Shoppers in Slovakia saw food prices fall by 2.1% in July, the fastest decline in almost a decade. But the respite could prove short-lived, with extreme drought and higher energy and fertiliser costs threatening to push prices back up.
The July drop helped slow Slovakia’s overall inflation to 3.3%, its lowest level in a year and a half, SME reported, citing data from the Statistics Office.
An unusual surplus of milk in Europe is one reason Slovak food prices are falling.
Production has increased as new livestock operations established when milk was in short supply have started supplying the market. In the first five months of this year, milk supply rose by 6% in Slovakia, 7% in Germany and 9% in Belgium.
The countries’ markets are closely connected, meaning a glut elsewhere in the EU can quickly affect Slovakia. Germany’s 7-% increase alone represents an additional 2.2 billion litres of milk a year – more than twice the 900 million litres produced by all Slovak farms.
The price paid to Slovak milk producers has fallen by 25% from a year ago, to 37 cents per litre. Butter, skimmed milk powder, and hard and ripened cheeses are getting cheaper too.
The July decline extended beyond dairy: meat prices dropped by 4.3% and fruit by 2.6%.
“For now, we assume that year-on-year inflation may have reached its low for this year in July,” UniCredit Bank analyst Lubomir Korsnak said.
The European milk surplus could continue for several weeks or months, he said. For many other foods, however, the factors pushing prices down are temporary and much of their potential has already been exhausted.
What happens next could depend heavily on this year’s harvest.
Extreme drought is expected to become the main driver of higher food prices, although CSOB analyst Marek Gabris says its impact cannot yet be quantified. A clearer picture should emerge once harvests in Slovakia and abroad are completed, with cereals, animal feed and products such as poultry potentially affected.
Slovenska sporitelna macroeconomist Maximilian Weber expects the poorer harvest to show up in food prices next year.
Farmers are facing other pressures as well. Nitrogen fertiliser prices rose by 50% in the spring, while Brent crude is 30% more expensive than before the war in Iran.
Disruption in the Strait of Hormuz could further affect fertiliser costs, as half of global seaborne sulphur exports – used in fertiliser production – pass through the waterway.
The Black Sea presents another risk. Drone and missile attacks are restricting exports of agricultural commodities from Ukraine and Russia, which together account for almost a third of global wheat trade.
Korsnak said domestically produced foods such as fruit and vegetables were therefore likely to become more expensive even as the international milk surplus continued to keep dairy prices down.
Average inflation could approach 4% towards the end of the year. (The Slovak Spectator)