A surge in non-spending.

The first monthly EU food inflation decline in nearly two years in July was hopeful. Eurostat data showed food prices dropped from their peak in March this year, largely due to lower prices for dairy products, fresh vegetables, margarine and sunflower oil. But many branded food producers reported lower sales as consumers turned to cheaper alternatives. And in a recent interview on a French radio, a major retailer CEO said that high prices forced consumers to cut back massively on basic necessities, calling it a “tsunami of non-spending in France".

The EU Commission's latest report notes that weather conditions were generally negative for the yield of many crops. The situation varies depending on crop and region and one of the biggest weather victims in EU this year is olive oil. Due to persistent drought in Spain, especially the lack of rain in spring, olive oil production remains too low. There are nearly no alternatives outside EU as EU is the largest exporter of olive oil. Although sunflower oil with a high oleic acid content can be a valid alternative. Global olive oil supplies are seen dropping to a near 25-year low and after doubling vs. last season, origin prices may further soar above €10.000/mt.

Some food companies are also struggling to buy enough tomatoes as the severe drought that hit southern EU last and this year caused shortages, forcing buyers to look outside EU to buy tomatoes.

The price of pork also doubled in recent years and is now at an all-time high due to lower supplies. The nitrogen problem, ecological restrictions and other regulations, African Swine fever disease and deteriorating profitability, caused pork production to drop to its lowest in nearly 20 years. A structural reduction is in the works and already the number of pigs in the whole of EU is expected to fall more than 5%. Consumption is barely falling, making EU a potential net importer again in a not-too-distant future. In contrast China faces an oversupply and low prices. In both markets oilseed-meal demand for feed is seen dropping vs. a rise in oil demand.

Month-on-month or year-on-year inflation are one approach but cumulative inflation can no longer be ignored. And food inflation, which is double that of general inflation, is far from gone. Governments are eager to curb inflation and French authorities already intervened to freeze supermarket prices, Italy is also contemplating price ceilings, Portugal scrapped the value added tax on some foodstuffs, etc.

Of course, apart from tax inflation, governments have little control over the weather, cost of wages and energy and their inflationary impact. And the real cause of inflation does not lie with retailers, traders or producers. Basically, it's too much (worthless)money chasing too few goods.

Overspending governments and central banks printing money haven’t been much help. The only possible countermeasure is to limit the money supply by raising policy interest rates to levels that hurt economic growth. So far, the economy as shown some resilience and inflation has far from disappeared so further interest hikes are to be expected.

MARKETS

Palm oil

Generally, the seasonal palm oil production increase and stock growth remain a bit disappointing. The lagging negative effect on production of the El Nino weather pattern, later in the season, stays on everyone’s mind as the situation looks a touch tighter than before. In the marketing seasons 2022/23 and 2023/24 demand is projected to equal or exceed production. But that is ‘forecasting future demand’ and there is always a price to correct things. Moreover, the price and availability of other oils as well as macroeconomics will also impact where demand and price of palm is going.