Higher prices of agri-commodities adding to inflation: analysts

Singapore

THE year ahead is likely to hold fewer pandemic-related disruptions as more countries accept living with Covid-19.

But agricultural commodities are unlikely to see "any sense of normalcy", market watchers said, thanks to continued logistics bottlenecks, labour shortages and weather-related supply disruptions. Food price inflation should be expected as some commodities test multi-year highs.

Rabobank analyst Oscar Tjakra said climate, which is a key determinant of agri-commodities supply, has been extreme in a number of geographies. At the same time, demand is growing rapidly.

"Like a spiral, the higher commodities prices go, the more buyers want to stock up - to avoid shortages and disruptions ahead and guarantee normal operations," he said. Food prices are likely to remain above their 5 or 10-year averages this year, he added.

Other factors include "astronomical" shipping costs, high energy and fertiliser prices, as well as labour shortages in many countries.

Here are some other commodity-specific issues to be aware of:

Wheat

Russia and Ukraine collectively account for about a quarter of global wheat supply.

A recent Rabobank report noted that wheat could face "huge upside volatility" and that a retaliatory embargo could see up to 29 per cent of global exports being withdrawn from the market. "The price effect on wheat would be so extreme that we believe any sanctions will contain an exception for wheat exports," Rabobank said.

Coffee

Coffee prices are set to rise due to lower crop expectations in Brazil and Colombia, as well as worsening transport challenges. Heavy rainfall and frost in Brazil may have had some adverse effects on some farms, analysts said.

The disruption to the transport of coffee has also become more serious since December when the Omicron variant struck Europe.

Just as with previous virus waves, the variant led to higher demand for the transport of goods in containers, which in turn pushed up container prices.

Edible oils

Prices of edible oils - namely palm, sunflower and soybean oils - have multiplied threefold in 2 years, with palm oil "rallying and reaching new records".

Eugene Ong, an analyst at IHS Markit, said corn and soybeans will see "significant price increases" as continued droughts in Brazil, Argentina and the United States could hit supply even as demand remains strong.

Vegetables and others

High freight costs could push up prices for "heavy vegetables" such as potatoes and celery.

But Ong of IHS Markit reckons prices for processed foods such as canned or frozen items will be "relatively more stable", although they are still expected to record an increase. "Most manufacturers have already secured their ingredients for 2022 and lock in the prices through contracts," he said.

What does this mean for the end consumers?

Rabobank's Tjakra said that although he is expecting upstream inflationary pressures to move along the supply chain to reach consumers, the proportional increase in prices on supermarket shelves will be "much smaller" as commodity prices are usually only a relatively small proportion of the prices of final goods.

"Higher farm input costs, expensive shipping, and good demand provide for a grim combination," he added. "A 'normalisation' of the supply chain in 2022 is unlikely, and players will have to find solace in just a bit of a price drop off historical highs."