Falling Food Prices Ease Upward Pressure On Global Inflation
Agricultural markets remain volatile due to war and hot weather.
Agricultural markets remain volatile due to war and hot weather.
Falling prices for commodities such as wheat or corn are set to slow consumer food price increases, easing pressure on a major driver of global inflation.
But economists warn it is too soon to declare victory. Agricultural markets remain volatile and the continuing war in Ukraine, combined with unusually hot and dry weather in Europe and parts of the U.S., could bring new disruptions to food supplies.
“We’ll see certainly in the short run adjustments in prices,” said Rob Vos, an economist at the International Food Policy Research Institute. “I would be very cautious in making big projections that things are stabilizing and getting better because we still are in a pretty difficult and tight situation.”
Supply problems caused by the Covid-19 pandemic sent the price of food soaring last year. Russia’s invasion of Ukraine in February of this year added additional pressure. The two countries combined accounted for 28% of global wheat exports last year and 15% of corn exports. Russia is also a major exporter of agricultural fertilizer, and Ukraine leads the world in sunflower oil exports.
The onset of the war pushed up global food prices by 13% in March from the previous month, according to the United Nations’ Food and Agriculture Organization.
Prices have edged down since, and in June, they were about 3% below March levels, though they remain higher than before the war started, according to the FAO.
Futures markets point to continued price declines. Wheat futures prices are now roughly where they were before Feb. 24, when Russia began its invasion of Ukraine. Corn prices are at their lowest level so far this year.
A recent agreement between Russia and Ukraine allowing exports of Ukrainian wheat could help cool global prices. After the agreement was signed, Russia attacked two of Ukraine’s biggest ports, Odessa and Mykolaiv, which handle much of the country’s food exports, raising doubts about Russia’s adherence to the deal.
The recent decline in commodity prices has already started to show up in consumer prices in some countries, and economists expect further moderation in coming months.
Annual food inflation in Colombia has eased from its peak in April, even though it remains historically high, according to government statistics. In Egypt, food prices fell on a monthly basis in June, the government reported.
In the U.S., Wingstop Inc., a restaurant chain, said it had started seeing falling chicken prices. “We are benefiting from meaningful deflation in bone-in wings,” said Chief Executive Officer Michael Skipworth in an earnings call.
J.P. Morgan economists now forecast global food inflation rates falling by half to around 5.5% or 6% in the fourth quarter of this year from around 13% in the second quarter.
That would make a big difference in emerging markets, where food accounts for a greater share of consumer spending than in developed economies. Easing food inflation could bring inflation down by 1.5 percentage points globally and 2 percentage points in emerging markets, J.P. Morgan estimates. That could take some pressure off central banks, many of which have been raising interest rates to bring inflation under control.
The U.S. could also see food prices moderate. Agricultural economists, though, say the effect at U.S. grocery stores could be muted. Commodities contribute only about 15% of retail food costs, with labour, shipping, packaging, advertising and profit margins contributing the rest, said Jayson Lusk, an agricultural economist at Purdue University.
Lower commodity prices “certainly can’t hurt,” he said. “From the consumers’ perspective it’s a positive sign that maybe we’ll see some downward pressure or at least a reduction in the increase.”
U.S. consumer food prices, both at grocery stores and restaurants, were up 10.4% in June from the previous year, the highest in more than four decades, according to the Labor Department. Food inflation accounted for roughly 1.4 percentage points of the 9.1% overall inflation rate in June, according to the Labor Department.
Higher prices are prompting some consumers to pull back or switch to cheaper brands. Unilever PLC and Kraft Heinz Co., which own many major food brands, both reported last week that higher commodity costs had forced them to raise prices even though that meant losing some customers.
Mr. Vos said food commodity prices are going down for the wrong reasons. Rather than signalling easing supply constraints, the price declines are a reflection of the dollar’s strength and an expectation that demand will decline as global growth cools, he said.
Since commodities are priced in U.S. dollars, a rise in the value of the dollar tends to push down the price for commodities, to offset the more expensive currency, Mr. Vos said. At the same time, central bank interest-rate increases to curb inflation have raised the risk of a global recession, he said.
On Tuesday, the International Monetary Fund lowered its forecast for global growth and raised it for inflation, as China’s Covid-19 lockdowns, rampant inflation and the war in Ukraine continue to weigh on the world economy.
“There are a few things on the horizon for me that say we may not be done with higher food prices,” said Scott Brown, an agricultural economist at the University of Missouri.
Chief among them are war and weather. Hot and dry weather in Spain, Italy and parts of the U.S. will lower rice production next year, the U.S. Department of Agriculture estimates, which could raise rice prices.
The agency says global wheat and corn production will fall by 1% and 2.6%, respectively, next year. Ukraine will see its wheat output fall 41% and its exports by almost half, according to the USDA.
“There are just so many uncertainties or unknowns right now, if I was a consumer I’d expect a lot of volatility in food prices ahead,” Mr. Brown said.
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
As geopolitical tensions rise, Taiwan is shifting its economy to rely more on the U.S. and other countries but at a cost
TAIPEI—For years, Beijing hoped to win control of Taiwan by convincing its people their economic futures were inextricably tied to China.
Instead, more Taiwanese businesses are pivoting to the U.S. and other markets, reducing the island democracy’s dependence on China and angering Beijing as it sees its economic leverage over Taiwan ebb.
In one sign of the shift, the U.S. replaced mainland China as the top buyer of Taiwanese agricultural products for the first time last year.
Electronics firms such as chip maker Taiwan Semiconductor Manufacturing Co. are also selling more goods to American and other non-Chinese buyers, thanks in part to Washington’s chip restrictions and Apple’s bets on Taiwanese chips.
Overall, Taiwanese exports to the U.S. in the first 10 months of 2023 were more than 80% higher than in the same period of 2018, Taiwanese government data shows. Taiwanese exports to the mainland were 1% lower—a major change from a decade or so ago when China’s and Taiwan’s economies were rapidly integrating.
Taiwan’s outbound investment has also shifted. After flowing mostly to mainland China in the early 2000s, it has now moved decisively toward other destinations, including Southeast Asia, India and the U.S.
Taiwanese electronics giant Foxconn, which assembles iPhones in mainland China, is expanding in India and Vietnam after Apple began pushing its suppliers to diversify.
Chinese state media recently reported that China had opened tax and land-use probes into Foxconn. Though Taiwanese officials and analysts interpreted the probes as a sign that China wants Foxconn founder Terry Gou to drop plans to run in Taiwan’s presidential election in January, some have said Beijing may also be trying to pressure Foxconn into resisting decoupling with China.
“Any attempt to ‘talk down’ the mainland’s economy or to seek ‘decoupling’ is driven by ulterior motives and will be futile,” said a spokeswoman for Beijing’s Taiwan Affairs Office in September. “The mainland is always the best choice for Taiwanese compatriots and businesses.”
Fully decoupling from mainland China’s economy likely isn’t possible, and would be disastrous for Taiwan, not to mention China, even if it were.
Foxconn and other major Taiwanese companies depend heavily on China for parts, testing and buyers. Some 25% of Taiwan’s electronic-parts imports still come from the mainland.
If China’s weakened economy returns to strong growth, it could shift the calculus back in favor of the mainland, where the Communist Party claims Taiwan despite never having ruled it. About 21% of Taiwan’s total goods trade this year has been with mainland China, versus 14% for the U.S., though the U.S. share has risen from 11% in 2018.
“My hunch is that the large manufacturing sectors will try to stay in the Chinese market, even with harsh conditions,” said Alexander Huang, director of the international affairs department of the opposition Kuomintang Party, whose supporters include business people with mainland ties. “If you talk to those business owners, they say, ‘Nah, no way will I give it to my competitors.’”
Even so, many forces are pushing Taiwan to rewire its economic relationship with China.
Trump-era tariffs and Biden administration export controls have raised the cost of sourcing from China, and in some cases prohibited it. U.S. firms are pushing their Taiwanese suppliers to diversify sourcing, and rising wages in China have made it less attractive than before.
Long-running shifts in Taiwanese sentiment toward China—and China’s own efforts to punish the island using its economic leverage—are also factors. China has banned Taiwanese agricultural products such as pineapple and, in 2022, grouper fish, and restricted outbound tourism to Taiwan.
Those restrictions to some degree have backfired, pushing Taiwanese businesses to look elsewhere.
Chang Chia-sheng, who runs a fish farming operation in Taiwan, said his main export target a decade ago was mainland China. But as geopolitical tensions climbed, he looked elsewhere. Sales to Americans have jumped fivefold since 2018, he said. “In the U.S., things just seem to work out more easily,” Chang said.
The U.S. and Taiwan reached an agreement in May on a number of trade and investment measures to deepen ties, though the deal stopped short of reducing tariffs.
In the June quarter of 2023, 63% of revenue at TSMC, which makes most of the world’s most cutting-edge logic chips, came from the U.S., up from 54% in the same period in 2018, according to S&P Global data. Just 12% of TSMC’s revenue now comes from Chinese buyers, down from 22% in the second quarter of 2018.
Taiwan’s government is also encouraging closer economic links with Southeast Asia, South Asia, Australia and New Zealand. Its “New Southbound Policy,” rolled out in 2016, has been the subject of fierce debate in Taiwan, with the Kuomintang Party saying steps to boost relations—like handing out scholarships—aren’t worth the cost.
Exports to “New Southbound” partners have risen, however, to $66 billion in the first nine months of 2023, about 50% higher than the same period in 2016.
“Frankly speaking, we’re responding reactively” to the need for more diverse trading partners, Taiwan’s Economic Minister Wang Mei-hua said. “Taiwan needs to manage the risks on its own, but we also need our allies to join us more in mitigating these risks.”
Together, the U.S. and the six largest Southeast Asian economies accounted for 36% of Taiwanese exports in the third quarter of 2023, according to data from CEIC, surpassing the percentage sent to mainland China and Hong Kong on a quarterly basis for the first time since 2002.
In September, Taiwan sent less than 21% of its exports to the mainland, the lowest percentage since the global financial crisis.
Taiwanese foreign investment into mainland China, steady at around $10 billion a year for most of the early 2010s, plummeted in late 2018 and has since been running at about half that level, according to Taiwanese government data. In 2023 so far, just 13% of Taiwan’s investment went to mainland China; 25% went to other Asian locations, and nearly half went to the U.S.
A survey of Taiwanese businesses conducted last year on behalf of the Center for Strategic and International Studies, a Washington think tank, found that nearly 60% had moved or were considering moving some production or sourcing out of China—a significantly higher rate than European or American firms.
Jay Yen, chief executive of Yen and Brothers, a Taiwanese frozen-food processing company, said his firm received a government subsidy of around $75,000 to market his products to American consumers. China now only accounts for about 3% of its revenue, he said.
That said, “if you really have to consider the risks of a war between the U.S. and China and its potential impact on Taiwan, you might want to place your bets on a third country—neither China nor the U.S.,” Yen added.
After China began to open up its economy in the late 1970s, Taiwanese businesses were among the first investors.
By the 2000s, China seemed to be succeeding in its strategy of integrating the two economies, with more than 28% of Taiwan’s exports going to the mainland in 2010, from less than 4% a decade earlier.
Direct flights between the two sides were normalised for the first time in decades. Mainland tourists were allowed to visit Taiwan on their own.
By 2014, the tide was turning as more Taiwanese grew worried about over dependence on China. Student demonstrators protested against a trade pact, later abandoned, that would have deepened ties with China. President Tsai Ing-wen, who took office in 2016, has pushed to diversify Taiwan’s economy.
China has responded by moving trade issues more into the spotlight.
In April, it opened an investigation into Taiwanese trade restrictions that it says limit exports of more than 2,400 items from the mainland to the island in violation of World Trade Organization rules. In October, China’s Ministry of Commerce announced the probe would be extended until Jan. 12—the day before Taiwan’s coming election.
Taiwan’s government has called the probe politically motivated.
Chinese officials have implied that Beijing could suspend preferential tariff rates for some Taiwanese goods in China under a 2010 deal signed when Kuomintang’s Ma Ying-jeou was president. Beijing has also reacted angrily to Taiwan’s recent trade agreement with the U.S.
For Taiwanese companies, building and operating new factories in places other than China isn’t cheap or easy. Protests have at times disrupted operations at Indian plants operated by Foxconn and Wistron, another Apple supplier. In September, a fire halted production at a Taiwanese facility in Tamil Nadu.
Still, some Taiwanese businesspeople have clearly soured on China.
“The electronics industry has already become a Chinese empire, not a Taiwanese one,” says Leo Chiu, who worked in mainland China in quality control for an electronics manufacturer for 14 years before concluding he couldn’t move up further there and returning to Taiwan in 2019. Many of his old colleagues have left, he said.
“If Xi Jinping steps down, there’s still a chance it could change,” says Chiu. “But I think it’s very hard.”
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’