Rising global food prices for producers are making headlines and worrying the public. The most recent data shows a moderation in consumer food price inflation globally, but as we explain below, that could change in the coming months. This would only add to the high prices that consumers in many countries have already suffered in the past year.
If prices do eventually rise again, there will likely be significant differences between countries. Due to various factors, it is likely that the effect would be felt primarily by consumers in emerging markets and developing economies struggling with the effects of the pandemic.
Fact # 1: Food price inflation started to rise before the pandemic.
The rise in consumer food price inflation predates the pandemic. In the summer of 2018, China was hit by an African swine fever epidemic, wiping out a large part of the Chinese pig herd, which accounts for more than 50% of the world’s pigs. This pushed pork prices in China to an all-time high in mid-2019, creating a ripple effect on the prices of pork and other animal proteins in many parts of the world. This was made worse by the introduction of Chinese import tariffs on US pork and soybeans during the US-China trade dispute.
Fact 2: Early lockdowns and supply chain disruptions caused consumer food prices to soar.
At the onset of the pandemic, disruptions in the food supply chain, the shift from food services (such as restaurants) to retail grocery and consumer storage (coupled with a strong appreciation of the US dollar) made rising consumer food price indices in many countries â with consumer food inflation peaking in April 2020 â even though producer prices of basic commodities, including food and energy, fell sharply due to the disruption in demand for commodities. By early summer 2020, however, various consumer food prices had moderated, lowering food inflation in many countries.
So while the prices of food at your grocery store (i.e., consumer food prices) may have gone up, it is an exaggeration to say that they are currently increasing at their fastest rate in recent years. years. They are also not currently contributing to headline inflation, although they may do so later this year and into 2022 (see outlook below). Producer prices, on the other hand, have recently skyrocketed (see fact # 4). But it takes at least 6 to 12 months before consumer prices reflect changes in producer prices. In addition, on average, the pass-through of producer prices to consumer prices is only around 20%. This is because consumer food prices include the cost of shipping primary food products, food processing, marketing and packaging, and final distribution costs such as transport costs.
The last two facts will help us understand what to expect for consumer food prices.
Fact # 3: Soaring shipping and freight costs.
Ocean freight rates as measured by the Baltic Dry Index (a measure of shipping costs) have increased about 2-3 times over the past 12 months, while higher gasoline prices and shortages of gasoline Truck drivers in some areas increase the cost of road transport services. Higher transportation costs will eventually increase consumer food inflation.
Fact 4: Global food prices have risen to multi-year highs.
Since their April 2020 low, international food (producer) prices have risen 47.2 percent, reaching their highest (real) levels in May 2021 since 2014 (the highest level on record in terms of current dollars). Between May 2020 and May 2021, soybean and corn prices increased by more than 86 and 111%, respectively.
Three main factors explain the recent rise in producer prices: (1) The demand for basic foodstuffs for human and animal consumption has remained high, especially from China, as countries have accumulated food reserves due to concerns pandemic related to food security. (2) The recent La NiÃ±a 2020-2021 episode, a global weather event occurring every few years, resulted in dry weather in major food exporting countries including Argentina, Brazil, Russia, Ukraine and the United States. This has resulted in, in some cases, harvests and crop prospects below expectations. As demand outstripped supply, inventory-to-use ratios in the United States and globally, a measure of market stress, hit multi-year lows for some commodities. (3) Strong demand for biofuels has increased speculative demand from non-commercial traders, and export restrictions are additional factors supporting world producer prices.
Based on the four facts presented, it is plausible that consumer food price inflation will accelerate again between now and 2021 and 2022. Indeed, the recent sharp increase in international food prices has already slowly started to pick up. pass through to domestic consumer prices in some regions. because retailers, unable to absorb the rising costs, pass the increases on to consumers. However, it is likely that there will be more, as international food prices are expected to increase by around 25 percent in 2021 compared to 2020, to stabilize in 2021. A pass-through of 20 percent (13 percent percent in the first year and 7 percent in the second) would therefore imply an increase in consumer food price inflation of about 3.2 percentage points and 1.75 percentage points on average in 2021 and 2022, respectively. An additional percentage point to global consumer food inflation in 2021 could be added by higher freight rates.
The impact, however, will vary by country. Consumers in emerging markets could see even larger increases due to greater dependence on food imports (e.g. countries in sub-Saharan Africa and the Middle East and North Africa) . The pass-through of producer prices to consumer prices also tends to be greater for emerging markets. For low-income countries struggling with the pandemic, the effects of further food inflation could be disastrous and risk undermining efforts to end hunger.
Emerging markets and low-income countries are also more vulnerable to food price shocks because consumers in these countries typically spend a relatively large proportion of their income on food. Finally, for emerging markets and developing economies, an additional risk factor is the depreciation of the currency against the US dollar, possibly due to declining export and tourism earnings and net outflows from the dollar. capital. Since most food products are traded in US dollars, countries with weaker currencies have seen their food import bills increase.
* About the authors:
- Christian bogman is an economist in the IMF’s Research Department (Commodities Unit). His main research interests are in the fields of environmental and energy economics and international trade, with an emphasis on the relationship between trade, natural resources and the environment.
- Andrea Pescatori is an economist in the Western Hemisphere Department of the IMF. His research interests lie in the area of ââmonetary and fiscal policy and commodity prices. He has publications in the Journal of Credit d’Argent and Bank, the IMF staff documents, the Economic review and the Journal of the European Economic Association.
- Ervin Prifti is a Senior Economist in the Research Department of the International Monetary Fund and works on issues of food security and agricultural commodity markets.
Source: This article was published by IMF Blog