Cyclical food inflation factors

Food inflation factors… While global inflation is heavily affected by commodity prices, food inflation stands out as one of the biggest triggers for this. Although the Russia-Ukraine war seems to be the most important cause of food inflation, it is not the only reason, but rather a phenomenon that worsens the current problem and exacerbates the marginal effects. While factors such as climate change and environmental factors that reduce food supply security are evident, the inability to plant fertile agricultural areas after the Russia-Ukraine issue, the difficulty in food shipments, the protectionist measures taken by the countries against supply insecurity and the cost factors in food inputs layer the inflation effect here.

Cost and price analysis… Food price inflation was on the rise years before the pandemic, driven by both demand and supply. Demand was fueled by better economic growth, increased purchasing power and population pressure. Food production was restricted due to climate change (poor harvest), increased production costs, epidemic, decreased productivity. The war in Ukraine caused further supply cuts, which in turn pushed up the prices of commodities such as corn and wheat. Higher wheat prices translated into higher food prices, while more expensive animal feed and fertilizers increased the cost of food production. Also, countries with weaker currencies have seen their food import bills rise, as most food products are traded in dollars.

On top of “high prices driven by strong demand and high input costs” resulting from the COVID-19 recovery, FAO analyzes that Ukraine and Russia are key players in global commodity markets and the uncertainty surrounding the war has led to further price increases. The FAO Food Price Index hit its highest ever level in March, averaged 158.2 points in April and remains at historic highs.

Factors that trigger prices… The two most important parameters can be listed as the increase in fertilizer prices and the increase in energy costs. Fertilizer prices, which were in the band of 300 dollars per ton in June 2020, move in the band of 970 dollars compared to June 2022. This situation puts pressure on the producer and pushes prices up. The cost of fertilizers and agrochemicals rose 50% from last year as the war in Ukraine put more pressure on Russia as the main exporter of nitrogen, potassium and phosphorus fertilizers. Another factor that puts pressure on food prices is energy prices. In particular, the outbreak of the Russia-Ukraine crisis caused volatility in the energy markets and accelerated prices. This situation increased production costs and caused inflation to flare up. Energy is still one of the determinants of cost factors in global food production.

Global fertilizer prices index.. Source: https://fred.stlouisfed.org/

Another risk factor can be said to be weather conditions. A possible contingency in weather conditions could affect the harvest, which could reduce the supply. In the event of this scenario, even if there is no change in demand, supply-side prices can be expected to continue their upward trend. Rising food inflation can be expected to fuel the global food crisis, especially in developing economies and low-income countries that experience foreign exchange shortages and are more vulnerable to food price shocks.

Due to the war, an important area could not be cultivated in Ukraine. Therefore, the inability to use fertile lands in Ukraine and the affected agricultural production also cause difficulties in food supply. For example; 56,072,746 tons of sunflowers are produced annually worldwide. The Russian Federation is the world’s largest sunflower producer, with a production of 15,379,287 tons per year. Ukraine ranks second with an annual production of 15,254,120 tons. The Russian Federation and Ukraine together produce more than 50% of the world sunflower production.

Rising prices have prompted some countries to implement short-term intervention and administrative measures, such as subsidies, price controls and export restrictions to set price ceilings, lower import tariffs and maintain or improve domestic supply and suppress food price inflation. Similar to countries such as India and Indonesia that restrict food exports, possible export bans to ensure domestic food security within the framework of protective measures may have an increasing effect on global food inflation. This situation will cause problems especially in countries that import food intensively. This may cause new vicious circles in the supply dynamics.

Natural gas prices… (dollars) Source:finance.yahoo.com/

Conclusion? Rising energy and transportation costs are affecting many components, including food. Extreme weather and pandemic disruptions have increased production costs and reduced food supply while demand has increased. Russia’s invasion of Ukraine is a phenomenon that can lead to constant price increases. Rising food inflation is also putting pressure on the disposable income of low- and middle-income households for non-discretionary expenditures.

We see that mechanisms such as price controls and subsidies temporarily implemented by governments to keep food prices under control do not put permanent downward pressure on price levels. It is understood that environmental sustainability and technological development elements, which will focus on areas such as climate change, crop yield and mechanization, are important in agricultural production. Creating a more resilient food supply chain will also provide more and better market options for consumers and producers.

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