Food Inflation

Food Inflation

Subject: Economy

Section: Inflation

Context

Food inflation may ease faster than expected.

Details:

• The UN Food and Agriculture Organization’s Food Price Index (FPI) averaged 140.9 points in July, 8.6% down from its previous month’s level and marking the steepest monthly drop since October 2008.
• Between March and July, the FPI has cumulatively declined by 11.8%.
  • This has been led by vegetable oils and cereals, whose average prices have fallen even more.

Factors determining food prices:

There were four major supply-side shock drivers of the great global food inflation especially since October 2020:

• Weather–
  • Droughts in Ukraine (2020-21) and South America (2021-22) impacted sunflower and soybean supplies.
  • March-April 2022 heat wave that devastated India’s wheat crop.
• Pandemic
  • Example-  Malaysia’s oil palm plantations hampered as done by migrant labourers from Indonesia and Bangladesh. 
• Russia-Ukraine war
  • It led to supply disruptions from the two countries.
  • In 2019-20 (a non-war, non-drought year), these two accounted for 28.5% of the world’s wheat, 18.8% of corn, 34.4% of barley and 78.1% of sunflower oil exports.
• Export controls
  • Shortage concerns at home triggers such actions
  • Example-palm oil by Indonesia, wheat by India during March-May 2022.

Causes of declining food prices:

• Global factors:
  • Resumption of exports from Ukraine via the Black Sea.
  • The UN-backed agreement for unblocking of the Black Sea trade route also provides for unimpeded shipments of Russian food and fertilisers.
  • Indonesia has lifted its ban on palm oil exports.
  • The US, Brazil, Argentina and Paraguay are set to harvest bumper soybean crops. 
• Domestic factor:
  • Above average rainfall across the South Peninsula, Central and Northwest India has boosted acreages under most crops this kharif (monsoon) season.
    • The benefits of groundwater recharge would also flow to the rabi crop.
  • Higher buffer stock with the government.
  • International exportable surpluses, primarily from Canada and Australia, are also higher than last year’s by about 0.5 mt each for both pulses.
  • Policy of duty-free imports of arhar, urad and masur till March 31.

 A good monsoon would also mean more fodder and water for animals, further reducing livestock input costs and inflationary pressures on milk, egg and meat.