Highlights:

This report includes a Special Focus section that provides a preliminary assessment of the potential impact of the conflict in the Middle East on commodity prices. It finds that the effects of the conflict are likely to be limited, assuming it does not widen. Under that assumption, the baseline forecast calls for commodity prices to decline slightly over the next two years. If the conflict does escalate, the assessment also includes what might happen under three risk scenarios, relying upon historical precedents to estimate the effects of small, moderate, and large disruptions to the global oil supply. The magnitude of the effects will depend on the duration and scale of the supply disruptions. Trade restrictions and weather-related disruptions could also result in higher prices; conversely, weaker-than-expected global growth represents a key downside risk to commodity prices.

Prior to the latest conflict in the Middle East, agricultural commodity prices fell 3 percent in the third quarter, mainly driven by declines in the price of food (the index’s main component). The food price index fell by 3 percent, led by a 7 percent drop in grains. The non-renewal of the Black Sea Grain Initiative, India’s export ban of non-basmati rice, and the impending El Niño drove volatility in agricultural prices, but ample supplies kept prices on a mild downward trend.

Agricultural prices have risen since September and ticked up almost 4 percent since the beginning of the conflict. Domestic food inflation has moderated but remains at double-digits in four out of ten low-income countries and a third of middle- and high-income countries, adding to the burden of food insecurity in many parts of the world.

Food insecurity has been rising for several years, and as of August of this year affected over 210 million people living in countries facing conflict and violence (figure 1.C). Stretched resources have hampered food distribution by aid agencies as they respond to several conflicts and disasters, including Afghanistan, the Middle East, Sub-Saharan Africa, and Ukraine (WFP 2023). In particular, the latest conflict in the Middle East has exacerbated food insecurity in the region as 53 percent of the population in Gaza was already facing insecurity prior to the conflict. Beyond its direct impact on the affected populations, an escalation could worsen food insecurity at the global level, particularly if food prices jump and funds for food distribution are further stretched.

The baseline forecasts assume that the latest conflict will have a limited impact on commodity prices, with prices ultimately being driven by fundamental demand and supply factors. Agricultural prices are forecast to fall by 7 percent in 2023 and a further 2 percent in 2024 and 2025 owing to ample supplies. Food and beverage prices will decline slightly more, while agricultural raw materials will rise by over 1 percent. Following a more than 11 percent fall in 2023, the grains price index is projected to fall by 4 percent on average in 2024 and 2025 amid ample supplies and adequate stock levels. However, rice prices will remain high into 2024, assuming India maintains its export restrictions. The outlook assumes a moderate-to-strong El Niño. Sugar and cocoa prices are expected to decline from 2023 highs, though fruit prices should remain high in 2024 on weather-affected supply shortfalls. Fertilizer prices are expected to decrease as more supplies come online, but they are likely to stay above historical averages due to some supply constraints and China’s ongoing fertilizer export restrictions.

Other geopolitical risks, additional trade restrictions, and continuation of production cuts by OPEC+ into 2024 also cloud the outlook. The cessation of the Black Sea Grain Initiative has limited the scope for Ukrainian grain and oilseed exports, and further disruptions to bulk transport and power distribution could push food and energy prices higher. Moreover, export restrictions on certain commodities could lead to price spikes.