Despite food prices in the UK seeing a month-on-month fall for the first time in two years in September, research group The Smart Cube has warned that the disruption causing “unprecedented” food inflation levels is far from over as sugar and oil prices are expected to rise.
According to The Smart Cube, geopolitical unrest, supply chain issues and rising energy costs have all contributed to the rise in food inflation. As well as these factors, El Niño, the climate phenomenon which affects global temperatures and precipitation, has had “a major effect” on crop growth, quality, yield and supply chain, directly affecting food prices.
El Niño is typically associated with bringing increased rainfall to regions such as Latin America, the southern US and Mexico. On the other hand, it can lead to lower levels of rainfall and drought in other regions, including Australia, Indonesia, parts of southern Asia, and West and Central Africa. Episodes of the weather event typically last nine to 12 months, although in some cases, they can persist for years, said The Smart Cube.
Nidhi Jain, commodity specialist at the research group, said: “The shifts in rainfall and temperature caused by El Niño are expected to have a major impact on the global supply of essential food commodities in the coming month, including grains, vegetable oil, and sugar, thus exerting an upwards pressure on food prices.
“Historically, global vegetable oil output has declined during periods of El Niño – and this is unlikely to be any different during this year’s weather event. Slow production of palm oil in key producing nations in southeast Asia, coupled with a likely fall in the US soybean output and increased demand for vegetable oils from China, is set to drive up prices.
“As such, palm oil prices are set to increase by 8%, with the cost of soybean oil rising by 6% for the marketing year 2023/24 (MY 23/24).
“Elsewhere, the intensity of the El-Niño-driven dry season is set to cause sugar production in India and Thailand – two of the top five producers of the commodity globally – to fall significantly for MY 23/24.
“It’s very unlikely that most countries have the necessary levels of carry-over stocks to manage this issue. In turn, declining sugar production is expected to lead to the commodity’s price rising by 11% across MY 23/24.
“For cocoa, output is also likely to fall as we head into 2024. El Niño will cause lower levels of precipitation than usual in West Africa, one of the leading cocoa producing regions in the world.
“Combined with cocoa production in the area already declining due to the spread of diseases and logistical issues, this has seen the cost of the commodity surge in recent months, with its price likely to remain elevated in the coming months and forecasted to increase by 9% this MY.”
El Niño boosts grain yield
Kumar Amit, senior specialist at The Smart Cube, said: “Nevertheless, the impact of El Niño on soft commodities is not entirely negative. In fact, in some regions, the weather event can be a boon, boosting crop yield and leading to a strong harvest.
“This is evident in Brazil, where wetter conditions have led to a bumper harvest of both corn and wheat. This will help to mitigate declining grain yield in countries such as Australia, caused by drier conditions as a result of El Niño. As such, wheat and corn prices are set to rise by just 1.3% and 0.5% respectively.
“Although there have been signs that food prices are beginning to fall, the drop in the output of vegetable oils, sugar and other soft commodities is likely to cause the current trend of high food inflation to continue throughout the remaining months of 2023 and into 2024.”