Aurelia Butler

Has the high price of food passed a peak? Even before the UN-brokered grain deal between Kyiv and Moscow gave the green light last week for shipments to leave Ukraine’s Black Sea ports, food commodity prices had been plummeting. Fears of recession, a bumper harvest in Russia and hopes of revived grain trade flows have pushed prices lower.But the price declines do not mean the food crisis is over. Analysts say the underlying factors that drove markets higher are unchanged. The ongoing war is only one of a multitude of problems that could sustain higher hunger rates for many years to come.The Ukraine conflict came at a time when food prices were already being pushed upwards by a range of factors — mainly droughts affecting key crop-producing countries and supply chains dealing with the residual effects of the pandemic. In poorer countries whose economies have been left in tatters by Covid-19 lockdowns, the war only exacerbated a grim situation.“What sets this global food crisis apart from previous similar situations is that there are multiple major causes behind it,” says Cary Fowler, the US special envoy for food security.The true impact of this combination of factors will only become apparent next year, analysts say. “I’m more worried about 2023 than 2022,” says one.

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Storm clouds on the horizonThe war has undoubtedly been a big drag on global food production. With Ukraine’s ports blockaded and capacity on alternative routes limited, export volumes are significantly down. In June, the country exported just under 1mn tonnes of wheat, corn and barley, 40 per cent lower than the same month in 2021, according to Ukraine’s agriculture ministry.Ukraine’s harvest started this month and growers are scrambling for storage for the new crop. But if farmers cannot sell their grains, it will have a knock-on effect into 2023 as they will not have the funds to pay for seeds and fertiliser for the next season. They may not even have a crop, warns an international food policy official.

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The high commodity prices seen in late spring may have incentivised greater production elsewhere. But that will be offset by the surge in input costs for many farmers, especially fertilisers and diesel used for transportation and farm equipment.Food policy officials warn that soaring energy prices, which are expected to rise further over the winter, have also hit the production of nitrogen fertiliser, a key crop nutrient.“If we don’t sort out [the issue with] agricultural inputs — in particular fertilisers — then the crisis of affordability will turn into a crisis of availability come next year,” warns Arif Husain, chief economist at the UN World Food Programme.So far, the main concern about food has been grain supplies, especially the wheat and vegetable oils of which Ukraine is a large exporter. But some analysts are concerned about the price of rice, the cornerstone of diets across Asia.

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For now, there are high levels of inventories in leading producing countries such as India, Thailand and Vietnam. However, there are worries about export restrictions, if the high cost of wheat prompts more consumers to turn to rice as a substitute. Only about 10 per cent of total global production of the grain is exported, so a restriction by any one exporter can have an outsized impact on international prices. In 2007-08, export restrictions by India and Vietnam combined with panic buying by large rice importers, such as the Philippines, leading to prices more than doubling. “We are monitoring rice prices closely,” say analysts at Nomura, the Japanese investment bank, adding: “If rising wheat prices lead to substitution towards rice, this could lower existing stocks, trigger restrictions by key producers and lead to higher rice prices over time.” Officials are also watching fertiliser availability for rice production in Asia. The human effectsLong before Russia invaded Ukraine, food insecurity was at record levels. Due to the pandemic, droughts and other regional conflicts, just under 770mn went hungry in 2021, the highest number since 2006, according to the UN Food and Agriculture Organization. The FAO predicts the war in Ukraine will raise the number of undernourished people by up to 13mn this year and another 17mn in 2023. According to the World Bank, for every 1 percentage point increase in food prices, an additional 10mn people are expected to fall into extreme poverty.Across much of Africa, the Middle East and central Asia, consumption of staples outweighs production. It is countries in these regions that are most exposed to global price rises, according to commodity data group Gro Intelligence. Many emerging economies are facing the additional burden of a decline in their currencies on top of rising food prices.The impact on countries in the Middle East and Africa that depend on imports from Ukraine and Russia has been stark. Egypt has turned to the IMF for aid, inflation in Turkey has surged to almost 80 per cent while the World Bank has described the crisis in Lebanon as one of the most severe of the past 100 years. Even countries that do not buy from Russia or Ukraine but are high net importers of agricultural commodities are facing higher import costs. The prices of staple foods such as bread, pasta and cooking oils have been rising fastest. A loaf of bread in Bulgaria cost almost 50 per cent more in June than it did a year earlier. Cooking oils in Spain are almost twice as expensive now as they were a year ago and sugar prices in Poland have risen by 40 per cent.

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In lower income countries where food makes up a large portion of consumer spending, cutting back to compensate for rising costs of living is much harder. In Egypt, where food and non-alcoholic drinks account for more than a third of household spending, people are facing food price rises of 24 per cent. In Ethiopia, where the budget on food is even higher, food inflation is 38 per cent.“If you live in a country where, on a good day, you spend upwards of 50 to 60 per cent of your disposable income on food, there’s not much space left after that to deal with a shock of this magnitude,” says Husain.In Africa especially, “there is a risk of famine next year,” says Gilbert Houngbo, president of the UN International Fund for Agricultural Development. This in turn “could create social unrest and mass economic migration,” he adds.Food price spikes in 2007-08 and in 2010-11 each resulted in riots around the world, and sky-high food prices were a key factor in the unrest that recently gripped Sri Lanka. Other worst-affected governments have so far managed to keep a lid on social unrest by using subsidies.“That’s provided a Band-Aid,” says Michael Pond, analyst at Barclays. “But at some point, the pressure might be so strong that governments can’t provide that Band-Aid. And that’s where things could boil over,” he adds.

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No return to normalNot everyone thinks the crisis will become more severe. Earlier this month, Morgan Stanley issued an optimistic report on the future of food prices, suggesting increases in 2023 will be lower than expected. Increased grain production by farmers, including in Ukraine as tensions ease, will temper food inflation, the report said. Yet while some international traders are hopeful that the reopening of the Black Sea trading route for Ukrainian grains could signal the start of a “de facto ceasefire”, there is still uncertainty over Russia’s intentions. It is continuing to attack areas around Ukrainian ports.And even if the war were to end tomorrow, Ukraine’s agricultural and port infrastructure need to be rebuilt and the waters off its coastline demined. The country’s farmers may not be able or willing to come back to work on their land.Many western government officials and analysts expect the current food crisis to last years, with the war coming on top of climate change, the pandemic and other conflicts around the world. “Any one of these factors that have pushed food inflation [higher] could continue,” says Pond. Diversifying import sources among countries that were reliant on Ukraine for grains and vegetable oils means that prices will remain elevated for longer, and the story will be similar in energy, says Laura Wellesley, senior research fellow at Chatham House. “The overall picture looks like one of tightening supply and high prices, without any likelihood of let-up any time soon.”Consumers may need to get used to permanently higher food prices, economists warn. Capital Economics forecasts that market levels will “remain at historically high prices” due to the increased volatility in the weather. “It’s undeniable that we’re seeing lower yields and harvests” over the past few years due to the growing impact of climate change, says Caroline Bain, chief commodities economist at the research firm. Some analysts wonder whether the conflict has started a process of dismantling a trade system designed to deliver low cost goods, including food commodities, to all corners of the globe. The global food trading system that allowed us to access all kinds of foods is not set to return to normal any time soon, says Wellesley. “That in turn likely means continued high food and fertiliser prices and a reconfiguration of trade dependencies, perhaps with a greater focus on more regional supply chains.”Additional reporting by Federica Cocco in London More

A handy thing about inflation is that it improves government finances, though not reliably. Deflating public debt with higher prices only works when it’s the right type of inflation, and that’s not what Europe has got.The UK’s post-WWII rebuild is example of how reflation can work. Wartime spending loaded Britain with public debt equivalent 270 per cent of GDP and a recession lasted from 1943 to 1947. But by letting inflation run high for a few decades (4.6 per cent annually on average) the ratio had deflated to about 50 per cent by the start of the 1970s. It didn’t happen in isolation though. Post-war stimulus including a 30 per cent devaluation of sterling vs gold meant nominal growth easily outstripped nominal interest rates, resulting in rising incomes and governments that consistently ran in surplus. Real growth through the golden era (~2.8 per cent pa on average) plus a tame interest rate on the mostly foreign-held sovereign debt (~3.6 per cent pa) became a fiscal snowball — as illustrated by this chart from Bridgewater’s Principles for Navigating Big Debt Crises:

As per above, economies are manifold. Barclays’ economist Philippe Gudin de Vallerin et al explain the evolution of public debt as . . . … the sum of the primary balance as a percentage of GDP and the debt-to-GDP ratio for the previous period, multiplied by the difference between the average nominal interest rate on the stock of debt and nominal growth:Bt = -Dt + Bt-1 (rt-gt)where B is the debt ratio, D the primary balance ratio and r the average nominal interest rate on the stock of debt and g nominal growth.The big problem now is with g, the nominal growth rate. It’s tricky to measure because consumer price indexes include imported goods such as Norwegian gas and Indonesian coal, whereas GDP is exclusively domestic value-add. And since Europe is a net importer of commodities, nominal growth is being squeezed. These two charts from Barclays show how the Harmonised Index of Consumer Prices is running 3 percentage points hotter than the GDP deflator, which has a drag from import prices of about 8 percentage points versus zero a year ago:

A weakening ratio between import and export prices (known as the terms of trade) also means European households suffer disproportionately. Barclays guesses that the supply-side shock has knocked 4 percentage points off Euro area growth, which against tepid wage inflation leaves the nominal rate deep in negative territory:

What about windfall taxes? Ok, but recent measures taken by Spain, Italy and Germany have been earmarked to stuff like social security and renewable energy investment, with no corresponding reduction in deficit targets. Also, stagflation almost never translates into higher tax receipts. Here’s Barclays again:

Another thing to note there is r, the average nominal interest rate, which is very slow to move. Market interest rates can rise but only new bond issuance will price off the higher yield. Even that might not even matter much, given a percentage of new issuance will be to flip expensive debt issued during the 2010-12 crisis. And since the crisis, Euro area states have been issuing debt with ever-lengthening maturities. Absent a default threat or a serious political meltdown, the pass-through of market rates should happen gradually. That’s not true of inflation-linked debt, which for France and Italy make up 10 per cent of the total. Italy, unlike its neighbours, also has floating-rate securities that account for another 6.6 per cent of tradeable debt. Under Barclays’ base case of inflation peaking in September, Italy will be paying about €10bn more in inflation compensation next year, or double the 2021 level. If inflation stays elevated through 2023 the bill will rise to €16bn, which is that’s on top of about €3bn in variable rate coupons:

Based on current market rates this burden isn’t big enough to raise serious concerns about sustainability, “assuming [Italy’s] fiscal position returns to a conservative stance”, says Barclays. The bigger worry is a repeat of May and June’s mini panic, because any threat that policies tighten further and growth forecasts deteriorate would raise the real possibility of a doom loop: More

Almost everyone in the financial markets remembers 10 years ago yesterday when Mario Draghi, then European Central Bank president, said he would do “whatever it takes” to save the euro. Some will also recall the first time the euro dipped below parity with the dollar in December 1999, less than a year after the currency had been launched on a crest of frothy boosterism claiming it would soon challenge the dollar for global supremacy.On both occasions there was great hullabaloo, in retrospect much more justified for one episode than the other. The “whatever it takes” speech was genuinely important in stopping the eurozone debt crisis spiralling out of control. It led to the Outright Monetary Transactions bond-buying programme, which kept sovereign debt spreads down despite never actually being used.It’s much more surreal to remember the frenzied parity party of 1999: foreign exchange traders’ scorn about the “toilet currency” that only ever went down, weeks of suspense while the exchange rate hovered close to the entirely arbitrary 1:1 level, wild rumours of this or that investment bank buying euros to keep it above parity. In September 2000, by which time it had sunk below $0.85, the systemic problems of a weak euro worried global policymakers enough that there was a concerted intervention by the big central banks.Two weeks ago, the euro hit 1:1 with the dollar again for the first time since that first sub-parity period ended in 2002. Last week the ECB raised rates for the first time in more than a decade and announced a fresh bond-buying programme, the transmission protection instrument.The ECB needs all the tools it can get. It’s facing an extremely difficult time, more so than the other big central banks. The energy shock from the Ukraine war, which could be multiplied many times this winter if Russia cuts off gas supply, is the classic stagflationary challenge that leaves monetary policymakers with no good options. Meanwhile, the recent rise in bond spreads within the eurozone, particularly because of political uncertainty in Italy, continue to reflect the currency’s famously incomplete nature. Compared with its counterparts in the other big economies like the US and Japan, the ECB is running a currency without a unified bond market or a large and centralised fiscal authority.But it’s also true that at each iteration, the development of the euro’s governance becomes slightly more calibrated and precision-designed and slightly less existential and jury-rigged. This time round, financial markets met the breach of dollar parity with equanimity. The truth has sunk in that large swings in the external exchange rate aren’t necessarily a judgment on the credibility of the currency or its policymakers. The eurozone is currently in a markedly worse economic state than the US, and ECB rate rises have lagged behind those of the Federal Reserve: it’s understandable that the currency would depreciate. Movements in bond spreads between eurozone members are certainly a huge issue, certainly for a large country with a sovereign debt stock the size of Italy’s. But although the markets are asking questions about the TPI’s design and the criteria for its use, these are technical issues that can be worked out in practice, not fundamental questions of functionality or legitimacy.The TPI is an iteration rather than a radical departure. There will no doubt be a challenge to its legality at the German constitutional court, and there are of course misgivings within eurozone officialdom about how much it can be expected to achieve. But these differences have calmed down considerably from the huge objections on principle, particularly from the Bundesbank and the German finance ministry, which the ECB encountered when trying to expand its range of tools a decade ago. And compared with the spasms of hysteria back then about Greece quitting the euro, there’s notably less hyperventilating commentary this time round about the currency breaking up. Let’s be clear: a great deal more work needs to be done in giving the euro a stable governance structure, including improving eurozone-wide banking and capital markets and expanding the pool of safe euro-denominated assets. Until it is, those expectations from the time of the euro’s launch that it would soon challenge the dollar as a global currency will continue to be proven wrong. The dollar’s share in international funding fell after 2000 to the benefit of the euro but recovered all of that lost ground by 2020.But although the potential challenges to Europe’s economies may be bigger even than during the eurozone sovereign debt crisis, the ECB is in a better position to solve them. Its judgment can always be criticised, but its authority is much less in question. Ten years on from Draghi’s speech, the financial markets know that the central bank will do whatever it takes to hold the eurozone together without having to make it [email protected] More

LONDON (Reuters) -The euro zone’s looming gas crisis along with Italy’s renewed political troubles will push the bloc into a mild recession by early next year and limit European Central Bank interest rate hikes, JPMorgan (NYSE:JPM) has warned.The bank’s economists cut their economic forecasts, predicting euro zone GDP growth would slow to 0.5% this quarter and then contract 0.5% in both the fourth quarter of this year and the first quarter of next year. Two consecutive quarters of contraction are the traditional definition of recession.”Our new forecasts assume gas prices at 150 euros/MWh” the bank said in note on Wednesday, adding that combined with strains like in Italy, it would add up to a 2% hit to euro zone GDP.The high gas prices would also push up headline inflation by 1.2 percentage points in the near term, although it would drop again next year due to the economy’s negative reaction and thereby reduce the degree to which the ECB hikes rates. “We expect the ECB to deliver another 50 basis points of hikes by year-end,” JPMorgan said, cutting it from a previous forecast of 75 bps in three instalments. “We now expect 25bp in September and 25bp in October” the U.S. bank said, removing an additional 25bp hike that had been pencilled in for December. The recession call follows an IMF warning on Tuesday that both Europe and the United States would see virtually no growth next year if Russia cuts off Europe’s gas supply completely and slashes its oil exports further.JPMorgan said its new 150 euros/MWh baseline gas price forecast – which is well below current prices of more than 200 euros TRNLTTFMc2 > – likely required gas flows through Europe’s main Nord Stream 1 pipeline to hold at around 40% of normal levels.That “may just about avoid a much larger hit from major gas rationing in Europe while keeping prices persistently higher”, the bank said. Moscow this week though has warned the flows will drop to just 20% of capacity due to more maintenance issues.”The bigger call is about 2024 and beyond,” JPMorgan said. “The GDP level will be lower and unemployment higher, which argues for a disinflationary impulse.” More

Total new-vehicle sales including retail and non-retail transactions this month are expected to decline 5.7% from a year earlier after adjusting for total selling days, the consultants said in a report on Wednesday.Automakers have struggled with supply-chain disruptions caused by the COVID-19 pandemic including those resulting from recent lockdowns in China, with Russia’s invasion of Ukraine exacerbating the problem.The industry also has to compete for limited semiconductor supplies with other manufacturers such as consumer electronics device makers.”In August, the overall industry sales pace will continue to be constrained by procurement, production and distribution challenges,” said Thomas King, president of data and analytics division at J.D. Power.But the supply shortfall, coupled with strong demand, has translated to record transaction prices and dealer profitability, according to the consultants. New vehicle prices in the United States likely stayed near record levels in July, with average transaction price expected to rise 12.3% to $45,869, they said. The seasonally adjusted annualized rate for total new-vehicle sales in the country is expected to be 13.7 million units, down 0.9 million units from last year.The consultants also expect 2022 global auto sales volume to decline 0.8% from a year earlier to 80.8 million units.”While there is near-term upside potential in China, we believe volume will cool as inventory becomes tight, given strength of demand,” they said. More