of food. In fact, the sanctions has caused a storm of protests from European farmers in recent weeks, requiring the EU to compensate them for losses incurred because of collapsed milk prices.

- The Russian embargo led to a rise in food prices meanwhile the rest of the world accelerated their decline, as goods intended for the Russian market had to refocus on other markets," – said Lars Ehrlich. According to him, all the fundamental factors point to the fact that in the coming months, food prices, especially wheat, will continue to become cheaper, because the "warehouses are filled up to the top."