Global food prices to remain high amid Russia-Ukraine war, IMF warns

By Onome Amuge

Food prices, which surged to a record valuation earlier this year,have been projected to remain elevated amid the ongoing Russia-Ukraine war and bad weather experienced in many food production regions across the world, according to a new report by the International Monetary Fund (IMF).

According to the report, the high cost of food commodities have increased food insecurity and added to social tensions globally, straining the budgets of governments struggling with rising food import bills and diminished capacity to fund extra social protection for the most vulnerable.

An analysis by the financial agency of the United Nations showed that a one per cent drop in global harvests raises food commodity prices by 8.5 percent,a one per cent increase in fertilizer prices, which have climbed recently on the surge in natural gas prices, raises food commodity prices by 0.45 percent, and a one per cent. These estimates, it noted, explains the impact of the recent fluctuations in food prices globally.

The IMF  disclosed that La Niña weather conditions, which refers to the periodic cooling of ocean surface temperatures in the central and east-central equatorial Pacific, are forecast to return for a third consecutive year, bringing below-average water temperatures to the east-central Pacific Ocean.

The report further noted that the Black Sea Grain Initiative that provides safe export shipping from Ukraine could cause another shock to cereal supplies if it is suspended again by Russia. It explained that this alone would reduce global wheat and corn supplies by 1.5 percentage points, relative to current expectations, and in turn raise cereal prices by 10 percent within a year.

In addition, it explained that high energy prices raise fuel and fertilizer prices, boosting food production costs, adding that they also divert output from food to biofuels. With Fertilizer prices being double what they were before the Covid pandemic, even after a pullback in recent months, the report noted that this could likely lead to an adverse implication as farmers in poorer countries would be forced to use fertilizer more sparingly, resulting in lower harvests.

.Looking forward, the IMF said it  remains uncertain how the combination of harvest disruptions, energy prices, and monetary policy will play out.

“Trading in futures markets suggests that wholesale cereal prices will only drop 8 percent next year from the current highs. But our estimates indicate supply constraints could outweigh weakening demand, keeping prices elevated for the next few quarters.

Higher international food prices are estimated to have added 6 percentage points to consumer food inflation in 2022. However, the passage to higher domestic retail food prices could take six to 12 months—another reason why, in addition to the recent weakening of emerging market currencies, many people will have to wait for relief from lower commodity prices,” it said.

According to the IMF, the risk of food prices increasing again rather than declining during the next couple of quarters remains high. It further pointed out the combination  of still elevated food price levels,would increase the number of food insecure people.

On the way forward, the report recommended that it remains vital that international trade remains free to defend against new price surges and allow food and fertilizer to flow to those who need it most.

“In particular, the Black Sea grain corridor has facilitated cereal exports from Ukraine and brought down prices to pre-invasion levels, mitigating global hunger. It is important that there is also global access to fertilizers by eliminating trade barriers that are limiting global supply, as far as possible,” it said.

The report also encouraged countries to allow the increase in global prices to pass through to domestic prices while also increasing targeted social protection spending, as their budget allows. This, it explained,  is necessary to allow price signals to rebalance food markets and at the same time to protect vulnerable families’ purchasing power. It added that external debt relief and grants from international organisations could help finance the expansion of social assistance schemes in developing countries.

To further help ease supply tensions, countries were advised to stimulate domestic food production, while avoiding stockpiling and using reserves, especially those that have accumulated higher stock levels.