José Ronaldo de C. Souza Jr.: Food inflation: what happened in 2021 and what to expect in 2022

Food at home represents on average more than 15% of Brazilians’ budget expenditures.

The weight is even greater for very low-income families (about 25%), who consume few services. In 2020, food was the great villain of inflation, with a rise of 18% (well above average inflation). Last year, inflation in this group of goods slowed down, but it still closed the year at a significant rate (8.2%) – albeit below the IPCA average (10.1%).

In the last two years, the high international prices of agricultural commodities were added to the exchange rate devaluation of the Brazilian currency and put pressure on the price of food in the country. The exchange rate devaluation, however, was much lower than it had been in the previous year.

The rise in international prices, in turn, was fueled by the growth in demand from developed countries –which continued to use intensive demand-stimulating policies– and by adverse weather events, which harmed Brazilian agricultural production and had significant effects on prices. in Brazil and abroad.

In 2021, the volume of rains well below the historical average and the severe frosts hampered the production of important goods such as corn (-15.6%), sugarcane (-8.3%) and coffee ( -22.1%). Even soy, whose production increased by more than 10%, had its prices high due to strong international demand.

The behavior of demand is also due to the growth in developing countries, especially in Asia, which has caused a sustained growth in demand for grains (such as soybeans and corn) for animal feed. China, in particular, has undergone a relevant transformation with the replacement of part of the home production of pork with large-scale production, which uses industrialized feed.

It is worth remembering that developing countries, when they increase their per capita income, generate an increase in the demand for animal protein – a more expensive food that has repressed demand among low-income families. This movement, therefore, does not seem to be just a short-term issue. There is a trend of increasing demand for meat and, consequently, for grains used in animal feed. This puts pressure, in the long run, on the level of food prices.

For this year, however, food is expected to have a new deceleration, closing the year with a rise of 4.5% – a little lower than expected for the IPCA. Contributing to this expected slowdown are the IBGE and Conab forecasts of a new high in the soybean crop and a strong recovery in the corn crop. In addition, Ipea expects an increase in animal production, especially cattle (3.6%).

Obviously, there are still many uncertainties about agricultural production in 2022.

The failure of crops in neighboring countries, such as Argentina and Uruguay, has already affected international grain prices. In the southern region of Brazil, lower than expected rainfall in November and December should negatively affect soybean production. Excessive rainfall, on the other hand, may affect soybean production in Mato Grosso and cattle ranching in Minas Gerais.

The second corn crop, in turn, has a naturally higher degree of uncertainty, as it is not yet known what the actual planted area will be and how productivity should be. Another risk to prices is related to limitations on exports from countries that produce fertilizer raw materials and logistical bottlenecks may affect the domestic supply of this important input in the agricultural sector.

Finally, the exchange rate issue directly affects the prices of goods tradable abroad, which is the case for a large part of the food consumed by the population. As it is an election year, uncertainties related to the future of economic policy may affect the value of the national currency and, consequently, Brazilian inflation.