Analysis: Global interest rate hike triggers food inflation even further

The rise in interest rates, a measure by governments to contain high inflation, could trigger even more inflation, especially in Brazil.

Brazilian exports are doing well, bringing a good trade balance, and the GVP (Gross Production Value) has reached a record level.

The numbers, however, do not reflect the reality of small and medium producers, especially those focused on basic products consumed domestically.

These producers have been assimilating costs, but they have not been able to pass on prices to a population that has had the lowest income since 2012, as shown by an income survey from all sources by the IBGE, which began in 2012.

It’s a war scenario, says Bruno Lucchi, technical director of the CNA (Brazilian Confederation of Agriculture and Livestock). From January 2021 to April this year, the value of potash rose 243%; that of glyphosate, 395%; and diesel, 80%.

The CNA director also includes services, freight, agricultural machinery and other inputs on this list of highs.

High costs, reduced incomes and falling consumption, due to weak incomes, are reducing the food supply on the part of producers and, in many cases, driving farmers away from their activities.

This is what already happens with the production of milk, vegetables, manioc, beans and even rice. A reduction in the supply of these products, typically aimed at the domestic market, will drive up prices even further and put pressure on inflation.

This is a world scenario, and all producing countries are taking measures with a view to the next harvest.

Hence the need to convince the government that a cheaper policy that results in a greater supply of food is a good Safra Plan, says Lucchi.

Controlling inflation through high interest rates is bad not only for agribusiness, but for the entire economy, according to the CNA’s technical director.

Ivan Wedekin, a consultant and former Secretary of Agricultural Policy, says that raising interest rates will not have major effects on agricultural products. There is a supply problem, given a heated demand. There will be at least two harvests for the return of a balance, he says.

The world is experiencing food inflation, which rose 68% from 2019 to last April, according to UN data, he says.

Rising interest rates in the United States can take capital out of Brazil and into the US market. With that, the dollar is scarce here and goes up.

This high benefits producers of exportable commodities, such as soybeans and meat, but disadvantages the producer turned to the domestic market, says Wedekin.

For Daniele Siqueira, an analyst at AgRural, investors are risk averse and always look for the safest assets. Soybean prices had already registered this expectation of a 0.75 percentage point increase in interest rates in the United States.

The shortest contracts, and with greater value, have been falling in recent days. The November contracts, the most liquid contract on the market, had a smaller decline.

Soybeans and sugar closed lower on Wednesday (15) on US commodity exchanges, but corn and coffee rose. Wheat kept prices stable.

The Fed raised interest rates by 0.75 percentage point, the biggest increase since 1994.

The Central Bank of Brazil, on the other hand, increased the Selic rate by 0.5 percentage point, to 13.25%. North American interest rates should end the year close to 3.5%, while in Brazil it is already projected to reach 15%.