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Category Insights & Outlook 2023 h2
Food & Agriculture
In June 2023, the UN Food and Agriculture Organization’s (FAO) global food price index fell to 122.3 points, its lowest level in more than two years and 23.4% below an all-time peak reached in March 2022.*1
While the high food commodity prices and supply shortages that occurred following the onset of the Russia-Ukraine War have eased considerably compared to their peaks last year, the food market remains volatile and continues to be marked by supply chain risks and macroeconomic pressures.
Geopolitical tensions between Russia and Ukraine and uncertainty regarding the Black Sea Grain Initiative
Sustained impact of a strong US dollar contributing to high domestic food prices
Continued supply chain pressures and high production costs
Rising interest rates constraining borrowing for producers
Climate change and animal diseases impacting overall yields
In H1 2023, the renewal of the Black Sea Grain Initiative continued to help keep grain exports from Ukraine flowing to global markets. Other factors contributing to the decrease in agricultural commodity prices include better harvests in other major grain-producing countries and lower energy prices compared to 2022.
However, Russia officially pulled out of the Black Sea Grain Initiative on 17 July 2023, as the UN and Western countries have refused to meet the country’s demands to remove sanctions on its state agricultural bank. The end of the grain deal could cause food prices to climb again, but the impact is expected to be muted, with other countries – including Argentina, Brazil, and European nations – now producing more grain to counterbalance losses from Ukraine.
Importantly, domestic food prices in many countries remain high or continue to increase due to the strength of the US dollar and the resulting depreciation of the real exchange rate of other currencies against the dollar. Annual domestic food price inflation across 146 countries reached a peak of 20% in February 2023 – the highest level in the past 20 years.
* Note that this data and related contents refer to circumstances as at end of September 2023.
Trends to date
Wheat
-8.72% YoY change (Jul 2022 to Jul 2023)
While wheat prices remain elevated compared to pre-pandemic levels – 4% above their five-year average value in May 2023 – good global supply levels have underpinned a continued downward trend in global prices.
- Prices have generally faced downward pressure since mid-2022, as supply prospects improved, with the Black Sea Grain Initiative easing market uncertainty regarding Ukraine exports.
- Heading into the 2023/24 season with ample anticipated global supplies and carryover stocks from last season, prices were down 35% in May 2023 compared to the same month in the previous year. Wheat futures have been falling since 2022, in May 2023 reaching their lowest level since Q4 2021.
- It remains to be seen whether the recently announced (July 2023) cessation of the Black Sea deal will impact prices significantly, while the expectation is that there is sufficient supply from Brazil, Argentina, and European markets to offset the loss of supply from Ukraine.
Price of Wheat
Fig. 1: “Wheat, Kansas Ordinary Hard Red Winter, Free on Board Track ($/Bushel)” (July 2022 to July 2023), Refinitiv Eikon
corn
-16.57% YoY change (Jul 2022 to Jul 2023)
International prices of coarse grains, including corn, have also declined to their pre-2022 levels after reaching record highs in 2022. International corn export prices in early June 2023 were down 18-25% Y-o-Y. 2
- Prices fell quickly in 2022 and remained mostly stable with the Black Sea Grain Initiative, except for short-term periodic increases caused by uncertainty around extension of the deal.
- Prices began to ease again in H1 2023 due to the start of corn harvests in South America, including expectations of a second record output in Brazil and rebound in US production following reduced outputs last year.
- The 12% fall in corn futures prices between January and May 2023 is also attributed to expectations for increased export availabilities in the 2023/24 season.
- Prices are predicted to follow a downward trend amid higher supplies though, as with wheat, the extent of the impact of the cessation of the Black Sea Grain Initiative remains to be seen.
- High volatility in corn futures indicates that the overall softer outlook is coupled with heightened vulnerability in the market.
Price of Corn
Fig. 2: “Corn Number 2 Yellow Central Illinois ($/Bushel)” (July 2022 to July 2023), Refinitiv Eikon
DAIRY
-20.63%* YoY change (Jul 2022 to Jul 2023)
Dairy prices trended downward in H1 2023 on subdued import demand from key importers, despite tight global supplies from leading global exporters. The FAO Dairy Price Index averaged 118.7 in May this year, down 21% from its June 2022 peak.
- This period saw lackluster global demand, especially for spot supplies.
- Market uncertainties from continued lockdowns caused by the zero-COVID policy in China, weaker country currencies against the US dollar, and poor economic growth prospects further contributed to the price declines.
- Price decreases could have been steeper had it not been for market concerns about supply limitation and the risk of limited production potential due to high energy costs and extreme weather events.
* Using the Dairy Price Index
Price of Dairy
Fig. 3: “UN FAO (Food and Agriculture Organization of the United Nations) Dairy Indices” (July 2022 to July 2023), UN FAO
SUGAR
+34.36% YoY change (Jul 2022 to Jul 2023)
The expected tighter global sugar supplies led to sharp increases in sugar prices in recent months. International sugar prices increased overall since Q4 2022 and were similarly at their highest level since October 2011 in May 2023.
- H1 2023 saw lower than expected outputs in China, India, Brazil, the EU, Mexico, and Thailand.
- In May, the US Climate Prediction Center raised the likelihood of an El Niño weather pattern emerging between August and October of this year to 94%, which also contributed to upwards pressure on prices.
- Heavy rains delayed the 2023 harvest in Brazil, thus placing upward pressure on prices. However, significant recovery is now projected for Brazilian production.
Sugar remains in high demand, with global sugar consumption forecast to continue increasing for a third successive season, despite being muted by slowed economic growth globally.
Price of Sugar
Fig. 4: “Raw Sugar-International Sugar Agreement (ISA) Daily Price (¢/lbs)” (July 2022 to July 2023), Refinitiv Eikon
RICE
+4.60% to +24.45% YoY change (Jul 2022 to Jul 2023)
After rising during much of last year, international rice price rises have remained high in 2023, with global rice prices increasing 14% since June 2022.
- Higher prices have occurred due to strong demand from Asian buyers and production disruptions in 2022/23, caused by adverse weather and input cost increases.
- Recent months have seen adverse weather in key supply locations in South Asia – monsoon rains in India and floods in Pakistan – reducing supplies. At the same time, high fertilizer costs have contributed to the increased cost of growing rice. Recent concerns over a potential El Niño phenomenon impacting production have also contributed.
- In July, India banned exports of non-basmati white rice in a critical move aimed to stabilize its rising domestic rice prices. The devaluation of currencies has led to increased import costs for numerous countries, while high inflation has elevated borrowing costs of the trade.
- India is the world’s top rice exporter, accounting for approximately 40% of the global trade. The move has raised concerns of international rice price spiking further, with the announcement coming at a time when supplies are already strained and the arrival of new crop in the markets is still months away.
- There are hopes that global production could recover in 2023/24, which could ease pressure on prices, but macroeconomic and supply chain risks persist.
Price of Rice
Fig. 5: “UN FAO (Food and Agriculture Organization of the United Nations) Rice Indices, 2014-2016=100” (July 2022 to July 2023),UN FAO
*The Aromatic Index follows movements in prices of Basmati and fragrant rice
MEAT
-5.06%* YoY change (Jul 2022 to Jul 2023)
Global meat prices decreased in H1 2023 as a result of subdued global demand. The FAO Meat Price Index averaged 117.9 points in May, an 8.1 point decline from its all-time high in June 2022.
- Beef and poultry prices decreased in Q2 2022, driven by subdued import purchases stemming from economic hardships, depreciation of currencies against the USD, and limited food service sales.
- Export availabilities also rose in some key exporting countries, despite high production input costs and the impact of Avian Influenza (HPAI) outbreaks.
- However, poultry prices rebounded in April 2023 after nine months of continuous decline as import demand from Asia increased, while supply limitations caused by widespread HPAI outbreaks continued in many regions.
- Beef prices increased from February 2023 on constrained supply in the US and increased demand from China after the reversal of a one-month ban imposed on Brazilian beef due to an outlier case of mad cow disease detected in Brazil.
- Global meat production is set to marginally increase in 2023, despite animal diseases and high production costs challenging production, while import demand from Asia including key importer, China, is expected to increase.
*Using the Meat Price Index
Price of Meat
Fig. 6: “UN FAO (Food and Agriculture Organization of the United Nations) Meat Indices” (July 2022 to July 2023), UN FAO
Future outlook and key risks
Overall, food commodity prices are forecast to remain broadly unchanged for the remainder of 2023 and into 2024 amid improved supply prospects and weakening global demand. Nonetheless, they remain elevated when compared to pre-pandemic levels. In addition, food markets are vulnerable to shocks stemming from extreme weather, geopolitical tensions, policy changes, and developments in local supply markets – all of which have the potential to tip the delicate supply-demand balances.
Key risks include:
- Disruptions in trade routes: Trade route disruptions could limit supply and raise prices, particularly for grains around the Black Sea and Ukraine amid sanctions and countermeasures. The Black Sea is becoming increasingly dangerous for commercial vessels. The Black Sea Grain Initiative, which relieved pressures on grains prices in H1 2023, expired in July and the extent of the impact remains to be seen.
- Climate change: The occurrence of unexpected adverse weather events affecting crops in major global food-producing regions could result in food price increases and availability challenges. This is likely to persist, with unpredictable weather becoming more frequent due to global warming.
- Domestic policies of key supply countries: Key supply nations are implementing policies to limit exports in the face rising domestic food prices. For example, India’s recent export ban of non-basmati white rice is expected to constrain global supply and push prices up further.
Recommended responses for procurement teams
Best practices
1. Research the market.
- Understand trends and opportunities.
- Research and speak to potential alternative suppliers to understand their businesses.
- Keep an open mind to creative alternatives and innovation.
2. Analyze your categories.
- Use invoice data to identify top spending categories and top suppliers.
- Find cost drivers, risks, and opportunities.
- Challenge existing specifications to simplify or harmonize, where possible.
- Speak with your current suppliers to find improvement opportunities.
3. Consult the market through a robust RFP
- Define clear requirements and specifications for each category to ensure a like-for-like comparison of suppliers.
- Give as much information as possible in the RFP to avoid suppliers building risk into their responses (for example, provide volume forecasts and seasonality, delivery schedules).
- Ensure clear and timely communication to potential suppliers regarding evaluation criteria, timeline, and deliverables.
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