Led by continuous strengthening of global prices of vegetable oils and pulses, world food prices have soared to a 10-year high, giving rise to fears of a new wave of trade protectionism setting in.
The Food and Agriculture Organisation (FAO), an arm of the United Nations, said in a release on Thursday that the FAO Food Prices Index (FFPI) averaged 133.2 points last month, up three per cent from September and 31.3 per cent from October last year. This is the highest since July 2011.
“After rising for three consecutive months, the FFPI in October stood at its highest level since July 2011,” it said.
The FAO Cereal Price Index averaged 137.1 points in October, up 3.2 per cent from September and 22.4 percent over the year-ago period.
“Higher food prices, along with the recent spike in energy costs, are pushing food price inflation up and raising food-security concerns in several developing economies,” the World Bank said in its Commodity Markets Outlook.
Fitch Solutions Country Risk and Industry Research (FSCRIR), in its note on “Weekly Commodity Strategy” on Friday, said the surge in agricultural and food prices since the beginning of this year could lead to a new wave of trade protectionism and panic buying in the agricultural sector, last seen during the onset of the Covid-19 pandemic in March-April 2020.
The current scenario is a throwback of incidents that occurred in 2011. Then, the World Trade Organisation (WTO) Director-General Pascal Lamy said that in response to the food inflation crises, some (nations) started looking further inwards. “We saw a whole host of export restrictions flourish. These export restrictions had a domino, market-closing, effect, with one restriction bringing about another,” he said then.
Lower supplies, output
FAO said: “International prices of all major cereals increased month-on-month (in October). World wheat prices continued to surge for a fourth consecutive month, rising by a further five per cent in October, to stand 38.3 per cent higher year-on-year, and reaching their highest level since November 2012.”
Tighter availability in global markets due to lower harvests in major exporters, especially Canada, the Russian Federation and the US, continued to put upward pressure on prices, it said.
“Reduced global supplies of higher quality wheat, in particular, exacerbated the pressure, with premium grades leading the price rise. Among coarse grains, international barley prices increased the most in October, underpinned by strong demand, reduced production prospects and price increases in other markets,” the food agency said.
World maize prices also firmed up, supported by gains in energy markets. However, increased seasonal supplies and easing of port disruptions in the US limited the increase in maize values. “International rice prices also edged up further in October, although the onset of main crop harvests in various Asian suppliers capped the increases,” FAO said.
Russian, Chinese curbs
Fitch Solutions pointed out that both China and Russia have introduced policies to curb their exports of fertilisers and/or agricultural crops. “These measures could be extended and/or tightened over the coming months. Argentina may also enact tighter trade policies, as they have previously done so in the past,” it said.
In his comments on soaring energy prices, Ayhan Kose, Chief Economist and Director of the World Bank’s Prospects Group, said the sharp rebound in commodity prices is turning out to be more pronounced than previously projected. “Recent volatility in prices may complicate policy choices as countries recover from last year’s global recession,” he warned.
FSCRIR said most other governments were seemingly focusing on subsidising agricultural production and/or key inputs for now. “But, we note that there is a sizeable risk that they (will) turn to more restrictive trade practises in the near future if food prices remain elevated,” it said.
The World Bank said this year prices of some commodities increased to or exceeded levels not seen since the spike of 2011.
Reasons for inflation
Fitch Solutions said there were several reasons for the skyrocketing of global food prices. One was adverse weather in countries such as Brazil, Canada, Ukraine, Russia, China and Germany. Second was higher costs for energy, fertiliser and electricity. These were compounded by high labour and freight rates.
The Word Bank agrees with these views, saying “Events of this year have highlighted how changing weather patterns due to climate change are a growing risk to energy markets, affecting both demand and supply.”
FSCRIR said: “The acceleration in agricultural and food prices has already forced many policymakers to tighten monetary policy faster than expected and also increased the risk of social unrest.”
It said the risk of greater agricultural protectionism is higher in emerging markets (EMs) than developed markets (DMs), as consumers in EMs spend a greater proportion of their incomes on food products.
Also, there is more of a direct impact between agricultural and food prices due to fewer intermediaries involved throughout the supply chain. Some countries, such as Russia and Argentina, are well known for enacting restrictive trade policies, whereas the US is not.
Referring to the Chinese curb on export of fertilisers from September this year, Fitch Solutions, a unit of the Fitch Group, said it impacted rice production in Thailand and Vietnam, where the respective governments have asked farmers to cut fertiliser application by 50 per cent.
It said India, which was the top export destination for Chinese fertiliser last year, has warned its growers not to hoard fertilisers. China has also asked its households to stop up essentials in case of emergencies, leading to panic purchases.
FAO said its Vegetable Oil Price Index had increased to a record high of 184.8 points as global edible oil prices increased for the fourth consecutive month in October. Sugar and meat prices declined in October but dairy prices were up for the second consecutive month.
The World Bank projects an easing of the situation next year.