June 13, 2024


Welcome to the Food

U.S. food and farming costs could be pushed higher by war in Ukraine

Even though only a fraction of the food eaten in the United States is imported, with much of that coming from Mexico and Canada, the ripple effects of the conflict in Ukraine will conspire to further drive up food prices and keep them high into next year, analysts say. And because Russia is a main producer of fertilizer and other agricultural chemicals, the conflict is likely to have an impact what is grown this year on American soil.

Guebert has seen the effects firsthand. His fertilizer cost was $510 a ton last year, he said. This year, it’s $1,508. He has no choice but to pay it to meet his target crop yields, he said, and while the price he is paid for his grain will rise, too, “prices will reach a point where no one can afford to purchase them.”

Even before the conflict, input costs had surged for key segments of the consumer packaged goods industry, said Geoff Freeman, president of the Consumer Brands Association, with food manufacturing prices up 14.2 percent overall since February 2021. While goods that travel by truck or ship are seeing price increases because of rising fuel costs, grocery categories that lean heavily on cooking oils, aluminum packaging or commodity grains such as wheat will see higher prices and tighter supply because of the uncertainty associated with the conflict. That would include breads, baked goods, pasta, cereal and many items in the center aisles of the grocery store.

“We knew the first two quarters of 2022 were going to be rough coming out of covid, with the addition of some weather events,” said Patrick Penfield, professor of practice in supply chain management at Syracuse University’s Whitman School of Management. “But the thinking was that this would subside by the third quarter and inflationary pressures would go down. But that’s all off the table now.”

Penfield predicts consumers will see many food prices go up further in the next month, and he foresees double-digit inflation by the end of this year.

While there is no shortage of wheat in the United States, the global supply was the tightest it had been in 14 years even before the conflict. That left the market primed to be sensitive, said William Osnato, senior research analyst for the Gro Intelligence agriculture data platform.

Wheat futures are up 29 percent since Feb. 25, with corn up 15 percent since that date, soybeans up 6 percent and other commodity grains dragged along with them.

“Last Tuesday was a bananas day for wheat, one of the most volatile days in the history of the wheat market,” Osnato said. “During the wild ride it hit an all-time high.”

And on the eve of planting season, American farmers are poised for even more significant impacts. High fuel and input prices will affect what farmers grow, and a worldwide shortfall of wheat, corn and vegetable oils such as sunflower and canola will mean that “for China, India and other countries around the world, it will go to auction and there will be a bidding war, and the highest bidder wins,” Penfield said.

“The number one issue right now … is energy prices; then fertilizer prices, because Russia is the second-largest supplier; then you have the chemicals farmers need for their soil,” Penfield added. “Farmers are going to see increased costs across the board.”

Jed Bower farms corn and soy in southwest Ohio. He is hoping to start planting this year’s crops the second week in April, but he’s nervous not just about the prices of the chemicals he needs, but also about their availability.

“Fertilizer and herbicides are hard to get; retailers are holding supplies pretty tight. If I need 1,000 gallons of Roundup for the year, I might only be able to get 50 right now,” he said, explaining that farmers and agricultural supply stores don’t know how much will be available this year. “They are trying to make sure that every grower has access to some. We saw the run on the toilet paper during covid — and that what’s they’re trying to prevent.”

If he can’t get the fertilizer and other chemicals he needs, Bower may be forced to pivot from corn, which requires more nitrogen fertilizer, to soy, and from genetically modified crops to older technology — all of which will affect his bottom line.

“I don’t want to do that,” he said, “but I’d have to make that decision in the next two weeks.”

Higher gas prices also have a psychological effect on consumers that will drive some prices higher, said Tinglong Dai, a Johns Hopkins University business professor.

“Gas at more than $5 per gallon will discourage a lot of people from driving, and that is going to make the labor problem even worse. Retailers and restaurants won’t be able to find workers unless they pay higher wages — and they will have to figure out ways to recoup those prices,” he said. “It’s not about the food, per se; it’s about the people who bring the food to the shelves and tables.”

Dai added that high prices for gas and for new and used automobiles will cause a hesitancy to expand trucking capacity, which will make the recovery of the supply chain harder. Even consumer behavior will lead to shortfalls and higher prices, he said.

“High gas prices make consumers drive less, so they will buy more at each visit to the grocery store, which makes it harder for grocery stores to plan and replenish their inventory,” Dai said.

Higher fuel prices drive up the prices of other commodities, too, Osnato said. Brazil is the world’s largest producer and exporter of sugar. With higher fuel prices, it may be more lucrative for Brazil to use more of its sugar cane to produce ethanol, which will tighten up the global supply of table sugar and drive prices higher.

Osnato said that food and beverage manufacturers are now 18 months into feeling the pinch of higher input costs. Many have already announced that they are passing those costs on to consumers via across-the-board price increases.

“There’s no light at the end of the tunnel,” he said. “Companies will continue to pass on costs as much as they can for at least another year.”

Sophia Murphy, executive director of the Institute for Agriculture and Trade Policy, says that because the food system we have is sufficiently concentrated — 80 percent of U.S. beef is controlled by just four companies; Walmart sells more than a quarter of all groceries; Unilever owns more than 400 food brands — consumers will see prices surge right away, even if tight supplies for things such as wheat and corn are a ways off.

“Companies will ask the consumer to bear the cost,” she said. “Every corporate boardroom is protecting shareholder interests, looking to hedge risk and thinking about what consumers will bear.”