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Food commodity prices in times of COVID-19

12 Jun 2020

While industrial commodity prices, especially oil, plunged following the spread of COVID-19, prices of staple food commodities have been broadly stable. Early indications for the 2020/21 season point to abundant food supplies, and by most expectations, stable prices. Yet, there are numerous risks and uncertainties to this outlook.

Energy prices are particularly important for the price outlook of food commodities, affecting their production directly through fuel costs and indirectly through the cost of fertilisers and other chemical inputs. Extended weakness to energy and fertiliser prices could exert downward pressure on food prices, especially for grains and oilseeds, which are also facing less demand from the biofuels sector due to the pandemic-indused collapse in the transport sector.

Future feed demand is another source of uncertainly, given the profound impact that the COVID-19 pandemic has had on the livestock sector. Widespread lockdowns, social distancing measures and market closures resulted in substantially reduced food service sales and depressed demand for meat. In addition, many slaughterhouses have been struggling to implement adequate health safety standards for their workers. In view of ample feed supplies, particularly in the United States, the pace and extent of recovery in the livestock sector will have an important bearing on food commodity prices, particularly on maize and feed wheat.

On the macroeconomic side, a further strengthening of the US dollar could continue to depress commodity prices. Indeed, the weakness in some commodity prices during the first quarter of 2020 can, in part, be attributed to a stronger dollar. Research has shown that a 10 percent appreciation of the dollar against major currencies is associated with a 5 percent decline in prices of internationally traded commodities. Similarly, the price outlook will be affected by currency depreciations of countries that account for a large share of global trade for an individual commodity market.

Restrictive trade policies and domestic support measures could also play an important role in commodity price movements. In the early phases of the pandemic, some Central Asian wheat producers and East Asian rice producers announced intentions of export restrictions to ensure domestic availability of food supplies. However, these fears have so far had little impact on global markets in view of the comfortable supply situation.

Disruptions to supply chains as a result of the pandemic constitute another risk to commodity markets. Travel restrictions have already affected numerous commodity markets, especially for perishable foods, while possible disruptions to labour and input supplies (e.g., chemicals, fertilisers, and seeds) could negatively affect next season’s crop.