"Our outlook for food prices still tells us the supply and demand balance here is still really delicate," Allen told me. "We still have critically low exportable [stores] of grains and vegetable oils."
Breaking it down: Let's stick with wheat prices. There are a few reasons they've dropped almost 45% from their March highs and are down nearly 25% since the beginning of May, per wheat futures traded in Chicago.
A lot of speculative activity tied to the outbreak of war in Ukraine has pulled back as investors take profits, Allen said. Traders have also been reconfiguring their portfolios to brace for a possible recession, which could hit demand for some agricultural products.
What's more, anticipation has been building for an agreement to get massive stores of grain out of Ukraine. Last Friday, Ukraine and Russia struck a deal to resume wheat exports from ports on the Black Sea, which was heralded as a major diplomatic breakthrough.
In theory, that should help ease some supply concerns. Ukraine, a major wheat supplier, expects to harvest 50 million metric tons of grain in 2022 and has said it will need to export 30 million metric tons.
But Allen said there are huge risks to the outlook, and predicts another sharp rally in wheat prices is coming. She thinks they could jump another 20% and 30% just to reflect actual conditions in the market.
The United Nations has said that the first shipment of Ukrainian grain under the Black Sea deal will move within days. But there are major questions about the tenability of the accord following Russia's strikes on the port of Odesa Saturday.
"The attack cast serious doubt on the credibility of Russia's commitment," US Secretary of State Antony Blinken said.
The logistics around transporting grain from a dangerous war zone are also complex and will require buy-in from a matrix of commercial and government players.
Scorching heat in the Northern Hemisphere could also jeopardize future crop yields, Allen said. Plus, we're entering a period where demand traditionally ramps up, adding to strain on supply.
"There's a lot of vulnerability in this market," Allen said.
On the radar: The FAO Food Price Index for June was still 23% higher than it was one year earlier. And Máximo Torero Cullen, the organization's chief economist, warned that many of the dynamics that initially pushed up prices haven't gone away.
"The factors that drove global prices high in the first place are still at play, especially a strong global demand, adverse weather in some major countries, high production and transportation costs and supply chain disruptions due to Covid-19, compounded by the uncertainties stemming from the ongoing war in Ukraine," Cullen said.
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