Food prices have been rising rapidly and there are reasons to fear they will push even higher. Economists warn some prices might never come down.

The ominous outlook is linked to drought conditions wilting crops in major grain-producing nations, disrupted grain deliveries out of Ukraine and moves by governments to ban food exports to protect their own supplies.

In the longer term, concerns are growing over the enduring effects of a warming climate on production and the danger of high food and energy prices getting embedded into an economy, leaving prices higher for ever.

An increase in supermarket profits arguably doesn’t help.

Wilting wheat

Prices of wheat, one of the world’s major staples, spiked last month in reaction to Russian missile strikes on Ukrainian ports, after a decision by the Kremlin to pull out of a Black Sea grain deal that had allowed agricultural exports.

Prices then retraced and didn’t jump even as tensions escalated, with Russia firing on a cargo vessel.

Part of the market’s relaxed approach is tied to a large regional harvest – Russia is the world’s biggest wheat exporter and has been expanding its planting area – and expectations that a new safe passage trade deal with Ukraine will be reached.

The Rabobank grains analyst Dennis Voznesenski said the market optimism didn’t leave much room for bad news, with any market shock likely to push grain prices higher.

“When we start moving beyond this Black Sea harvest period, the market will react to any strong negative factors,” said Voznesenski.

Voznesenski, who recently visited major grain-growing areas in Australia, said many regions are at risk of a wheat production downgrade this season as conditions turn drier.

Heat is also wilting Canada’s grain production forecasts while prolonged heat and drought in the US will leave grain-growing states like Kansas with one of its smallest harvests on record.

Rice export ban

Increasingly erratic weather is having a notable impact on one of the world’s other big staples, rice, with monsoons depleting harvests in India and pushing prices higher.

In response, the Indian government has banned exports of some rice types, mirroring policies governments implemented when the pandemic struck and after Russia invaded Ukraine.

While the bans can ease food prices in their home country, it comes at the expense of those relying on imported produce.

“Governments are becoming more trigger happy at putting restraints on exports,” said Voznesenski. “It is increasing the risk of prices going higher.”

India is the world’s largest rice exporter, accounting for 40% of global rice exports, according to the International Food Policy Research Institute. The institute believes the latest ban poses risks of higher global prices and food insecurity.

There are more than 60 export restrictions currently in place on food, feed and fertilisers among member nations of the World Trade Organization.

Food inflation

Inflation has cooled in Australia to 6%, even as food prices remain steep, currently rising by 7.5% a year, according to the most recent data.

Dairy is leading the price rises, up by more than 15%, while breads and cereals are increasing at an annual rate of more than 11%. The prices are indicative of what shoppers pay at the checkout, given the Bureau of Statistics uses scanner data from major supermarkets to calculate price changes.

The figures show that even when overall inflation falls, it masks the persistent pain of households, especially those with less income who typically spend a larger share of their budget on necessities.

Surging food prices are a global problem, with rises outpacing overall inflation in many countries.

UK food prices are up by more than 17% over 12 months, while prices have increased by more than 14% in France. The US has fared better, where food prices are rising at an annual pace of 4.6%.

Nicholas Hyett, an investment manager at UK-based Wealth Club, said high global food prices mean it is unlikely supermarket prices will fall any time soon.

“That creates a risk that the economy ends up in an inflationary spiral,” Hyett said.

He said global food prices are beyond the central banks’ influence.

Economies that rely on food imports are in a precarious position. Food price increases are gathering pace in import-reliant Japan, up by an annul 9% and rising.

Baked in

The price of food products can generally be split into three categories: inputs (such as raw ingredients), labour and markups; the latter representing the difference in the price a food retailer buys from suppliers and sells to shoppers.

While price increases are sometimes spread across the supply chain to accommodate higher costs, they can also accumulate at one point, typically when a product is sold to customers.

The Australian Food and Grocery Council said in a submission to a parliamentary committee that suppliers were prohibited from retrieving increased costs by food retailers.

“The major supermarkets’ use of their market power to impede suppliers from passing on the full price of increases in their costs of doing business is a grave challenge for food and grocery manufacturers in the current inflationary environment,” the council said.

Coles and Woolworths have increased profit margins during the inflationary period, which they attribute to improved productivity.

Australia’s big supermarket chains deny they are profiteering and say they work with suppliers to keep prices low for shoppers.

“We continue to receive cost price increase requests from our suppliers, particularly related to packaged goods, wages and energy,” a Coles spokesperson said.

AMP’s deputy chief economist, Diana Mousina, said while there is a risk of a short-term escalation in food prices, she doesn’t believe conditions are as severe as last year, when global issues combined with floods in Australia.

“I don’t think that the extent of the price rises will be as bad as last year, but they will probably still add to near-term inflation,” she said.

Mousina said Australia had likely experienced a “levels adjustment”, which means some of the recent food price hikes are here to stay, distributed through the supply chain.

“Consumers will feel the change in purchasing power,” she said.