Crop, Food Supply Woes Complicate Central Banks' Inflation Fight

From sugar in India to Kansas wheat, food prices face upward pressure

Three combines harvest wheat.

Andy Sacks/Getty Images

Supply shortages, falling production and poor growing conditions for some of the world's most important crops could push food inflation higher as the year progresses, complicating matters for global central banks pondering whether to halt months of interest rate increases.


  • Shortfalls have pushed prices for some key agricultural commodities to multi-year highs.
  • Rice supply may drop to a 20-year low, and sugar prices increased to 12-month highs.
  • Supply crunch has a potential inflationary impact that complicates global central banks' fight against inflation.
  • Higher food commodity prices may deter central banks worldwide from halting interest rate hikes.

Drought in the Great Plains has decimated this year's U.S. crop for hard red winter wheat, used to make flour for everything from hamburger buns to breakfast cereal.

Meanwhile, the global market rice market could face its biggest supply shortfall in two decades because of falling production. Sugar prices have reached multi-year highs amid an array of crop deficiencies from India to Europe.

The crop woes follow a recent surge in egg prices caused by an avian flu epidemic that wiped out poultry flocks across the U.S. last year. Combined, their inflationary impact on the U.S. could prove problematic for central banks.

Preparing to Pause?

As global inflation has slowed after peaking last year, investors increasingly expect the Federal Reserve and other central banks soon will halt the interest-rate hikes they began last year.

In the U.S., for instance, the majority of investors expect the Fed next week will raise its benchmark rate by 25 basis points one last time before keeping it steady at its June policy meeting and perhaps even cutting it later in the year.

Rising food prices could compromise those expectations, however. Food and beverages account for 14.4% of the monthly Consumer Price Index's (CPI) calculation.

Globally, the United Nations Food and Agriculture Organization's monthly food index has dropped for 12 straight months since peaking. The sugar component of that index, however, has increased for two straight months, reaching its highest reading since October 2016.

Raining on Sugar

Sugar prices could keep rising. Prices for refined sugar reached a 12-year high earlier this month at nearly $700 per ton amid unseasonably heavy rain in India, the world's second-largest sugar producer.

That country reduced its crop production estimate for the 12 months through September. Global production already had dropped after a severe drought reduced planted sugar beet acreage last summer in Europe. Beets provide the 20% of world's raw sugar not supplied by sugarcane.

In addition, OPEC's decision to reduce oil output by 1.2 million barrels per day has caused some sugarcane producers to divert their supplies to ethanol production instead of food uses, Fitch Ratings said in a research report earlier this month.

Worst Rice Shortage in Two Decades

The world faces even more profound shortage of rice, the primary food staple for about half the world's population. Fitch noted that the largest global deficit between expected demand and limited supply could materialize as low production from last year reverberates through the market.

Flooding in China, which produces about 30% of the world's rice, and Pakistan crimped global production last year. Production also declined in the U.S. and the European Union, leaving expected supplies this year short of anticipated demand by 8.7 million metric tons, the largest shortfall since 2004.

Prices for July delivery of rough rice at the Chicago Board of Trade hit $18.39 per hundredweight (cwt) in December, the highest since 2011, and have remained near that level so far this year.

Drought Decimates Plains Wheat Crop

Another grain, hard red winter wheat, grown in the so-called "bread basket" of the U.S. faces supply limitations later this year because of widespread drought from Nebraska through Texas.

"I don't know that the rest of the world is taking into account how bad it is in the Southern Plains," said Mike Schulte, executive director of the Oklahoma Wheat Commission.

Three counties in northern Oklahoma's key wheat growing region are the driest they've been since recordkeeping began in 1895—drier than at any time during the region's fabled Dust Bowl of the 1930s.

U.S. drought Monitor Map April 18, 2023

National Drought Mitigation Center University of Nebraska-Lincoln

Drought conditions in Kansas, which leads all U.S. states in wheat production, have turned so severe that just 26% of the state's crop currently rates in good-to-excellent condition. That's the lowest since 1989, when the state's farmers abandoned about 30% of the acres they planted.

As a result, U.S. wheat exports likely won't increase much, if at all, from the projected 51-year low during the marketing year ending May 31. The Plains wheat harvest won't hit high gear for about another six weeks.

In the meantime, hard red winter wheat prices for July delivery at the Chicago Board of Trade have sunk to two-year lows. Prices typically fall as harvest nears; however, they increased as much as 15% within two months after last year's harvest.

Article Sources
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