Food inflation risks balloon with Ukraine attack as prices of wheat to palm oil soar

Wheat harvesting in a field near the village of Nedvigovka in Rostov region, Russia. PHOTO: REUTERS

KUALA LUMPUR (BLOOMBERG) - A spectacular rally in crop prices from wheat to palm oil has increased concerns that food costs are going to get a lot higher. Those fears only got worse on Thursday (Feb 24) after Russian forces attacked targets across Ukraine.

Both countries are key suppliers of grains and edible oils.

The crisis has driven wheat to the highest level since 2012, while drought in South America has dimmed the outlook for soya bean supplies.

Palm oil, which is used in thousands of products from cookies to shampoo, is on a record-breaking run as a labour shortage crimps output in major producer Malaysia.

This could feed through to higher prices at grocery stores as everything from pasta to chocolate becomes more expensive to produce, further squeezing household budgets already strained by rising inflation. A measure of global food costs calculated by the United Nations rose near a record in January.

The Russia-Ukraine crisis “represents a major concern for vegetable oil, wheat and corn”, said Mr Oscar Tjakra, a senior analyst at Rabobank in Singapore. “We started 2022 from a position of low stocks in many agricultural commodities.”

Russian forces hit cities in Ukraine after President Vladimir Putin ordered an operation aimed at demilitarising the country. This sparked a rally across commodities on Thursday, driving Brent crude oil above US$100 a barrel for the first time since 2014 and sending Chicago wheat futures almost 6 per cent higher.

Ukraine and Russia account for about a quarter of the global trade in wheat, a fifth of corn sales, and 80 per cent of worldwide sunflower oil exports.

Wheat extended gains from the highest close since 2012 and was 5.4 per cent higher at US$9.3475 a bushel at 1.46pm in Singapore. Corn and soya beans also rallied. In Malaysia, palm oil climbed as much as 6.2 per cent to a record RM6,351 a tonne.

Exacerbating the inflation outlook is the surging cost of fertiliser. The market is already feeling the pinch because of reduced potash supplies from Belarus after United States sanctions, and any reduction of crop-nutrient exports from Russia will fuel the squeeze. With farmers scaling back fertiliser use, this could trigger lower crop yields and push up food prices even higher around the world.

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There are signs that China, the world’s top importer of agricultural products, is concerned about the rally.

Beijing announced this week that it will sell edible oil and soya beans from state reserves to boost supply on the domestic market. The Dalian exchange will also raise margin requirements for some corn and soya bean meal futures contracts in a bid to cool speculation.

“The proportional increase in prices on supermarket shelves will, of course, be smaller as commodity prices are usually only a relatively small proportion of the prices of final goods,” said Mr Tjakra.

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