The Food and Agriculture Organization of the United Nations (FAO) Food Price Index – a global benchmark for food prices – is up 22.8% above the same corresponding month in 2021 due to a global agriculture supply shortage.

But you don’t need us to tell you that. A short stroll through the local fresh food section will give you a fair indication of the havoc. $12 lettuces. $17 green beans. $10 for a punnet of strawberries!

Food prices have been on the rise since late 2020, largely due to supply-side factors. Output by farmers has been hindered by the rising cost and availability of key inputs such as fertilisers and chemicals. This has been caused by a sharp increase in global energy prices that has made some fertiliser production uneconomical in addition to adding to fuel costs. The impacts are more pronounced in developing regions. ​In North America, ​fertiliser accounts for 10% of inputs costs, whereas in West Africa this increases to 56%.

​Supply had been also been impacted by an unusual combination of weather events. La Niña reduced yields in the Southern Hemisphere leading to drier conditions. Flooding in China impacted rice harvests while heat waves in India limited wheat output. Add in pandemic-induced shipping bottlenecks in addition to labour constraints and the scene was set for a global supply shortage and thus more expensive food.

​Then Russia invaded Ukraine, making a bad situation worse.

The two warring nations provide 28% of the world’s wheat and 69% of the global sunflower oil supply. Concerns over Russia blocking grain exports out of the Black Sea led to a price spike. Bans on Russia and Belarus, which account for 20% of fertiliser exports, have only worsened supply issues. Further sanctions by the EU and US on oil and gas have had a similar impact. With food security front and centre, nations such as India, Argentina and Malaysia have withheld exports to bolster domestic supply. The shortages have created a vicious cycle, with the United Nations estimating that 1.7bn people could fall into hunger and poverty.

​The positive news is that prices look to be turning a corner. In May the FAO Food Price Index fell, albeit modestly, for the second consecutive month. Prices for fertiliser are off 30% while shipping rates and energy prices are also beginning to cool down. Certain food commodity prices, like fish and meat, remain elevated. But overall the old adage – the cure for higher prices is higher prices – is starting to take effect.

On Friday Russia withdrew from Snake Island, reopening shipping lanes for grain exports out of Ukraine. While only a small concession, this will put downwards pressure on wheat and other commodity prices.

Markets are also beginning to price a correction. The BetaShares Global Agriculture Companies ETF (FOOD.ASX) has fallen 18% in the past three months. Moreover, most futures curves are in backwardation (when the future price is lower than the current price), implying that abnormal food prices should revert over time.

Interestingly, this hasn’t quelled investor interest. Salmon producer Tassal Group (TGR.ASX) received a takeover bid last week. Fortescue Metals (FMG.ASX) founder Andrew Forrest also purchased a 17.4% stake in cattle and beef producer Australian Agricultural Company (AAC.ASX).

Agriculture is a cyclical industry, prone to peaks and troughs. It’s hard to imagine conditions getting any worse, but that doesn’t mean they won’t persist. Despite energy prices moderating, it will take time for decreases to flow through. Moreover, future-proofing supply chains will be a longer-term project given it takes two to five years to develop new fertiliser plants and oil refineries. Reducing dependency on Russia will also be no easy (or cheap) task. While markets are pricing in falling agriculture prices, it’s likely they will remain above historical levels for the time being.

Disclaimer: Tassal Group (TGR.ASX) and Fortescue Metals (FMG.ASX) are both currently held in TAMIM portfolios.