Rising food prices in some EMs can be attributed to several factors directly related to the pandemic. First, the mentioned change in consumption patterns, with the consumption of many services limited by imposed and voluntary social distancing controls. That change resulted in higher demand for goods, including food items. The second factor behind the increase in food prices is the supply side of the equation, specifically disruptions in the production chain related to social distancing restrictions. There have been multiple reports of logistical issues and reduced capacity in food processing facilities during the pandemic. Dry weather in major producing countries such as Thailand, Brazil, Argentina, and Ukraine, plus a shortage of shipping containers, have further aggravated the supply-demand imbalances. There are also concerns about stockpiling in China, given large imports of corn, wheat, soybean, barley, etc., in order to build strategic food reserves amid the pandemic scare and geopolitical tensions. Some of the other Asian countries are seeing food price pressures exacerbated by labour shortages due to the pandemic. Thailand’s seafood industry is witnessing a fresh pandemic wave following an outbreak in its key seafood market, while Malaysia’s palm oil industry is facing a labour crunch due to border controls and migrant worker outbreaks. The Philippines has been dealing with natural disasters such as typhoons at the end of last year which have led to a surge in vegetable prices, and the supply of pork has been dwindling due to the African swine flu. The Philippine Statistics Authority, however, puts more weight on rice than other food products in its CPI, and the drop in rice prices due to the Rice Traffication Law has masked the uptick in vegetable and meat prices. The increase in food commodities that started in mid-2020 added inflationary pressures as well. The FAO food real price index, which measures the international prices of a basket of food commodities (cereals, vegetable oils, dairy, meat and sugar), rose for the seventh consecutive month in December 2020, to the highest level since July 2014 (Figure 3). The increase is mostly explained by vegetable oils and cereals, though the latter has in turn started to affect meat prices, which had been falling in January-September of 2020 but started to increase in October. Rising energy commodity prices since May, with rising optimism that vaccine rollout will unleash a rapid economic recovery, exacerbated inflationary pressures.

Figure 3 Food Commodities’ Real Prices Have Been Rising Since May (Index)

Source: Continuum Economics, Datastream

Authorities react

With global wheat prices and corn prices well up from their lows six months ago, the CBR is concerned about inflationary implications, especially given that in Russia, food represents 31% of the CPI basket. With the September Duma elections in sight, rising food prices also increase the scope for unrest, which the authorities will not tolerate. Russian President Vladimir Putin has also committed to regulating the cost of ‘socially significant goods’, i.e. mainly food staples, if they climb more than 10%. The BCB has recently also admitted it is concerned about the effect that the increase in commodity prices could have on food and fuel prices. And in Mexico, President Andres Manuel Lopez Obrador made a ‘friendly request’ to cornmeal producers not to raise prices. India is one of the rare countries to adopt an inflation-targeting framework, with food and beverages representing over 45% of the inflation basket. For inflation-targeting developed nations, food weights in CPI are far lower. The highly volatile food prices, therefore, make headline CPI difficult to predict, and policy decisions suboptimal. The upcoming review of the inflation targets is, however, unlikely to bring any material change, and we expect the RBI to keep its policy rate on hold even as it shifts the liquidity stance in light of the inflationary pressures. Across ASEAN, governments have stepped up food security policies and subsidies and are also looking at boosting domestic production. Indonesia expanded the coverage of its staple food card programme from 15.2 million to 20 million recipients and earmarked IDR 104trn for food security, including strengthening food infrastructure and technology. Thailand has implemented a co-payment scheme that subsidises 50% of food, drink, and general purchases at small shops. The Philippines has allocated PHP 31bn under its ‘Plant, Plant, Plant’ programme to ensure food sufficiency amid the pandemic. Of this, PHP 8.5bn will go toward increasing domestic rice production from 87% to 93% of rice consumption. Moreover, the increase in food prices during these delicate times of pandemic-induced income reduction gave rise to protectionist measures in Argentina and Russia. Argentina imposed measures to limit corn exports, while Russia did so with wheat and other grains. Although these protectionist measures may, in the very short term, achieve higher supply and lower domestic prices, the risk is that they hurt medium and long-term supply by reducing incentives to produce.

Food price pressures may ease, but not just yet With the reimposition of COVID-19 restrictions in many countries, some supply disruptions will likely continue for some time in H1 2021. At the same time, demand for services will probably remain subdued. This will likely prevent a return to the usual consumption patterns in the coming months, keeping food prices in the CPI inflation measures pressured. Meanwhile, the ongoing increase in food commodities and energy prices will probably keep pressuring final prices, at least in the coming months. Although the rise in global grain prices is reminiscent of the 2000s, stock levels are much higher now than in the 2000s, when they had fallen due to poor harvests. The aggregate stocks-to-use ratio, a measure of demand relative to supplies, has averaged nearly 30% since 2015 vs less than 20% during 2007-11. Also, global agricultural prices could well stop rising if CNY appreciation slows. That is because China, and to a much lesser degree India, seem to have bought up a huge share of the global agricultural surplus, taking advantage of CNY appreciation to buy up stocks of wheat and corn. High global stocks of grains suggest upward price pressures won’t last, and grain price forecasts are in for a correction lower as the 2021 harvest rebounds. Additionally, the scale of further CNY appreciation will be restrained by the Chinese authorities after the currency appreciated significantly against USD since 29 May.

But there are significant risks to this view. Because the elasticity of agricultural commodities prices to the USD is close to one, continued dollar depreciation could prolong food price rises for some time. Indeed, we are looking for USD weakness to extend against EUR and JPY into end-2021. Also, because energy is an important cost component to most crops, if prices for energy and fertilisers rise faster than expected, that would also feed into higher global agricultural prices. However, that is not our baseline scenario. Increasing food inflation has significant implications. In terms of politics, it could bring more protectionist measures and social unrest. Monetary policy-wise, high food inflation jeopardises the continuity of easy monetary stances, especially when activity in services recovers and potentially services prices go up. The CBR and BCB have both tightened their policy rates aggressively because of mounting inflation risks from goods, especially food, while the RBI also hiked its bank reserve ratio. Central European central banks have also joined the tightening bandwagon. And more tightening lies ahead in all these countries, because, although food prices may moderate not too far down the road, high food inflation has contaminated inflation expectations, making the rise persistent, as is particularly clear in Russia.