The Case of Rising Global Food Prices

Highest in the past 6 years – Global Food Prices

Along with unemployment and business disruption, there’s another factor that COVID has driven to an unprecedented height – Global Food Costs. The Food and Agriculture Organisation of United Nations (FAO) Food Price Index shot up by 4.3 percent in January 2021, the highest since the July of 2014. This is the eighth consecutive month that the index has seen a swing northward. In February 2021, the points averaged at 113.3 against 108.6 of December 2020. This sure does bode signs of an imminent global food shortage.

Now, first things first, what is the Food Price Index?

This index is a measure of the monthly changes in the international prices of commonly traded food commodities. These commonly traded food commodities include

-FAO Cereal Price Index

-FAO Dairy Price Index

-FAO Oils/Fat Price Index

-FAO Meats Price Index

-FAO Sugar Price Index

The average of these 5 commodities is weighted against the average export shares of each of the groups for 2014-2016, which is used as the general index.



Why is there food inflation?

A lot of factors are responsible for contributing to the rise in food prices. China, for instance, is currently stockpiling supplies. In December 2020, China published a new draft law on the management of its grain reserves to enhance its food security. China's increase in demand for imports has created a void in grain availability, thereby driving a shortage in the overall grain supply to the rest of the world.

Russia, one of the largest wheat exporters of the world, has brought in legislation that brings in higher taxes on wheat exports. Right after the announcement of this proposal, the price of wheat grains in several countries across the globe shot up as buyers scramble to hoard supplies. From March 2021, the wheat export tax would be 50 euros from the initial 25 euros per tonne. This effort was taken to curb the rising domestic price of food grains. Also, Russia plans to set a barley and corn export tax at 10 euros per tonne and 25 euros per tonne from the March of 2021. This could have a direct impact on the food prices in the Middle East, which is primarily dependent on Russian grain exports.

Poor weather has taken a toll on crop production in Europe. Heavy rain and severe drought have damaged yields, particularly in Spain where the projected winter barley yield is 21 percent below the trend, and spring barley is 33 percent below. The climatic conditions commingled with the virus have brought in a major setback to agricultural yields in France and Belgium as well, leading to a 25% decline in wheat production in France in 2020. Overall crop yields in the UK too were below average. As a result, overall EU exports are down, and EU stocks are expected to tighten.

Argentina, which accounted for 22% of global corn exports in 2019-2020, suspended its exports to protect domestic supplies. Lack of rainfall in several other countries of Latin America like Brazil has led to increased worry over the availability of soybean crops.

Also, the disruption in the supply chain during the pandemic has proved to be disastrous for the poultry industry which suffered great losses and diminished supplies.

Sugar prices hopped up by 8.1 percent since the 2019-2020 mark, with worries about worsening crop prospects in the European Union and Thailand and dry weather in South America pushing up import demand.

To sum it up, diminished supplies, frantic buying, and disrupted logistics have propelled the high prices of food.


How does food inflation affect the economy?

Food inflation has a direct effect on the consumer price index (CPI) inflation. Now, what is consumer price index? The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care.

In simple terms, it means that the prices of every other goods and services will rise. This effect tends to have a more profound impact on economies that largely depend on imports for food supplies. The worst effect of food inflation is usually directly felt by the lowermost strata of the society. In most developing countries, an average household spends 50% of its income on food. Thereby a price rise will precipitate a crisis, pushing people to the brink of poverty.


What could help?

In simple terms, an end to the pandemic. The vaccination drives kicking off in full swing throughout the globe sure seem to be a ray of sunshine in these dark times!


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