Explained: will food get more expensive?
Brent crude prices broke through the psychological level of $ 75 a barrel last week and closed at $ 76.18 on Friday, the highest since October 29, 2018. As international oil prices rise – Brent continues to rise. was trading at just over $ 41 / bbl a year ago – is fully passed on to Indian consumers, it raises a related question: will food follow fuel?
Trends: India and the world
Table 1 also shows that world prices for major agricultural products are now well above their levels of a year ago. The Food and Agriculture Organization of the United Nations (FAO) World Food Price Index (FPI) reached 127.1 points in May, its highest value since September 2011.
But unlike fuel, the increase in global food prices is not reflected in what Indian consumers pay. Annual consumer food price index (CFPI) inflation in India, at 5% in May, was well below the 39.7% year-on-year increase in the FAO-FPI index for the same months (see graph). While the ICSC and FAO-FPI inflation rates moved more or less in tandem until around February 2020, the period that followed saw a marked divergence. Global food inflation collapsed after March 2020 when the novel coronavirus pandemic struck. Retail food inflation in India, on the other hand, hovered around double digits until November. It then eased, at which point the recovery in world food prices accelerated.
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Why the divergence
What explains the above divergent trends? To do this, we must first understand the drivers of global and national inflation.
The surge in international food prices from September to October is due to the return of demand with the unblocking of economies, even as the restoration of supply chains takes time. This was further facilitated by Chinese storage (to build up strategic reserves, as well as in anticipation of new corona epidemics) and production deficits induced by the dry weather in Brazil, Argentina, Ukraine, Thailand and even in the USA.
India, on the other hand, had good monsoons in 2019 and 2020, making it the only agricultural power outside of Australia and Canada not to have faced severe weather problems. Unsurprisingly, food inflation started to decline from December with a bumper kharif harvest after the monsoon was harvesting and entering the markets.
Table 2 provides a more detailed breakdown of retail food prices in the domestic market. These have increased largely in edible oils and legumes, which are agricultural products that India imports significantly. The country imports 13 to 15 million tonnes (mt) of edible oils each year and produces only 7.5 to 8.5 mt. In pulses, national production has increased from 15-16 mt to 22-23 mt over the past five years. Although imports have also been halved to 2.5-3 mt, they still exert a considerable influence on domestic prices. In the case of edible oils and pulses, there has been an automatic transmission of prices from international to domestic markets, similar to that of fuel. But the same is not true for basic grains, sugar, milk and vegetables.
The relatively low domestic inflation of food products other than edible oils and pulses is attributable to two main factors. The first is, of course, the formidable monsoons which have ensured that there are no shortages on the supply side in most of the crops that are mainly produced in the country. The second factor has to do with the collapse in demand following the successive blockages triggered by Covid. With hotels, restaurants, confectionery, inns and canteens closed or operating at low capacity, in addition to the lack of wedding receptions and other public functions, the demand for food has been mostly limited to households. . Even this has been affected by many households who have suffered job and income losses due to the contraction in overall economic activity.
And then: the key factors
Food inflation in India in the coming months is expected to be influenced by four determinants. The first concerns international prices, which, as we have already noted, are important for edible oil and pulses. It is not clear whether the current surge is the result of temporary disruptions on the supply side or the harbinger of a larger “commodities super-cycle” of the kind seen over the last decade. 2007-2013 period. Table 1 shows that the recent peak in world prices for most agricultural products was reached in May. The drop since then is especially noticeable in edible oils, which have been really on fire.
The second, and probably the most important, determinant is the progression of the monsoon. While the country received 74% excess precipitation in May, the southwest monsoon season (June-September) itself has so far recorded 18% above-average precipitation. This should encourage plantations by farmers and, in addition, expand the areas cultivated with oilseeds and pulses. As production is a function of both area and yields, much of it also relies on the July-August rains when the Kharif crops are in the vegetative stage. A third successive good monsoon should effectively put the brakes on food inflation.
The third determinant is the extent to which increases in the cost of fuel are passed on to consumers. Its scope may be limited in today’s environment where demand is limited. Take milk, where dairies incur costs for its transport, first from collection centers in villages to processing factories in mini-trucks with a capacity of 2,000 to 3,000 liters. The pasteurized and packaged milk is then shipped from factories to markets in larger 10,000 to 15,000 liter tankers. Most dairies have not increased their prices for bagged milk, despite the diesel prices soaring by Rs 15-16 / liter in the past year alone. What many have done instead is lower the prices paid to farmers. Purchase prices for milk containing 3.5% fat and 8.5% solids non-fat in Maharashtra have dropped from Rs 31-32 per liter in February-March (before the second wave) to 21-25 Rs now. Thus, the pass-through of the cost of fuel was made not by an upward revision of the prices paid by consumers, but by a fall in the prices paid to producers.
If there is general growth and demand picks up – it is not known when this will happen – it is likely that processors, transporters and even farmers will pass the increased fuel costs on to consumers.
The last determinant is political. The NDA government was hawkish on food inflation during its first term. The annual increase in the ICSC was only 3.3% on average from June 2014 to May 2019. The same inflation averaged 7.4% during his second term from June 2019 to May 2021. The same inflation averaged 7.4% during his second term from June 2019 to May 2021. protests against its farm laws have forced the government to raise minimum support prices. as well as securing record quantities of wheat and paddy. With the upcoming state elections in Uttar Pradesh, it remains to be seen to what extent the increase in the price of sugar would allow factories to pay more to sugar cane producers.
The author is the National Rural Affairs and Agriculture Editor of The Indian Express and currently on sabbatical as a Senior Researcher at the Center for Policy Research, New Delhi.