Opinion – Why? Economês in Portuguese: Why global food prices are in shock

The combination of pandemic plague, war in Ukraine and droughts over the past two years seems to have come out of the Bible. Now, that combination is possibly incorporating hunger, with the food price crisis, in parts of the world.

The world food price index, collected 60 years ago by the Food and Agriculture Organization of the United Nations (FAO), hit a record in March, declining gently in April.

The rise in global food prices began in the mid-2020s, when lockdowns and restrictions on supply chains took place during the rush to stockpile food. Restrictions on the mobility of migrant labor affected harvests in much of the world.

Since then, weather phenomena have also brought problems with major crops in many parts of the world. Brazil, the world’s largest soybean exporter, suffered from a severe drought in 2021. This year, China’s wheat crop is among the worst ever.

India’s high temperatures – 45 degrees Celsius in March and April – hit its “wheat cord”, while its super-harvest last year partially offset poor harvests in other exporters such as Canada and Argentina. Last week, the US government’s Department of Agriculture released a report forecasting a decline in global wheat production for the 2022-23 harvest and regulatory stock levels.

An additional shock came with Russia’s invasion of Ukraine in late February. Nearly one-third of the world’s wheat and barley and two-thirds of global sunflower oil exports come from the two countries. Ukraine is the largest corn exporter in the world. The conflict has damaged Ukraine’s ports and agricultural infrastructure and this will certainly limit the country’s agricultural production for years to come.

The volume of grain produced in Ukraine fell from 5 million tons per month to 500,000. The post-meeting communiqué of G7 foreign ministers in Germany, last Saturday (14), warned of a global hunger crisis if alternative means of exporting grain from the country by land are not found.

According to the German minister, Annalena Baerbock, about 25 tons of grain are blocked by Russian armed forces in Ukrainian ports. In turn, Western sanctions on Russia have led some buyers to avoid buying grain from Russia.

The energy price shock caused by the Russian invasion will also impact food prices. The spike in fertilizer prices reflected not only the reserve for neighbors announced by Russia, but also the fact that, for example, nitrogen-based fertilizer production makes intensive use of expensive natural gas. Russia and its ally Belarus mine nearly 40% of the world’s potash that is used as an input for another type of fertilizer. Higher fertilizer prices will be felt in the current seasons.

As if all this were not enough, in the name of “food security”, export restrictions and the stocking of basic products to avoid future shortages have been practiced by countries since the pandemic, with consequences on the supply in the global market. Thirty-five countries have adopted export controls in the last two years. Parallels can be drawn with what occurred in the global food price crisis of 2007-08.

Kazakhstan, for example, the world’s second-largest wheat flour exporter and Russian grain dealer, has banned exports. Last Saturday, India, which is among the top 10 wheat exporters in the world, announced a ban on sales abroad. The impact on global prices started to be seen yesterday, Monday (16/5).

And examples of protectionism via banning foreign sales follow. Indonesia, responsible for 75% of the world’s palm oil production, banned exports in late April to secure domestic supplies of cooking oil. In fact, the explosive increase in food prices in general has been even greater in the case of vegetable cooking oils.

Rising food prices and, in some countries, the risk of social upheavals have led to an increase in the number of exporters banning foreign sales or establishing fees or quotas. These protectionist measures further increased the food import bill for countries dependent on international markets for the domestic supply of food commodities, hitting some of the poorest in the world.

The impact of the ongoing crisis is being differentiated by regions and levels of economic development. In countries in the Middle East and North Africa, wheat represents 50% to 70% of the total grain consumed, and is mainly imported from Russia and Ukraine. It is worth remembering that wheat prices were one of the triggers of the “Arab spring” at the beginning of the last decade.

The proportions of wheat in grain consumption in Asia and Latin America are lower: 29% and 16%, respectively. For its part, the IMF (International Monetary Fund) regional report for Sub-Saharan Africa for April brought warnings about how rising oil and food prices are putting pressure on the external and fiscal balances of commodity-importing countries, raising concerns about food security in the region.

In any case, no one can claim to be unharmed from the food price shock. Particularly in the case of the poorest economies, for which the share of food in the consumption basket is significant. Last year, the World Bank estimated around 100 million people in the world were being pushed below the poverty line of $1.90 a day, a figure that has been compounded by the shocks in place since the invasion of Ukraine.

What about national policies for mitigating the effects of food price increases – not worsening them, as in the case of protectionism we mentioned? The April IMF’s “Fiscal Monitor” report brings a survey of measures taken in 94 countries, carried out by economist Roberto Perreli.

In many cases, direct subsidies have been given to consumer prices, while others have established subsidies for seeds and fertilizers used by farmers, in addition to in-kind food distribution programs. The fiscal fragility inherited from the pandemic is limiting such public programs in many developing countries.

Otavio Canuto

(Senior Fellow at the Policy Center for the New South, Senior Non-Resident Fellow at the Brookings Institute, Professor at the Elliott School of International Affairs at George Washington University and Principal of the Center for Macroeconomics and Development in Washington. World Bank, executive director at the IMF and vice president at the IDB. He was also secretary of international affairs at the Ministry of Finance and professor at USP and Unica)