Global rush for inventories renews pressure on food and inflation

After breaking a historic record in February, before the war in Ukraine, and being forecast to rise by another 20% due to the conflict, food prices gained new pressure this week with large grain consuming and producing countries starting to restrict exports to increase stocks.

According to the Food and Agriculture Organization of the United Nations (FAO), the world’s grain buffer stocks are at their lowest level in eight years — equivalent to 29% of annual global grain demand.

In the 12 months through February, world food prices had already risen 24% on average. While the FAO predicted a rise of another 20% due to the war, products such as wheat have already soared 30%, according to the International Food Policy Institute, a think-tank specializing in the subject.

Together, Ukraine and Russia account for about 25% of world wheat exports; and almost 15% of corn and other products used for animal feed —which should also put pressure on meat prices.

At the moment, almost all Ukrainian ports are closed (some have been destroyed), and the country will find it very difficult to plant its new crop in the northern hemisphere’s spring. FAO estimates that at least 30% of the country’s arable land will be fully committed by 2022.

As a precaution, Egypt this week announced the suspension of its exports of wheat, flour, lentils and beans. With a population of 102.3 million, the country spends more than $4 billion a year on food imports — 70% of its wheat comes from Ukraine and Russia.

Indonesia, with a population of 273 million, has also adopted a heavy restriction on exports of vegetable oils (it is the world’s largest producer of “palm oil”) used in the kitchen and in the cosmetics and chocolate industries.

On Monday (14), the president of the World Bank, David Malpass, appealed to countries not to be aggressive in their storage policies, which could end up worsening the escalation of international prices.

In a joint statement, ministers from the G7 (rich nations club) also called on all producing countries to “keep their food and agricultural markets open”.

THE sheet questioned Conab (National Supply Company) and the Ministry of Agriculture about possible measures that Brazil might adopt in relation to stocks, but received no response.

Fertilizers (Russia now under sanction is the largest global supplier) and rising freight, in addition to the expectation of an increase in the dollar rate in the coming months, tend to put more pressure on food — and on inflation in several countries.

As in the rest of the world, Brazilian agricultural commodities follow international prices, even though the country is one of the largest producers.

To contain the rise in prices, it is expected that many central banks (in Brazil included) will increase their interest rates faster and more strongly — leading to a scenario of low growth, rising costs of local and international credit and of more public debt.

In Brazil, the projection is that public debt as a proportion of GDP will rise from the current 80% to almost 85%. This year, the country must pay twice as much interest (about R$900 billion) compared to 2021.

This Tuesday (15), the International Monetary Fund warned of the medium-term consequences of this scenario of global tightening and food inflation.

“Sharp increases in food and fuel prices could raise the risk of unrest in some regions, from sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity will further increase in parts of Africa and the Middle East,” he says. the Fund.

In February, before the war, FAO estimated that 800 million people in the world were suffering from some form of food insecurity. It’s the highest number in a decade.

Even if the conflict in Ukraine comes to an end soon, the effects of the war and the sanctions against Russia, according to some analyses, will bring together three types of economic crises typical of the 1970s to 1990s: oil shock, inflation and of interest; and increasing difficulty for emerging countries indebted in dollars to refinance loans —unlike past crises, Brazil today is a dollar-denominated creditor.

In this sense, the first test will be with Russia this Wednesday (16), when a period of 30 days begins for the country to pay or refinance US$ 117 million in interest on two categories of bonds (bonds) issued in dollars and euros.

Some Russian papers that were considered “investment grade” (relatively safe) before the conflict have lost more than 90% of their value, equaling Venezuelan bonds.

In the case of interest on the “bonds” that are due now, Moscow has already threatened to pay creditors in rubles – which would be considered a default; and the Russian currency has already lost about 40% of its value against the dollar.

For Mohamed Al-Erian, president of Queens’ College, Cambridge, and former CEO of the global fund Pimco, by bringing back the specter of crises typical of the end of the last millennium, the most likely scenario will be depression in Russia, recession in Europe (mainly due to more expensive gas and oil bills) and stagflation (stagnation with inflation) in the United States.

“What is happening economically and financially in Russia and Ukraine will not stay there. In addition to the tragic forced migration of millions of Ukrainians, there are consequences for the global economy and markets, both immediately and in the long term,” wrote Al-Erian. this Tuesday (15) in the Financial Times.