What’s the outlook for key food commodities in 2022?

November and December saw the UK battered by storms Arwen and Barra, which knocked out power grids and disrupted transport in a fitting curtain call to a squally year for food and drink supply chains. 

And the simultaneous emergence of the Omicron coronavirus variant suggests this year’s tempestuousness will roll over into 2022, with Mintec’s commodities experts highlighting “fears over further Covid-19 lockdowns in key consuming markets”. It could see reduced demand for some commodities, in keeping with the impact of previous rounds of restrictions, which also saw curbs in producer or exporter countries cutting supply and contributing to increased prices.

This all comes after world food commodity prices in November reached highs not seen since mid-2011, according to the UN Food and Agriculture Organization’s monthly update.

Rabobank managing board member Berry Marttin said agricultural commodity prices increased by an average of about 28% in 2021, taking them to 40% above pre-pandemic levels.

So what exactly is in store for commodity prices in 2022, and how much higher will they climb?

A return to the status quo ante – to before the coronavirus pandemic – seemed a long way off by late 2021.

Rabobank said in its recently published yearly commodities review that it was “highly unlikely” food prices would drop to something like a pre-Covid “five- or 10-year average” over the coming 12 months, while the Paris-based secretariat of the Organisation for Economic Co-operation and Development (OECD) warned overall inflationary pressures “risk lasting longer than was expected a few months ago”.

“Prices are expected to stay at high levels throughout 2022,” says Stephan Hubertus Gay, senior agricultural policy analyst at the OECD.

Paul Hughes, chief agricultural economist and director of research at IHS Markit’s Agri-Business Intelligence wing, adds he expects “inflationary pressures in overall food prices” even if these are unlikely to reach “the same level” as 2021.

“I don’t see us coming out of this any time soon,” says Abdolreza Abbassian, senior economist at the UN FAO.

Not only are prices set to remain high, but a Gordian knot of factors, that since mid-2020 have been pushing prices up, could defy unpicking.

Food commodities are “now supported by inflation in the general economy”, according to Rabobank, and reinforced by “astronomical” shipping container costs, rising energy and fertiliser prices, and labour shortages in ports and factories.

The impact of the above, according to Hughes, has been “more severe than most anticipated”.

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• ‘Grim combination’ of inflationary pressures to keep food prices high in 2022: Rabobank

By late 2021, global container prices were almost 600% higher than two years before, back when the coronavirus was a but a rumour.

Congestion and delays at major ports, such as Los Angeles, and along key routes, such as the Suez Canal, have added to this year’s soaring shipping costs.

Analysts at S&P Global Platts believe that congestion and delays at ports will “remain a pain point” likely to persist through the first half of 2022.

Delays mean trouble for perishable food commodities needing snappy delivery to intermediaries or producers. Meanwhile, the rising costs of shipping and containers, which in part were down to increased demand from sectors such as pharmaceuticals and electronics – demand stemming from the pandemic and related restrictions – have left commodity exporters struggling to compete for space onboard. It is a rat race that in turn has added to imbalances between supply and demand and pushed food commodity prices up.

By the OECD’s account, “the surge in demand for goods has met bottlenecks in production chains” and caused “disruptions in energy, food and commodity markets” that have pushed up prices.

“I do not recall a situation like this in terms of uncertainties,” says the FAO’s Abbassian.

Food retailers have already faced the dilemma, in some cases, of either absorbing some of the price rises themselves or passing them on to consumers.

How much a shopper ends up paying depends on myriad factors that can dilute or exacerbate the through-put of commodity prices, such as shipping costs, the processing, marketing and packaging of food, the cost of final delivery.

“On average”, the International Monetary Fund reports, “the pass-through from producer to consumer prices is only about 20%”.

Economists at the IMF estimate that when it comes to food, it “takes at least 6 to 12 months before consumer prices reflect changes in producer prices”.

So while the lag varies depending on the commodity and type of food, the IMF’s timing range suggests that further rises are likely – something many UK food businesses have been warning of during the last quarter of 2021.

Although intermediaries such as traders, processor and retailers often “buffer some of the price variation of agricultural commodity markets”, according to Hubertus Gay, the latest commodity prices mean it is inevitable “consumer prices of food will increase in the coming months”.

“This share differs and for products like fruits, vegetables, milk and to lesser extent meat it is higher and thus the price transmission to consumers will be more direct,” he says.

With “something like coffee, where the product to the consumer is simply the raw coffee beans, some processing and packaging, prices tend to get passed on quickly during sharply rising prices,” according to IHS Markit’s Hughes.

World Bank economist John Baffes adds that “changes in the prices of maize, wheat, and other grains take more time to transmit to consumers since these commodities go through a substantial amount of transformation”.

Prices in 2022 could also be affected by unpredictable weather, while environmental policies are likely to force hard-pressed shoppers to part with even more of their cash.

Rabobank warned in December that a resurgent La Niña weather system could continue to hamper key grower countries in the Americas and Australasia, which would likely keep many food commodity prices high – though the World Bank said recently the same weather phenomenon could lead to increased winter yields of maize and wheat in the Northern Hemisphere, with the increased supply potentially dampening inflation.

But the bank then warned that “global food prices could come under further upward pressure” in the wake of plans announced by countries “to divert food commodities to the production of biofuels”.

“In the worst-case scenario, rising food costs combined with surging energy prices have the potential to imperil the livelihoods of millions of people around the globe,” it said. According to the OECD, “rising food and energy prices are hitting low-income households in particular”.

Food supply chain operators in and to the UK have faced the additional challenge of Brexit and the requirements imposed by UK-EU Trade and Cooperation Agreement signed in late 2020.

The delays and complications are set to roll on with Britain preparing to impose border controls on most EU-sourced food and drink imports next year.

More paperwork and new checks could further add to food price inflation. “Although we have not analysed Brexit in the context of commodity markets,” Baffes says, “it is typically the case that more border controls tend to be associated with higher costs and hence, prices at the consumer level”.

In the UK, according to AHDB market specialist Chris Gooderham, “the underlying pressure on prices is upwards”.

“The impact of rising energy costs, fuel prices and labour costs are all putting margins under pressure for farmers and processors, and if the supply chain is to remain sustainable, prices will need to react to support the additional costs,” he says.

After mounting warnings, it looks like 2022 will be the year that commodity price volatility finally spills over into full-blown retail price inflation.