“Crop Failures in the U.S. and Europe, Compounded by War” — Surging Global Agricultural Commodity Prices Raise Fears of a ‘Lagged Shock’ to Consumer Inflation

Agricultural commodity prices climb as extreme weather devastates crops across the U.S. and Europe
Ukraine and Iran wars compound supply-chain uncertainty
“Consumer-price shock will come later” as inflation emerges with a lag

Global agricultural commodity prices are rising sharply. Heat waves, drought and other manifestations of the climate crisis have visibly eroded grain production prospects across the United States and Europe, while war-related disruptions to vessel traffic along critical shipping routes such as the Black Sea and the Strait of Hormuz have placed the broader supply chain under mounting strain. Market analysts increasingly expect the recent rise in grain prices to feed through gradually to consumer prices, with the impact potentially extending into the first half of next year.

Agricultural Commodity Price Gauges Surge

On August 31 (all dates local), Bloomberg reported that global agricultural commodity prices had recorded their steepest monthly increase in 14 years during August. The Bloomberg Agriculture Spot Index, which tracks the prices of 10 major agricultural commodities, surged more than 13% last month to 434 points. The increase was particularly pronounced in wheat. By the end of August, wheat prices had climbed to $7.79 per bushel, their highest level in approximately three and a half years since February 2023. Sugar and cocoa prices also rose by around 20% each over the same period.

The increase in grain prices is also evident across other indicators. According to the Chicago Mercantile Exchange (CME), KC hard red winter wheat (HRW) futures posted a monthly return of 13.15% last month, while Chicago wheat gained 8.49%. The CME Group Agricultural Commodity Index, which covers grains and oilseeds, rose 2.36% over the same period, bringing its year-to-date increase to nearly 9.21%. The UN Food and Agriculture Organization’s (FAO) Food Price Index stood at 131.1 last month, up 0.6% from the previous month and 1.0% from a year earlier. Within the index, the Cereal Price Index surged 3.4% in a single month to 113.8, marking a 6.9% increase from the same period last year.

U.S. Farmers Reeling from Drought

The climate crisis sweeping across major producing countries has emerged as a principal source of turmoil in global agricultural markets. In the United States, a prolonged drought has sharply deteriorated crop conditions across the Great Plains, a critical wheat-producing region. The damage has been concentrated in the central and southern Great Plains, particularly Kansas, Oklahoma, Texas and Colorado, the primary production belt for HRW wheat. According to Drought.gov, the official drought information portal operated by the National Integrated Drought Information System (NIDIS) under the National Oceanic and Atmospheric Administration (NOAA), agricultural drought in Oklahoma and northern Texas began in August last year and intensified through the winter and spring of this year. Although parts of the region received rainfall in May and June, much of the winter wheat crop had already passed through its principal growth and grain-filling stages, limiting the recovery in yields.

The damage sustained by farmers is clearly reflected in a range of indicators. According to data compiled by the U.S. Department of Agriculture (USDA) in late May, 44% of the country’s growing winter wheat crop was rated “poor” or “very poor.” Drought.gov estimated that the share of planted winter wheat unlikely to be harvested in the southern Great Plains would reach 70% in Texas, 47% in Oklahoma and 17% in Kansas. Even on fields where harvesting was successful, yields per unit of land declined year on year by 24% in Texas, 26% in Oklahoma and 27% in Kansas. The gap between expected and actual production value across these regions is estimated at more than $1 billion.

Table 1. Deterioration in U.S. and European Grain Crops Due to Extreme Weather

European Harvest Outlook Flashes Red

Extreme weather has also rapidly undermined crop conditions for major grains across Europe. According to the European Union’s (EU) Joint Research Centre (JRC), the hot and dry weather persisting since spring has placed winter wheat and other winter crops under pressure across Western, Central and Eastern Europe. Since June, the damage has spread to summer crops such as corn. In France, southern Germany, northern and central Italy, Austria, Czechia, Slovakia, Hungary and western Romania, high temperatures and insufficient rainfall disrupted flowering, fertilization and grain formation, substantially reducing kernel size and grain filling.

Grain production forecasts have consequently been revised downward in quick succession. COCERAL, a European grain industry association, lowered its projection for this year’s grain production across the EU’s 27 member states and the United Kingdom by approximately 8.9 million metric tons, from 295.5 million metric tons in June to 286.6 million metric tons last month. The revised figure is approximately 23.4 million metric tons, or 7.5%, below last year’s output of 310 million metric tons. In its latest crop-monitoring report released on August 24, the JRC likewise projected yields per unit of land for major summer crops at as much as 14% below the five-year average.

War-Driven Risks to Agricultural Supply Chains

Geopolitical factors are also placing food supply chains under pressure. Reuters recently reported that more than 97% of grain export facilities around the Black Sea and the Sea of Azov had ceased operations. Ukraine’s maritime export routes, in particular, have reportedly been almost completely cut off. Ukrainian Agriculture Minister Taras Vysotskyi said that not a single new vessel had entered the Port of Odesa between July 22 and mid-August. Russia, the world’s largest wheat exporter, has also suspended operations at most major terminals in Novorossiysk, a critical grain export hub. Its wheat exports contracted to approximately 1.8 million metric tons last month, the lowest monthly volume since 2010.

The Iran war has likewise dealt a severe blow to farmers worldwide, as the conflict has effectively halted vessel traffic through the Strait of Hormuz. Between March and May, following the outbreak of the war, average daily transit volumes of crude oil and petroleum products through the strait fell to 2.7 million barrels. International oil prices also remained elevated, at one point surging well above $100 per barrel. This drove up both the operating costs of diesel-powered agricultural machinery, including tractors and combine harvesters, and the cost of transporting agricultural products, markedly increasing farmers’ production expenses. Fertilizer supplies have also suffered direct disruption. According to the International Energy Agency (IEA), the Middle East accounts for more than 25% of global ammonia trade and approximately 40% of global urea trade. This explains why global fertilizer supply chains tightened sharply following the closure of the Strait of Hormuz. Rising natural gas prices have simultaneously pushed up the cost of nitrogen fertilizers, which use gas as a critical feedstock. According to the World Bank, the Fertilizer Price Index is projected to rise by nearly 30% this year from the previous year.

When Will Consumer-Price Pressures Intensify?

Against this backdrop, experts warn that the delayed repercussions may prove more consequential than the current increase in agricultural commodity prices. In grain markets, concerns over deteriorating harvests and supply shortages are priced into futures before crops are harvested. It then takes several additional months for higher grain prices to feed through to food prices. An analysis of the wheat price-transmission mechanism by the USDA’s Economic Research Service found that changes in farm-level wheat prices were largely reflected in wholesale flour prices within one month. By contrast, when wholesale flour prices rose or fell within a normal range, it took approximately two to four months for a substantial portion of those changes to be reflected in retail bread prices.

The lag becomes even longer when the analysis is expanded to overall food inflation. An International Monetary Fund (IMF) study of how international food-price shocks pass through to domestic consumer prices across countries found that food consumer-price inflation continued to rise for approximately 10 months following an increase in international food prices. The cumulative effect peaked after 10 to 12 months. A 1% increase in international food prices raised domestic food inflation by an average of 0.3 percentage points approximately 10 to 12 months later. Research focused on Europe identified a similar pattern. According to an analysis by economists at the Bank of Spain examining the relationship between food and energy commodity prices and consumer food prices in the euro area, the impact of a commodity-price shock did not emerge immediately but intensified over time, reaching its peak after approximately 12 months. This suggests that the grain-price shock recorded this summer could sequentially push up processed-food and consumer food prices through the first half of next year, exacerbating inflationary risks.