Global Food Prices Fall 10th Month In A Row

Food inflation in the US hit a new high of 9.9% in 2022. But according to the Food and Agriculture Organization (FAO), world food prices declined for the 10th consecutive month in January, and are now below the lowest prices of 2022. So, will global prices be a leading indicator??

The USDA says no. A recent report forecasted food prices to rise an additional 7.1% in 2023. Although the rate is slowing, food inflation across all categories is still 5-10% above the 20-year average. Food-at and -away-from-home inflation, for example, are expected to increase by 8% and 8.2% respectively in 2023.

Hidden Trends Below the Headlines

Global food prices have been declining from a record-high hit in the early part of 2022. The closest example to today was the record pace of food inflation during the 1970’s, when an oil embargo created an energy crisis and food shortages nationwide.

But some positive catalysts are hiding beneath the headlines. The FAO Food Price Index spiked last year primarily due to surging vegetable oil and cereal costs in the wake of the war in Ukraine, one of the largest producers of sunflower oil, wheat, barley, and fertilizer.

In July of last year, Turkey and the United Nations signed the Black Sea Grain Initiative to unblock food exports from Ukraine, and the global food index began to fall from record highs. As input goods at the bottom of the agricultural food chain, legume and cereal costs trickle up to prices at the supermarket.

Importantly, the FAO tracks only the export prices of these products, which have some spread against the prices of products for domestic consumption. Domestic food prices are often controlled by regulations and modified by subsidies. This distinction is fundamental in the US, which produces most of its base foods, such as cereals, oils, dairy, and meat.

Although the Ukraine war affected food prices by incentivizing exports and price increases, the shock was felt less in the US than around the world, so a subsequent decrease in prices may be less noticeable.

Ongoing factors like higher or more volatile fuel costs, fertilizer shortages, soil nutrient-depletion, and transportation constraints will likely remain in the medium to long-term too. A recent and dramatic spike in egg prices, for example, was exacerbated by the avian flu.

And as those issues will not suddenly resolve, the USDA must expect given their forecasts, then there isn't much point in expecting a sudden drop in American food prices similar to what the rest of the world is experiencing.

USDA forecasts do not anticipate a resolution to those catalysts either, so commodity traders have no reason to expect a sudden drop in input goods any time soon.

Preparing For A Rebound?

Publicly traded companies have not been immune either. Tyson Foods ($TSN) had operating margins decrease 68% year-over-year as the stock continued to underperform over the last few months.

Management argues that makes it ripe for a rebound, citing “operational inefficiencies” as the primary driver for decreased earnings. Those issued may be corrected and could improve substantially throughout the year if inflation trends continue.

Despite higher prices, the company has increased sales volume by 0.8% year-on-year. Notably, middlemen tend to benefit the most when material prices decline, which puts Tyson Foods in a privileged position when animal feed prices decline. According to the USDA's PPI predictions, farm-level egg and wheat prices should drop more than 10% in 2023.

Archer-Daniels-Midland has escaped the margin compression of its competitors, managing to expand operating margins last year. But ADM is in a better position to take advantage of what's expected to be a surge in global raw materials demand with China reopening and higher demand for oilseeds in particular, a crucial feedstock As an intermediary to Tyson Foods and others, Archer Daniels Midland will continue to benefit from strained commodity markets.