Supply, demand, subsidy effects in food

Supply and demand for food… High inflation, continued supply bottlenecks, uncertainty about the war in Ukraine and tighter fiscal conditions are putting significant pressure on forward activity, demand and optimism. Inflation fears, on the other hand, have turned into growth fears in recent days. The invasion of Ukraine rocked commodity markets, and countries responded by hoarding grains and various food crops or encouraging greater harvests. Governments are also taking steps to protect the local food supply.

Price impact… As prices sink into broader concerns about a global recession, the start of the grain harvest in some key food producers could help replenish the war-torn world supply. This points to a situation that could also help with the lower price impact for consumers, who are affected by the rising costs of basic necessities, from food to energy to fuel. However, downward changes in crop prices often take time to reflect on the markets, and Ukraine’s agricultural exports continue to be disrupted by the Russian invasion.

Wheat, corn, rice prices comparison… Source: Bloomberg

Subsidies and fiscal barriers… The tax cut or food subsidy extension has consequences for the fiscal balance. Subsidies such as increasing the fertilizer subsidy, lowering the special consumption tax on gasoline and diesel, reducing the customs duties on edible oil and various inputs also bring a decrease in the revenues of the states. For example, reductions are made in the consumption tax on gasoline and diesel to reduce inflationary pressures. All of these have implications for consumption taxes or public borrowing in financing fiscal deficits. Unit costs, on the other hand, do not decrease with price controls, and this situation will negatively affect the general production levels in terms of melting the producers’ margins. Namely;

Imagine you are an egg producer and you cannot sell your unit for more than $1 due to the subsidized price cap. However, with the increase in the price of inputs such as animal feed and transportation, the cost is at a breakeven point. Since production is not profitable enough, the producer may choose not to produce. In order to decrease the price of other inputs, it is necessary to multiply the effect of the subsidy. If the loss of income in the producer is to be compensated, the cost of this is on the budget, therefore on the public sector.

The export ban will also cause unit prices to rise, as it will reduce the suppliers’ hopes of finding cheap sourcing.

Conclusion? Wheat harvest is progressing faster than expected in the US and Europe. The news of the corridor on wheat exports from Ukraine was also reflected in the prices. Turning to the decline in rice, the increase in production in East Asia and the decrease in quarantines increased the selling pressure. With the Fed’s latest rate hike, concerns about a slowdown in economic growth are also escalating. Despite that; Given the ongoing tensions and concerns about Ukraine, the possibility of a prolonged decline until this season’s production levels are clear remains cautious.

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