Currency depreciation could worsen food crisis

The falling value of the currencies of most developing economies is raising food and fuel prices in ways that could deepen the food and energy crises that many of them already face, according to the World Bank's latest Economic Outlook report. Commodity Markets.

In US dollar terms, prices of most commodities have fallen from their recent peaks amid concerns of an impending global recession, the report documents.

From the Russian invasion of Ukraine in February 2022 until the end of last month, the price of Brent crude oil in US dollars fell by almost 6%. However, due to currency devaluation, almost 60% of oil-importing emerging and developing economies saw an increase in oil prices in national currency during this period. Almost 90% of these economies also saw a greater increase in wheat prices in local currency terms compared to the increase in the US dollar.

High prices for energy commodities that serve as inputs for agricultural production have driven up food prices. During the first three quarters of 2022, food price inflation in South Asia has averaged more than 20%. Food price inflation in other regions, including Latin America and the Caribbean, the Middle East and North Africa, Sub-Saharan Africa, and Eastern Europe and Central Asia, averaged between 12 and 15 percent. East Asia and the Pacific has been the only region with low food price inflation, in part due to largely stable prices for rice, the region's main staple.

"Although many commodity prices have retreated from their peaks, they are still high compared to their average level over the past five years," said Pablo Saavedra, World Bank Vice President for Equitable Growth, Finance and Institutions. "A further spike in global food prices could prolong the challenges of food insecurity in developing countries. A range of policies are needed to boost supply, facilitate distribution and support real incomes."

Since the start of the war in Ukraine, energy prices have been quite volatile, but a decline is now expected. After an increase of around 60% in 2022, energy prices are expected to fall 11% in 2023. Despite this moderation, energy prices next year will still be 75% above their average over the past five years.

The price of Brent crude oil is expected to average $92 per barrel in 2023 - well above the five-year average of $60 per barrel. Both natural gas and coal prices are expected to decline in 2023 from their 2022 records. However, by 2024, Australian coal and US natural gas prices are still expected to be double their average over the past five years, while European natural gas prices could be almost four times higher. Coal production is expected to increase significantly as several major exporters increase production, putting climate change targets at risk.

"The combination of high commodity prices and persistent currency devaluations translates into higher inflation in many countries," said Ayhan Kose, director of the World Bank's Outlook Group and chief economist at EFI, which produces the Outlook report.

"Policymakers in emerging and developing economies have limited room to manage the most pronounced global inflation cycle in decades. They need to carefully calibrate monetary and fiscal policies, clearly communicate their plans, and prepare for a period of even greater volatility in global financial and commodity markets.”

Agricultural prices are expected to fall 5% next year. Wheat prices in the third quarter of 2022 are down nearly 20% but remain 24% higher than a year ago. The drop in agricultural prices in 2023 reflects a better-than-expected global wheat harvest, stable supplies in the rice market and the resumption of grain exports from Ukraine. Metals prices are expected to fall 15% in 2023, largely due to weaker global growth and concerns about a slowdown in China.

The outlook for commodity prices is subject to many risks. Energy markets face significant supply concerns as concerns about energy availability during the upcoming winter intensify in Europe. Higher-than-expected energy prices could feed into non-energy prices, especially food, prolonging challenges associated with food insecurity. A sharper slowdown in global growth also presents a key risk, especially for crude oil and metals prices.

“Forecasting a decline in agricultural prices is subject to a number of risks,” said John Baffes, Senior Economist at the World Bank Outlook Group.

"First, disruptions to exports from Ukraine or Russia could again disrupt global grain supplies. Second, additional increases in energy prices could put upward pressure on grain and edible oil prices. Third, adverse weather patterns can reduce yields; 2023 will likely be the third consecutive La Niña year, potentially reducing yields of major crops in South America and Southern Africa."

About Agro

The agricultural price index fell 11 percent in the third quarter of 2022, after reaching an all-time high in April, in nominal terms.

Among major grains, wheat prices fell nearly 20% from the previous quarter (but remain 24% above a year ago), followed by corn prices (10% lower). Rice prices remained generally stable.

Thus, after a projected increase of more than 13% in 2022, agricultural prices are expected to fall by almost 5% in 2023, before stabilizing in 2024, as the supply of most food products has increased due to improved productivity.