analysis
The prices for orange juice, cocoa and sugar are rising rapidly. But are they really harbingers of food inflation due to climate change? Experts are skeptical.
The latest developments on the commodities exchange in New York do not bode well for consumers with a sweet tooth: prices for orange juice, cocoa and sugar have risen rapidly since the beginning of the year. “The price increase for orange juice is 66 percent this year, the price of cocoa has risen by 40 percent, sugar by 35 percent,” emphasizes market expert Robert Rethfeld from Wellenreiter-Invest in an interview with tagesschau.de.
Some experts attribute these developments to climate change. International sugar trader Czarnikow estimates that the 2023/2024 Thai sugar harvest will collapse by 31 percent to a 17-year low – due to the ongoing drought. Thailand is the world’s third largest sugar producer.
How rising oil prices are driving up the price of sugar
But the connection between climate change and rising prices for agricultural raw materials is not so seemingly obvious everywhere. For orange juice, “citrus greening” is primarily responsible for the sharp price increase. The disease, also known as yellow dragon, is caused by a bacterium and devastates entire plantations in Florida.
And behind the rise in sugar prices is also the increased demand for bioethanol as oil prices rise, as sugar cane is needed to produce the gasoline substitute.
Staple food cheaper again
However, quite a few fear that the price developments for cocoa, orange juice and sugar are only harbingers of widespread food inflation. In view of the devastating consequences of climate change, grain prices are also expected to rise. But do we really have to fear persistently high food prices?
The fact is: The prices for staple foods such as soybeans, wheat and corn have not risen this year, but have fallen significantly. This is shown by a look at the Food and Agriculture Organization (FAO) grain price index, which in August was a good 14 percent below its previous year’s value. The price of corn even fell to its lowest level since September 2020 in August due to a record harvest in Brazil.
Significant price drop staple foods
“Corn is down 30 percent this year, wheat is down 25 percent. Prices for soybeans have fallen by 14 percent,” explains Wellenreiter expert Rethfeld. “As far as basic foodstuffs are concerned, we have a discount – at least with regard to raw materials. However, the falling prices have not yet had such an impact on end consumers.”
According to Rethfeld, this is also due to the high process costs in the form of wages and energy that are incurred in the production of bread, for example.
Wheat price in long-term decline
Even in long-term historical retrospect, wheat is anything but expensive; Adjusted for inflation, the price of wheat in the developed world has actually fallen over the last 100 years, as Rethfeld emphasizes. In other words: the price of wheat has risen less than overall inflation. “From the end of the Second World War things went down significantly, and since 2000 we have been in a sideways movement.”
What are the future prospects for wheat? Commerzbank commodities analyst Thu Lan Nguyen sees short-term upside risks for wheat prices. As justification, she points to the significant reduction in the global wheat harvest forecast for 2023/2024 by the US Department of Agriculture. At the same time, inventories at the end of the season were as low as they were eight years ago.
El Niño as a price driver?
Experts agree: The El Niño weather phenomenon is also likely to drive up prices for wheat and other agricultural raw materials. The World Weather Organization (WMO) had already declared in July that El Niño conditions were prevailing in the tropical Pacific for the first time in several years. This could further increase global temperatures and change regional weather and climate patterns. The result: more heat, more droughts, but also more floods.
According to Aneeka Gupta, director of macro research at ETF provider WisdomTree, El Niño could drive up the prices of some commodities. In eight of the eleven past El Niño episodes since the 1960s, wheat was quoted an average of 14 percent higher in the following six months.
“When El Niño reaches its peak at the turn of the year, the wheat price will enter a phase of relative strength,” market expert Rethfeld is also convinced. The climatic conditions would then become less favorable: This reduces supply – the price rises.
What is El Niño?
El Niño is a natural weather phenomenon that occurs on average every three to four years. It is associated with warming seawater in the tropical Pacific and weak trade winds. The name comes from fishermen in Peru who often noticed the sea temperature rising during Christmas time – “El Niño” translates as the Christ child. El Niño may bring severe droughts to Australia, Indonesia and other parts of South Asia. In contrast, there may be increased rainfall in parts of South America, the southern United States, the Horn of Africa and Central Asia.
“Food prices are not inflation driver”
And what about the long-term consequences of climate change? “Climate change has been going on for 40 years now, temperatures have been rising since 1980. So far, climate change has not had a negative impact on wheat,” points out the surfing expert. In fact, the rather warm conditions are actually beneficial for wheat cultivation – as long as droughts don’t get out of hand.
“In the long term, I see food prices overall being at or below inflation levels. So they’re not driving inflation – it’s more likely to be energy.” Oil prices are currently at their highest level in ten months.