Food prices dropped significantly in July from the previous month, particularly the costs of wheat and vegetable oil, according to the latest figures from the United Nations' Food and Agriculture Organization.

Whilst the FAO describes the drop in food prices 'from very high levels' as being 'welcome,'  doubts still remain over whether the good news will last.

'Many uncertainties remain, including high fertiliser prices that can impact future production prospects and farmers' livelihoods, a bleak global economic outlook, and currency movements, all of which pose serious strains for global food security,' says FAO chief economist Maximo Torero.

The FAO food price index, which tracks the monthly change in the global prices of a basket of food commodities, fell 8.6% in July from the month before. In June, the index fell just 2.3% month on month. However, the index in July was still 13.1% higher than July 2021.

Prices in the short term may fall further, if futures are anything to go by. Wheat, soybean, sugar, and corn futures have fallen from their March highs back to prices seen at the start of 2022.

For example, the wheat contracts closed at US$775.75 per bushel on Friday, down from a 12-year high of US$1,294 in March, and around the US$758 price set in January.

Why prices fell
Analysts cited a mix of both demand and supply reasons for the slide in food prices: Ukraine and Russia's closely watched agreement to resume exports of grain through the Black Sea after months of blockade; better-than-expected crop harvests; a global economic slowdown; and the strong US dollar.

Rob Vos, the director of markets, trade and institutions at the International Food Policy Research Institute, pointed to the news that the United States and Australia are set to deliver bumper wheat harvests this year, which will improve supply since shipment from Ukraine and Russia have been curtailed.

The higher US dollar also lowers the price of staples, since commodities are priced in US dollars, Vos said. Traders tend to ask for lower nominal dollar prices of commodities when the greenback is expensive.

The widely heralded UN-backed deal between Ukraine and Russia also helped to cool the market. Ukraine was the world's sixth-biggest wheat exporter in 2021, accounting for 10% of global wheat market share, according to the United Nations.

Even with the existing agreement, arable Ukrainian land may continue to be destroyed 'for as long as the war continues,' which will result in even less crop yield next year, Carlos Mera, the head of agri commodities market research at Rabobank, told CNBC's 'Street Signs Europe' last week.

'Once this [grain] corridor is over, we might see even more price increases going forward,' says Mr Mera.

Consumers could also see further price increases as there is normally a lag of three to nine months before a movement in commodity prices is reflected on supermarket shelves. Then there is the pressure of exporting enough grain as quickly as possible from a war zone.

To read more on this subject, visit the FAO website HERE.

Cover image courtesy of Flickr user skyseeker under license Attribution 2.0 Generic (CC BY 2.0)

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