Cheap food has been taken for granted for almost 30 years. From their peak in the 1970s crisis, real food prices steadily declined in the 1980s and 1990s and eventually reached an all-time low in the early 2000s. Rich and poor governments alike therefore saw little need to invest in agricultural production, and reliance on food imports appeared to be a relatively safe and efficient means of achieving national food security."
The above lines appeared in the preface to a research monograph by the International Food Policy Research Institute in 2010, following a spectacular rise in global food prices beginning 2008, which peaked in 2011 and went on a downward spiral touching the lowest in a decade in 2016. India wasn’t insulated. The drop in farm-gate prices and hit to incomes led to widespread protests by farmers demanding better crop prices and loan waivers. In the summer of 2017, six farmers were shot dead in police firing after an agitation turned violent in the agriculturally prosperous Mandsaur district of Madhya Pradesh.
The covid19 pandemic reversed the trend. In 2021, global food prices, as measured by the United Nation Food and Agriculture Organisation’s (FAO) food price index, surged 28% year-on year, the highest in a decade. Cereal prices rose 27% in a year led by higher prices of wheat and maize, while edible oil prices rose 66% in a year, marking an all-time annual high, according to the FAO. In comparison, the surge in meat (13%) and dairy (17%) prices were modest, but international sugar prices rose by a staggering 37%.
The price rise was caused by a myriad of factors: supply disruptions and higher freight prices due to lack of shipping containers, adverse weather in different parts of the world, labour shortages and something less talked about or spoken of: China’s shopping spree.
According to a NikkeiAsia analysis of data from the US Department of Agriculture, China—which is home to a fifth of the world’s population—is expected to have 69% of the world’s maize reserves, 60% of its rice and 51% of its wheat reserves, by mid-2022. The stockpiling is driven by China’s priorities: to reduce dependence on major food exporters like the US, avoid future supply disruptions and also because its domestic production was unable to keep pace with consumption.
It’s no surprise that the massive stockpiling by China happened under the watch of president Xi Jinping. “Mao Zedong and China’s Communist Party staked much of their credibility on ‘solving’ hunger, but mid-century famines took the lives of tens of millions… Those memories have informed Xi’s policies since the start of his regime," Bloomberg columnist Adam Minter wrote in a piece early January, underlining how China views food and agriculture as a strategic sector.
A mixed bag
How did soaring global food prices impact India?
Due to an acute dependence on edible oil imports, India’s import bill shot up 63% to a record ₹1.17 trillion during oil year 2020-21 (November-October), up from ₹71,625 crore the year before. However, domestic oilseed growers benefitted from the surge in prices of native oils like mustard and groundnut. Further, India’s rice exports crossed ₹65,405 crore in 2020-21, a 44% increase year-on-year. Overall, farm exports surpassed ₹3 trillion mark in 2020-21, registering a robust 23% growth year-on-year.
On the flip side, the rise in global food prices worsened the hunger situation. As the pandemic triggered brutal recessions, 30% of the world’s population lacked year-round access to adequate food, said a July 2021 UN report on food security. In India, higher food prices burnt a hole in consumer pockets, disproportionately hurting the poor, who were also hit by falling wages and pandemic-induced job losses.
The government had little choice but to take a hit on account of food subsidy: it spent over ₹2 trillion to provide additional grains under the national food security scheme, in addition to the annual food subsidy bill of over ₹1.3 trillion. Further, according to CRISIL Ratings, India’s fertiliser subsidy bill is estimated to surge by 62% in 2020-21 following an unprecedented rise in prices of natural gas and other raw materials, despite 10% lower sales year-on-year.
From farmers growing sugarcane, oilseeds and rice to consumers who had to slash purchase of staple food items, how global food prices move in 2022 will determine the well-being of the majority of Indian population. Will surging crude oil prices, provide a tailwind to already high food prices? Can India export more sugar at higher prices which may lead to faster payments by mills to growers? Will remunerative edible oil prices push farmers to grow more mustard and groundnut shunning water-guzzling cereals? Much of these will be determined by a myriad of factors: from geopolitics and weather across the world to how the pandemic shapes up in the coming months.
What’s the common factor during the 2008-2011 global food price rise and now? The economic stimulus and liquidity provided by central banks then and now led to more inventory building and speculative trading, said Siraj Chaudhry, CEO of National Commodities Management Services Ltd., and former chairman of Cargill India. “The latest round of price surge was triggered by uncertainty prompting countries to stock up. But as it is often said, and it’s true, the cure to high prices is higher prices which pushes farmers to grow more (leading to a price correction). Besides, history shows that periods of food price surges are relatively short-lived," Chaudhry added.
Going ahead, crude oil prices could be a determining factor. Oil prices hit seven-year highs mid-January spurred by a recovery in mobility levels, worries over spare capacity among key producing nations, slow progress in getting Iran’s sanctions lifted and tensions over Ukraine which is a key commodity transit hub, S&P Global Platts said in a note on 24 January. Currently, Brent crude prices are close to $89 a barrel and analysts expect it to touch $100 by summer as demand returns to pre-pandemic levels. According to Bank of America, Brent might even touch $120 by July.
Any increase in crude oil prices have a direct bearing on food prices since it raises shipping and input costs (fertilizers and fuel) and drives diversion of crops to produce bio-fuels. An analysis by JM Financial (in February 2021) for the period spanning 1962-2019 showed that growth in global food prices closely mirror the trend in crude oil prices, and not global farm output which has been largely resilient over the years at an aggregate level.
Commodity outlook
A positive fallout of the rise in edible oil prices is farmers’ planting more area under native oilseeds like mustard while reducing area under cereals like wheat and rice. In the ongoing winter crop season, mustard was planted in a record nine million hectares—a near 50% jump from the five-year-average of six million hectares. The growth in mustard plantation comes on top of an estimated 15% increase in production of Kharif oilseeds like soybean and groundnut which were planted in June-July last year.
Despite the increase in production, consumer prices are unlikely to normalize to pre-pandemic levels anytime soon as India continues to be heavily dependent on imported edible oils. “We are expecting prices to cool down by the second half of 2022 but not to levels seen two years back," said B. V. Mehta, executive director at the Solvent Extractor’s Association, the vegetable oil industry lobby. Mehta added that a host of factors will determine international prices, from the weather situation in Latin America and India to crude oil prices trends and whether labour shortages persist in Malaysian palm oil plantations.
“Currently, about 20% of vegetable oil production globally is used for biodiesel conversion. Higher crude oil prices will lead to a higher diversion, pushing edible oil prices up," Mehta said.
Unlike edible oils, India, which produces more sugar than it consumes, was able to export a chunk of its surpluses following the surge in international price as two of the largest exporters of sugar, Brazil and Thailand, saw significant drop in production in the past two years (about 10 million tonnes).
“These top exporters are again seeing a sub-normal production situation. Overall, global supply of sugar is estimated to see a deficit of about four-five million tonnes (mt), which is why Indian mills are waiting for global sugar prices to firm up before getting into more export contracts," said Abinash Verma, director general of the Indian Sugar Mills Association. Higher crude oil prices also mean more conversion of sugarcane to ethanol in countries like Brazil pushing raw sugar prices up, Verma added.
Like last year, India’s rice exports are looking robust in 2021-22. Exporters estimate a record 20mt could be exported this year, up from 17.7mt in 2020-21, and 9.5 mt the year before. “The outlook for the year 2022 is impressive for grain exports with India emerging as an undisputed leader in global rice trade, and a reliable mid-size exporter of maize and wheat in recent years," said S. Chandrasekaran, a Delhi based trade analyst.
Inflation worries
However, India’s robust exports of key commodities like cereals and sugar, coupled with continued imports of edible oils at elevated prices, means consumer prices for these commodities is unlikely to soften significantly.
Retail food inflation in 2021 rose to a high of 5.2% in June (year-on-year) before falling to a low of 0.7% in October. In December 2021, it again climbed up to 4%, a six-month high, and could see a further increase due to higher fuel prices in the coming months.
The moderate food inflation in 2021 was a consequence of base effect since retail food inflation hovered between 9-12% the year before (May-November), after the first wave of covid-19 pandemic hit India and the government announced a stringent lockdown in May 2020.
Despite a hit to their incomes, consumers are still paying a high price for staple food. For instance, a comparison of prices of key food items between January this year and 2020 show that mustard oil prices are higher by 67% followed by tur dal (18%), milk (15%), sugar and rice (both 10%). Like every year, in 2022 as well, the scale of winter harvest beginning March, and the annual south-west monsoon will remain crucial factors determining food inflation.
“The risk to food inflation is tilted upside. Chances are more inflation will go up than come down as input costs increase with higher prices of fuel and fertilizer, and the base effect disappears," said Dharmakirti Joshi, chief economist at CRISIL. Joshi added that another key factor is whether the monsoon will turn out to be normal in 2022. If it does, that will be the seventh year of normal rains in a row, the chances of which are low.
Ahead of elections in key states like Punjab and Uttar Pradesh, the government has reduced import taxes on edible oils, announced duty-free imports of several categories of pulses and desisted from hiking fuel prices. But even hawkish inflation management might not be able to handle the approaching storm, warns Himanshu, associate professor of economics at Jawaharlal Nehru University, Delhi.
“India was in a demand deflationary phase in the past few years which dragged consumer prices. If consumer demand recovers, prices are bound to rise," Himanshu said. He added that on the food front, the government is making the mistake of sitting on massive cereal stocks at a time when prices are rising. And when fuel prices are raised after state elections are over, retail prices may rise significantly. “Soon, India could move into double digit inflation territory as retail prices catch up with the already galloping wholesale inflation."
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