First energy, now food: Why supermarket prices keep rising

Sascha: [00:00:02] From Equity Mates Media. Welcome to The Dive. I'm your host, Sascha Kelly. If you've gone food shopping lately, it's hard to ignore the ever climbing prices. 

Audio clip: [00:00:11] Sticker shock in the grocery aisle where prices are up a whopping 7.4% in just the past year. 

Sascha: [00:00:18] And if you haven't yet seen it on the shelves, you've probably heard about it on the news. And while there's been escalating prices across the board, there's a number of foodstuffs where there's been more pronounced increases. Wheat is one of them. 

Audio clip: [00:00:32] Global food costs are poised to climb even further on soaring wheat prices after India curbed exports. 

Sascha: [00:00:38] And that's what we're talking about today. And the reason we wanted to dig into it is because wheat is almost everywhere you look. It's in cereal, bread, pasta, noodles, biscuits, cakes, you know, the good stuff. But it's also used in animal feed as well, which means higher wheat prices also leads to higher meat prices. It's Monday, the 23rd of May. And today, I want to know what's going on with wheat prices. And to help me get to the bottom of this, I'm joined by my colleague and the co-founder of Equity Mates, Alec Renehan. Alec, welcome to the dive. 

Alec: [00:01:13] Hi, Sascha. Good to be here. It feels like 2022. We've all had to become commodity price experts. First it was oil and natural gas. Now it's food prices. 

Sascha: [00:01:22] Well, I'm looking forward to becoming an expert on wheat today. So tell me what's going on. 

Alec: [00:01:27] At the start of the year, wait was 6.72 USD a bushel. 

Sascha: [00:01:32] What is a bushel exactly? 

Alec: [00:01:34] Well, Sascha, this is a rabbit hole that we probably don't have time to go down, but a bushel is the unit of measurement for a number of food commodities. But confusingly, a bushel is a different weight depending on the food. Corn It's £56. Soybeans and wheat £60. Rye £56. Barley £48. Oat and fescue £32. 

Sascha: [00:01:56] That sounds like a trivia question or something that one of our listeners can come back to us and do the research and tell us why they're all different weights, but we're not going to talk about all those different food groups today. So importantly, it's for us to know that when we're talking about a bushel of wheat, it's about £60 or 27 kilos.

Alec: [00:02:13] That's right. And at the start of the year, a bushel of wheat was 6.72 USD a bushel. Today it's trading just below 12 USD a bushel. On the 17th of May, it reached a 14 year high of 12.88 USD a bushel. 

Sascha: [00:02:30] Did you ever think you'd say bushel so many times in 30 seconds? 

Alec: [00:02:33] I did. And I was very conscious that I was saying it a lot there in a nutshell, without saying bushel. Again, the price of wheat has nearly doubled within five months. That's the story here.

Sascha: [00:02:44] Why? Why is that the case? What is causing these higher prices? 

Alec: [00:02:47] China, the world's largest wheat producer, is flooding. India, the world's second largest wheat producer, is suffering extreme heat waves. Russia, the world's third largest, and Ukraine, the world's eighth largest are at war. America, the world's fourth largest, is suffering a drought. But Sascha, for this episode, we really want to focus on the three biggest issues here. First of all, higher energy prices, which in itself is an issue, but it's also pushing up the price of fertiliser. Secondly, the Russian invasion of Ukraine, which has impacted production from two major exporters. And then thirdly, the news of the week. India has just banned wheat exports after an unseasonable heatwave impacted crop yields. 

Audio clip: [00:03:29] India banned wheat exports on Saturday as a scorching heat wave slashed output and domestic prices hit a record high. 

Sascha: [00:03:36] Okay. Let's get to the news of the week in a moment. But first of all, can you start with energy prices? I think I have a bit of an understanding from the episode that I did with Bryce on gas in Russia, but I'd really love to hear your thoughts on what's going on. 

Alec: [00:03:50] Well, in a nutshell, farms run on fuel. And first of all, that's to run all their machinery. But secondly, and perhaps more importantly, for fertiliser, how. 

Audio clip: [00:03:59] Bad is the global shortage of fertiliser right now? 

Audio clip: [00:04:02] It is a huge problem. 

Alec: [00:04:04] Nitrogen based fertilisers are made with natural gas, and natural gas prices have more than doubled since the start of 2022. Now, how does this translate on an individual farm level? In India, farmers are reporting that higher fertiliser, diesel and labour costs have pushed up overall input costs 20 to 25% this year. Higher fuel prices means higher input costs for farmers, especially higher fertiliser prices, which has an effect on all crops. 

Sascha: [00:04:31] So our starting point is energy prices are already higher. And then Russia goes and invades Ukraine. We've all seen and we're acknowledging the devastation of the Russian invasion of Ukraine on a humanitarian level. But how has that also affected how wheat prices move as well? 

Alec: [00:04:50] Well, the context here is that in 2021, Russia and Ukraine were the world's first and fifth biggest exporters of wheat, shipping 39 million tons. And 17 million tons, respectively. 

Audio clip: [00:05:02] Ukraine grows enough food to feed 400 million people. And Ukraine and Russia together account for one third of the world's wheat exports. 

Alec: [00:05:11] And these exports have been throttled by war. Ukraine by the war and the invasion itself. Russia by the sanctions that followed. So starting with Ukraine, their weight production is expected to fall by 35% this year. And the wheat that is produced will be more difficult to export. 98% of Ukraine's grain exports normally pass through the Port of Odessa on the Black Sea, which is currently being blockaded by Russia. The blockade has meant that Ukraine's silos are still more than half full from last year's crop, and unless exports through the Black Sea start again, millions of tons could simply rot from last year, let alone from this year. 

Audio clip: [00:05:52] 11,000 tons of wheat arrived in Lebanon this week, but this will be the last shipment from Ukraine. 

Alec: [00:05:58] And Ukraine's minister for agriculture has acknowledged the issue here. He said before the war, Ukraine exported about 5 million tons of grain a month. Last month we managed to get 1.1 million tons out. So an 80% fall from pre-war levels. Now, Russia is also going to be impacted not directly because international sanctions do not target food exports, but they do make international trade more difficult. For example, the vessels that carry grain may be reluctant to ferry Russian grain because of the war, and that's had an effect. But Russia has been able to sell more than they were thought to be able to. This is mainly because countries like Egypt, Iran, Syria and Turkey have needed the grain and have kept buying. So prices were already high because of inflation and energy prices. And then Russian exports fell. Ukrainian exports collapsed, which restricted supply even further, pushing the price higher. 

Audio clip: [00:06:56] This war could mean so much for so many people around the world. Obviously, Ukrainians are the immediate victims, but there are there are victims all over the world. 

Sascha: [00:07:06] It's amazing to me every time I feel like I have an understanding of the effects that this war has had. There's a new market that I just have been very naive about. So that constraining supply further and that in turn is pushing prices higher. But earlier you mentioned India and that being the news of the week. So what's happening there? 

Alec: [00:07:24] So India is the second largest producer of wheat outside of China. But like China, they generally consume nearly everything they grow. So they're not big exporters, India and China. But with these higher prices on offer because of energy prices and the Russian invasion of Ukraine, Indian traders were looking to change that and direct more wheat into export markets because of the high price. Then India was hit by an unseasonal heat wave. The Economist went to one district in India and found that yields were down about 25% because of this extreme weather. So the Indian government has responded to this lower production by banning wheat exports, ensuring that the wheat that is produced stays in the country to shore up domestic food, security. 

Audio clip: [00:08:09] Officials told the news conference in New Delhi the plan is not to ban the grains export forever and that the rule could be revised later on. 

Sascha: [00:08:17] Extreme heat. Is there a climate change element to this? 

Alec: [00:08:20] Look, it's hard to say with any one extreme weather event, because it is true that India has seen heatwaves and droughts before. However, analysis by Britain's Met Office shows that global warming has made an extreme Indian heatwave like this year 100 times more likely. 

Sascha: [00:08:38] Okay, so higher input prices. You've got Russia's invasion of Ukraine. There's a heat wave in India. It almost seems like the perfect storm of events. Is there anything else that I'm missing that's pushing up wheat prices?

Alec: [00:08:53] Well, Sascha, wait. Like a lot of these commodities is a global market. And there are so many factors at play here, unfortunately for the world that wants to consume food and consume food cheaply, most of these factors are pushing the price up higher. So on top of what we've already spoken about in China, there was flooding last year. That's meant it's winter wheat crop could be, quote, the worst in history. In America, their grain belt is living through its worst drought in a decade. About 40% of America's weight was recently deemed in poor or very poor conditions, which is compared to about 15 to 20% in an average year. And because of this, the US Department of Agriculture predicted the country's production of hard red winter wheat would fall by 21% compared to last year. So that's China, America and also in Europe it's getting too little rain at a point in the season when the crops are most vulnerable to dryness, which is affecting massive grain growers in France and Germany. Now, there they're some of the supply issues that are at play here, Sascha. In response to these supply issues and shortages, 26 countries have implemented severe restrictions on food exports, like what we were speaking about with India. The Economist has estimated that these various measures cover 15% of the calories traded worldwide. 

Sascha: [00:10:16] 15% of calories traded worldwide. That is a terrifying statistic. And you've just given a wrap up of so many factors that are contributing to this increase in the price of weight. But I think the question that we both want to look at is, what does this mean? So let's take a quick break and we'll get into that when we come back. Welcome back to the dive. I'm joined today by my colleague Alec Rennison, who is telling me all about the price of wheat and why it's getting higher. Sir Alec, we've just wrapped on what is happening. Let's talk about what the effect is going to be. What is the effect of higher wheat prices? 

Alec: [00:10:58] Well, Sascha, it takes the world to feed the world. 

Sascha: [00:11:01] Did you write that or is someone else? 

Alec: [00:11:04] Oh, it's pretty good. 

Sascha: [00:11:05] It is good. It is good. I was going to give you a compliment.

Alec: [00:11:09] By some estimates, 80% of the global population living countries, which are net importers of food, more than 20% of the world's calories and more than 18% of its grain crosses at least one border on the journey from paddock to plate. So these growing global challenges and restrictions on food exports are going to have global ramifications. In a nutshell, we're already saying food shortages. Well, it's probably more accurate to say we are already seeing existing food shortages get worse. 

Sascha: [00:11:38] That sounds like you're leading me to say there's a bigger story at play here. This is part of a much bigger picture. 

Alec: [00:11:45] It is, Sascha. Over the past five years, the number of people with access to food so poor that their lives or livelihoods were at immediate risk has risen from 108 million to 193 million, according to the U.N. World Food Programme. And just six days before Russia invaded Ukraine, the executive director of the U.N. World Food Programme spoke about grain stockpiles in poor countries and said, if we do not address the situation immediately over the next nine months, we will see famine, we will see destabilisation of nations, and we will see mass migration. 

Audio clip: [00:12:20] And a worst case scenario, we could be looking at famine in about three dozen countries and in fact ten of these countries, we already have more than 1 million people per country who are on the verge of starvation.

Alec: [00:12:33] And that was before the war and the extreme weather that we spoke about in today's episode. 

Sascha: [00:12:38] Sir Alec 108 million to 193 million. That's almost double in a very short period of time, five years. And then you're saying that there's these warnings that have been happened even before the war between Russia and Ukraine. Give it to me straight. How bad is it now? 

Alec: [00:12:56] It's pretty bad, Sascha. The U.S. government has come out and said the world will need to reduce consumption of grains this year. And in developed countries, we're saying price rises in grain based foods. Cereal giants General Mills and Kellogg's have already passed price increases onto retailers. The shelf price of a lot of the wheat based food that we eat is going to get higher. But the impact of these issues will be particularly felt in poorer countries and import reliant countries. According to the UN's Food and Agriculture Organisation. Nearly 50 countries depend on either Russia or Ukraine or both for more than 30% of their weight imports. For 26 of those countries. The figure is over 50% of their imports. 

Audio clip: [00:13:39] What is happening in Ukraine is affecting the whole world food security. We must understand that we were already in the world, that we have 166 more million people chronically undernourished because of COVID 19. 

Alec: [00:13:51] And the U.N. World Food Programme itself also relies on Ukraine. It feeds more than 115 million people, and last year it got 50% of its weight from Ukraine. So these shortages are going to have massive impacts around the world. And we're already seeing protests over food prices in Iran. We saw food prices quadruple in a matter of days and people have taken to the streets to protest. So expect higher food prices globally and food shortages in import reliant countries.

Sascha: [00:14:22] And when we were talking about this issue before we started recording, you were explaining to me that higher wheat prices actually have a flow on effect to other food commodities and in turn, push up the price of other food. Can you explain that again to me? 

Alec: [00:14:36] Yes. So if the price of one food item goes up, consumers look for alternatives. And so we're seeing food price inflation in commodities not directly affected by the war or this extreme weather. The International Food Policy Research Institute has suggested that food price volatility is flashing red for all major grains, and they point to rice as an example where there are currently no supply concerns. But the supply demand imbalance in weight is pushing consumers to look to rice, which is pushing up demand for rice and pushing the price up for us. 

Sascha: [00:15:10] So essentially because they can't afford the weight, they're deciding to use the rice. And then that in turn is putting a supply and demand pressure on the rice. Is that makes sense? Okay. Yeah, I guess my big question then is when do we expect this to end or do we expect this to end? 

Alec: [00:15:27] Yeah. So, Sascha, there's a saying in economics, one of my favourites that the cure for high prices is high prices. 

Sascha: [00:15:33] That does not make me feel better at all. 

Alec: [00:15:35] Well, normally what we would expect to say is farmers. Globally seeing the high price of wheat and deciding to plant more weight rather than other crops to take advantage of these higher prices. But the problem with this situation is the higher input costs, the energy and fertiliser costs we spoke about, but also the war and the extreme weather means that it's not as easy for these wheat farmers or these potential wheat farmers to grow more. It's not like farmers in India, Ukraine, Russia can just ramp up production and supply and demand can get back into equilibrium. So Rabobank has forecast that higher grain prices will last for at least a year, but it's probably more likely that that will last as long as the Russian invasion of Ukraine continues. A recent survey by Ukraine's Agriculture Ministry suggests that 30 to 50% of the country's spring wheat fields, those that should have just been planted, could end up not being planted. And in Russia, the large farms which are so critical to supplying the global market with grain, may struggle to get the inputs they need because of these sanctions. Last year, Russia imported $870 million worth of pesticides and $410 million worth of seeds, mostly from the European Union and European Union. Exporters are going to be reluctant to sell to Russia this year. So there's a lot of factors that don't look like alleviating any time soon. 

Sascha: [00:16:59] Can I ask a naive question, Alec? And that's why can't other export nations like us, like us in Australia? Why can't we just grow wheat and export more? 

Alec: [00:17:08] Yeah, look, they will try. The cure for high prices is high prices. But it's not something that you can just turn around overnight. It's not quite as easy as maybe manufacturing where you can turn another production line on a little bit quicker. But also, when it comes to exports, the top seven countries account for about 80% of global exports. Many of them are these countries that we've spoken about here. Russia and Ukraine are at war. The US and France dealing with dry weather, leaving Canada, Australia and Argentina and they're going to try and produce more. But fertiliser is going to be difficult to get. Russia is critical for the fertiliser business. In 2021, 25 countries got more than 30% of the fertiliser from Russia. So that might be a constraint. But also, you know, if we talk about Australia where we are, we are coming off a record wheat crop in 2020 122 and analysts don't expect us to be able to match or beat that in this coming year, even with the high prices for three reasons. First of all, high input costs, which is affecting farmers around the world. Secondly, dry conditions in Western Australia, that's a little bit more Australia specific. But thirdly, that farmers don't have enough confidence that these prices will last and continue to be high by the time they're harvesting and selling this grain, which may limit how much they plant. So it's not a dumb question because it's a question people all around the world are asking. Can other countries pick up the slack and produce more and export more? And they're going to try. But the shortfall is pretty massive, so they probably won't be able to pick up all the slack. 

Sascha: [00:18:45] So is there anything that while governments can do or the UN can do in the meantime, or is this just going to be another issue that will continue to be a problem until the invasion of Ukraine stops?

Alec: [00:18:57] There are things that governments and global organisations are trying to do, but you've hit the nail on the head. This is going to be an issue while this war continues. 28% of the world's wheat export comes from Russia and Ukraine, or at least it came from Russia and Ukraine before the war. So the UN has reported that it will lay out a plan to revamp wheat exports. The World Bank has pledged 30 billion to stem food insecurity and Russia continues to say they'll have ample supplies for the coming year. But I think the conclusion that we can come to is there is a serious shortage of wheat and that doesn't look like it's going to change any time soon. 

Sascha: [00:19:36] A pretty pessimistic note to finish on today, Alec. I've got to say, I don't want to be flippant about it, but you have given me a bit of inspiration to go and revitalise my apartment vegetable patch. So just so I have my own food security because some of these statistics are absolutely terrifying. But yeah, as you said, another angle that we can see about the impacts on the global supply chain from this invasion of Ukraine. Thanks for joining us for today's edition of The Dive. If you're keen for us to talk about a particular story, then don't be shy. Make sure you contact us at the dive at Equity Mates AECOM and please do us a favour and give us five stars wherever you listen to your podcast. It really does make a huge difference for other people to be able to discover the show. In the meantime, thank you so much alike for joining me on The Dive today. 

Alec: [00:20:21] Thanks, Sascha. I feel like we're not commodity experts yet, but we are slowly learning. 

Sascha: [00:20:27] There's always time. There's always time. All right. Until next time.