This post is written by Joseph Glauber, Manuel Hernández, David Laborde, Will Martin, Brendan Rice, and Rob Vos. It originally appeared on the IFPRI site. 

After the sharp rise in international prices of wheat and other staple foods in the wake of Russia’s February invasion of Ukraine, since May prices have fallen back to pre-war levels. Has the global food price crisis now come to an end? Unfortunately, such a conclusion is premature. Domestic food prices for consumers continue to rise in most countries. Meanwhile, ongoing uncertainties—not the least of which is the continuing war—augur for continued turmoil in global food markets. Global food security remains at high risk; hundreds of millions of people already face acute food insecurity and their numbers rising, according to the Global Report on Food Crises. In this blog post, we try to disentangle the main factors in play.

Given the importance of both Russia and Ukraine as suppliers in global markets for wheat, maize, sunflower seeds and oil, and Russia’s importance in international fertilizer and energy markets, the war provoked a surge in food and energy prices worldwide. FAO’s international food price index climbed to its all-time high in mid-May (Figure 1). At that point, wheat prices, for instance, were up 32% from their level at the start of the war. Then prices fell, with those of agricultural commodities, including wheat, returning to pre-war levels. However, prices remain high by historical standards, reflecting impacts of supply disruptions and the surge in global demand for commodities during the recovery from the COVID-19 recession in 2021.

Figure 1: FAO monthly nominal food price index

High commodity prices alone need not pose risks to food security. Rather, it is the continuing volatility in tight markets and the degree of transmission to domestic food prices—i.e., what consumers are actually paying—that we should be concerned about. Food price inflation is still up in most countries. In January 2022, consumer food prices in many countries had already increased 5%-10% over the previous year. By July, consumers in a majority of both high- and low-income countries saw purchasing power go deeper into the red as they faced food price increases of between 10% and 30%—or even more in some contexts (countries marked in purple in Figure 2).

Figure 2: Consumer price inflation around the world, January 2022 and July-August 2022 

Understanding the price surge

The Ukraine shock came when most agricultural commodity markets were already very tight, with wheat and maize stock-to-use ratios at levels comparable to the lows of the 2007-08 global food price crisis. Market tightness was also reflected in high price volatility, which was already high in the months leading up to the war (see IFPRI’s Food Security Portal excessive price volatility early warning system). As explained in our previous post on food price trends, during 2021, commodity prices rose with the uneven recovery from the COVID-19 crisis. Global demand surged, accompanied by supply disruptions related to transport and logistics bottlenecks—pushing up food, energy, and fertilizer prices as well as freight costs.

Russia’s invasion of Ukraine further fueled food and fertilizer price inflation as it disrupted important supplies of wheat, maize, oil seeds, and fertilizer. Russia, meanwhile, is also a major exporter of fossil fuels, and war-related sanctions imposed on those exports pushed up the cost of nitrogen-based fertilizer production, which uses natural gas as a major feedstock and energy source. Fertilizer prices rose sharply. 

In response to the crisis, many staple-food-producing countries introduced bans and other restrictions on exports, especially of wheat and vegetable oils, in efforts to keep food prices down for their own consumers, but—by reducing global supplies—pushing up prices for everybody else. By the end of April, 17% of globally traded staple foods (expressed in kcal) were subject to such restrictions, according to IFPRI’s Food and Fertilizer Trade Restrictions Tracker.

Freight costs had surged during 2021 but dropped dramatically towards the end of the year, easing global supply chain disruptions. Then they surged again as the war triggered new supply disruptions and uncertainties. The Baltic Dry Index, a key indicator of freight cost for food and fertilizer trade, roughly doubled between February and May 2022 (Figure 3).

Figure 3: Baltic Dry Index of international bulk shipping costs 

Some observers are blaming market concentration and speculation as a factor driving up prices in global food (and fertilizer) markets. However, while many grain companies saw profits soar in the first half of 2022, it is less obvious these companies have been driving the surge in prices.

What goes up….

The more recent price declines are most notable for wheat and maize, while rice prices have remained relatively flat, and international prices for meat and dairy are still on a moderate upward trend. While prices of cereals have come down in recent months, they are still up from a year ago and remain well above pre-COVID levels.

The recent decline in international prices can be explained by several factors:

• Global growth has slowed as the recovery from the COVID-19 recession has faded and new lockdowns have slowed China’s economic growth. Commodity prices, including those for food and energy, eased with weaker global demand.
• Seasonal factors are also playing a role, with harvests for winter wheat and maize taking place during June-August, expanding supplies.
• The stronger U.S. dollar has softened dollar prices of internationally traded commodities.
• A number of countries lifted or reduced export restrictions. Between May and August, the share of global cereal and vegetable oils trade subject to restrictions dropped from 17% to 7% of trade.
• Freight costs dropped with weaker global demand, resuming the downward trend that set in shortly before the Ukraine crisis.
• The Black Sea Grain Initiative agreements, reached in July, allowed shipments to resume from three of seven major ports in Ukraine, lifting the country’s monthly exports of wheat, maize, and sunflower seeds to about 3 million metric tons per month. While encouraging, these levels are still less than 50% of the volumes typically shipped out of the Black Sea at this time of year. Thus, the actual impact on global market prices remains limited, as Ukraine would need to export at least 7 million tons per month to free up enough space in silos and ships to export the incoming harvests (arriving in August for wheat and in October for maize). On the other hand, however, Russian wheat exports appear less hampered by sanctions than originally feared.

But we’re not out of the woods yet. International food prices remain high by historical standards, markets remain tight, and high price volatility continues—especially for wheat and maize.

At the same time, the war continues with no end in sight. There are signs already that Ukrainian farmers are likely to plant far less wheat this fall. The war and sanctions have kept fertilizer prices volatile, and fertilizer costs have risen faster than agricultural output prices. In August, energy prices rose as Russia cut off supplies of natural gas through pipelines to Central and Western Europe—also leading to a halt to nitrogen-based fertilize production by several European producers, further pushing up fertilizer costs.

Another factor is poor weather conditions. Hot and dry conditions are affecting early development of wheat in Argentina and maize harvests in the U.S., China, and Europe (AMIS, September 2022). In addition, rice prices increased during August and September, driven in part by extreme weather in some major rice producing countries, including catastrophic floods in Pakistan, the world’s fourth largest exporter of rice. (High fertilizer prices and India’s recent restrictions on rice exports have also contributed.)

Amid this uncertainty, the risk of new price shocks remains high. Further problems with Ukraine production and shipments or any other geopolitical or weather shocks could trigger price surges. According to the World Bank’s April 2022 Commodity Markets Outlook, the war has altered global patterns of trade, production, and consumption of commodities in ways that will keep prices at historically high levels through at least the end of 2024, exacerbating inflation and food insecurity.

Food security remains at risk

These threats to food security remain acute in many countries. Food price inflation has accelerated across the globe. Fertilizer prices are rising faster than farm output prices, eroding farmer incomes. Surging domestic food and energy prices are drivers of general consumer price inflation around the world, as a recent IMF assessment points out. As a result of these trends, domestic food prices have not followed the downturn in international prices. Relative to the world market price, the average domestic price of wheat, for instance, rose by almost 20% between April-May and July.

These pressures are disproportionately affecting the poor, who spend most of their incomes on food, energy, and other basic needs. The poor in food-importing low-income countries tend to be hit hardest. Many of those countries are facing a perfect storm of overlapping crises and shocks that have eroded their already weak capacity to insulate their vulnerable populations from the worst impacts.

First, the global COVID-19 recession reduced livelihoods in general, and policy responses during 2020 eroded both fiscal space and foreign exchange. To fill fiscal and balance-of-payments gaps, countries ran up their external debt; the resulting overhang is now impeding further fiscal responses and import capacity that could mitigate the impacts of rising prices. The recent shocks have further weakened affected countries’ currencies, exacerbating the domestic cost of the international price shocks.

As the recent update of the Global Report on Food Crises points out, countries that were already facing protracted food crises before COVID and the Ukraine war have been among the hardest hit by recent problems (Figure 4).

Figure 4: Rise in cost of basic food basket in 45 food crisis countries

Populations in all 45 countries and territories already in food crisis before the Ukraine war started had seen the cost of a basic food basket increase by at least 10% by April-June 2022 above the five-year average cost for that period). People in Sudan, South Sudan, Syria, Zimbabwe, Ethiopia, Yemen, Sierra Leone, Haiti, and Honduras faced a food cost increase of over 75%.

Most food crisis countries have high food import dependence and weak capacity to insulate their populations against imported food inflation due to low foreign currency reserves and/or depreciating national currency. Thus, they lack the capacity to expand social protection and other means to support vulnerable populations. In addition, many are witnessing high general price inflation, further eroding purchasing power. Protracted civil strife and weather shocks have compounded the economic woes in many of these countries, such that the total number of people facing crisis-level or worse acute food insecurity increased from 155 million in 2020 to 193 million in 2021 and to 205 million-223 million by mid-2022, according to the Global Report.

The global food crisis clearly is not over yet. The most vulnerable people continue to be hurt by sharply increasing food costs, seeing little relief even as global prices have fallen. While immediate humanitarian assistance will be necessary to avert more widespread famine, governments and international organizations should also focus on promoting major investments in more resilient and shock-proof food systems. This will require unprecedented international cooperation to address the consequences of unstable global commodity markets and climate change-driven extreme weather.

Joseph Glauber, Manuel Hernández, Will Martin, and David Laborde are Senior Research Fellows with IFPRI's Markets, Trade, and Institutions Division (MTID); Brendan Rice is an MTID Research Analyst; Rob Vos is Director of MTID. Opinions are those of the authors.