Analysis: Three Cs and a P help you understand why food is so expensive this year

By means of pen strokes, inflation begins to show signs of deceleration at the average rate. Food, however, remains on the rise. And here there is no possibility of pen strokes.

The food boom, which has helped push the world’s inflation rate to four-decade highs, has distant causes.

In the grain sector, it started with strong Asian demand, mainly from China, at least five years ago. Next, it was the turn of meats, due to the outbreak of African swine fever in China, the country that most produces and consumes this protein.

The Chinese went to the international market and boosted prices not only for pork but also beef and chicken, a level that still holds.

The pandemic also had a good share in the rise of agricultural products. Until then, everything was working normally, and countries had limited food stocks. Even China, a traditional producer of reserves, was reducing its volumes.

With the pandemic and the disruption of world transport, countries went to the international market to stock up and ensure food security. Some even limited exports of their products.

When everything seemed to return to normal, with the return of relative stability in the world economy, uncertainties about the world’s food supply increase with Russia’s invasion of Ukraine.

In addition to all these factors, another phenomenon, and with even greater damage power, has been strongly affecting the food market in recent years: the climate.

In a period of strong global demand, production, affected by weather problems, falls. As a result, world food stocks returned to very low levels.

A clear example of this climate effect —which has spread across India, Australia, China, the United States, Europe and South America—is Brazil. In the last two harvests, the country lost 20 million tons of corn and another 20 million tons of soybeans because of drought and frost. In addition to crop reduction in other crops, ranging from coffee to vegetables.

The country, which expected to reach 300 million tons of grain, produced 255.5 million in 2021 and is expected to get 271 million this year.

This strong international demand and the lower supply of food had serious consequences for consumers, especially for Brazilians, who had a great loss of income in the period.

High inflation, however, also hit the countryside. Large producers, especially those who produce with an eye towards exports, maintain liquidity, due to the still high international prices of commodities.

Small producers, who often produce only for the domestic market, are left with high costs and low demand for their products.

The result was a lower investment in production and a consequent lower supply of product. This is what happens in the hortifrutis and milk sectors, some of the items that push up inflation.

Tomato growers elucidate this scenario. In general, small producers have costs of, on average, R$ 185,000 to cultivate one hectare of land with the product.

In some cases, these expenses go up to R$275,000, says João Paulo Bernardes Deleo, a researcher in the field of vegetables at Cepea (Center for Advanced Studies in Applied Economics).

The investment is high for a dubious return. The producer is selling the tomato box for R$ 36.53, but spending R$ 35.96 to produce.

The slightest mistake in a crop leaves the producer in debt and removes him from the activity. This is what the researcher’s follow-up shows. Since 2013, the tomato area has been reduced year by year in the country.

In a period when demand and income of Brazilian consumers are short, the producer will think twice before investing such a large amount. And that goes for all cultures, says the researcher.

This departure of small producers from the fruit and vegetable market reduces product supply, concentrates production and will increasingly allow price formation to be in the hands of a few.

The danger also surrounds the supply of other basic products, such as rice and beans. In these cases, the lower income with these products makes the farmer leave the activity and seek the production of more profitable items for the foreign market, such as soybeans and corn.

Conab (Companhia Nacional de Abastecimento) announced on Thursday (11) that ending stocks of beans — that volume left over from one harvest to another — dropped to 214,000 tons this year, 23% less than the agency had forecast. in July.

Rice will be less than 2 million tonnes, with a 10% decline compared to estimates made last month.

The second semester is normally a period of greater supply and more comfortable prices for produce. This year, however, there is a new component for producers: the intense increase in costs. Deleo believes that prices will not rise, but they are already at high levels.

In the grain sector, it is the planting period for the new 2022/23 crop. Producers will also face new costs, but they have already anticipated part of the sales of the future harvest at high prices, ensuring liquidity.

The worst is for farmers, generally small-scale, focused on the domestic market. They will face high production costs and weak demand due to low consumer income. Relief could come from some of the money from the government’s temporary income programs.

In addition to a possible lower supply of various products, consumers will have a greater pass-through in food prices, due to the acceleration of farmers’ costs, especially those of basic inputs.

One of them is fertilizer. Prices begin to retreat, but are still at high levels, where they should remain for a long time.

World production declined in this sector, raw material prices rose and recovering mines or opening new ones is a lengthy process. The result is a smaller supply, dispute over the input by several countries and high prices worldwide.

The world food supply still depends on some factors that strongly affect production and are unknown in the producer’s decision.

One of them is living with higher costs, which will interfere with final prices. The dollar’s behavior is a component of this equation.

Second, rising interest rates around the world could lead to a recession, affecting food demand, albeit to a lesser extent than in the rest of the economy.

The conflict between Russia and Ukraine, two major world food suppliers, is still far from being resolved, and this influences global supply.

There is also the climate factor, which weighs heavily and has been a constant in agricultural production. Difficult to measure in advance, this phenomenon has brought down world agricultural production. Both small and large producers are subject to possible adverse weather conditions.

Right now, the eyes of the world are on US crops, where the heat is affecting grain yields. The Americans, world leaders in corn production and major suppliers of soybeans and wheat, still depend on the weather factor to achieve a good harvest. For now, the intense heat during the day and night in the belt with the highest production has already removed the country’s maximum production potential. The harvest will be smaller.

The production chain is interconnected. A shortfall in corn and soybean crops affects production and costs in the meat, energy (via ethanol and biodiesel) and food (bread, soybean oil and others) sectors, consumer’s daily items.

The world, in order to continue with reasonable levels of food, cannot bear another crop failure in Brazil, in the States, in Europe or in other producing regions. Inventories are low, and prices should remain heated.

Food may even have small price reductions, as is happening, but the level reached in Brazil and in the world takes away the purchasing power of a large part of consumers, due to the loss of income.