Food prices fell sharply in July — but the respite may not last

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.

But the FAO said that while the drop in food prices "from very high levels" is "welcome," there are doubts over whether the good news will last.

"Many uncertainties remain, including high fertilizer 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," FAO chief economist Maximo Torero said in a press release.

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 $775.75 per bushel on Friday, down from a 12-year high of $1,294 in March, and around the $758 price set in January.

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

The widely heralded U.N.-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.

The first shipment of Ukrainian grain — 26,000 tons of maize — since the invasion left the country's southwestern port of Odesa last Monday.

Global skepticism over whether Russia will keep its end of the bargain hangs in the air.

Russia fired a missile onto Odesa just hours after the U.N.-brokered deal in late-July.

And freight and insurance companies may still think it's too risky to ship grain out of a war zone, Vos said, adding that food prices remain volatile and any new shock can cause more price surges.

"To make a difference it will not be enough to get a few shipments out, but at least 30 or 40 per month to get the existing grains stored in Ukraine out, as well as the produce of the upcoming harvest," said Vos.

"To help stabilize markets, the deal will need to hold in full also during the second half of the year since that is the period where Ukraine does most of its exports."

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," Mera said. 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.

"It's time that we're working again. I don't see us exporting two [to] five million tons per month out of these Black Sea ports," John Rich, the executive chairman of Ukrainian poultry giant Myronivsky Hliboproduct (MHP), told CNBC's "Capital Connection" on Monday.

"Hungry people, at the end of the day, get hungry very quickly after a week."

In a note published earlier this month, credit rating agency Fitch Ratings' analysts wrote that a possible increase in fertilizer prices, which fell recently — but which are still double that of 2020 — could cause grain prices to jump again.

Russia's restriction of gas supply has led European natural gas prices to spike. Natural gas is a key ingredient in nitrogen-based fertilizers. La Nina weather patterns could disrupt grain harvests later this year as well, they added.

And the fall in food prices is not all good news. Part of the reason why staples have become cheaper is that traders and investors are pricing in recessionary fears, the analysts said.

The global manufacturing purchasing managers' index has been in decline, while the U.S. Federal Reserve seems bent on raising interest rates to curb inflation even if it triggers a recession, the Fitch team wrote.

Cereal prices, under which wheat falls, fell by 11.5% month on month, the FAO index showed. Prices of wheat specifically fell by 14.5%, partly because of the reaction to the Russia-Ukraine grain deal, and better harvests in the Northern Hemisphere, the FAO said.

Vegetable oil prices fell by 19.2% month on month — a 10-month low — in part because of ample palm oil exports from Indonesia, lower crude oil prices, and lack of demand for sunflower oil.

Sugar prices dipped by 3.8% to a five-month low in light of shrinking demand, a weaker Brazilian real against the greenback, and increased supply from Brazil and India.

Dairy and meat prices dropped by 2.5% and 0.5% respectively.