Supply shocks threaten gains against global food inflation
Global food prices may creep up again due to wars and export bans, while the ill effects of climate change loom on the horizon.
If economists could predict external shocks, a month back, this article would have had a completely different flavor, for food inflation, which had made consumers’ wallets lighter for over a year, was finally showing signs of reversing.1 In June, global food prices—according to the Food and Agriculture Organization’s (FAO) food price index—had dropped to levels last seen in April 2021.2 The reduction in food inflation was widespread, although price levels in many countries were still elevated compared to prepandemic levels. But, with energy prices also on a decline, it suddenly seemed that the saga of high food inflation that had plagued nations for much of 2022 and 2023 had finally run its course.
Then came July, and with it two major supply shocks. First, Russia pulled out of the Black Sea Grain Initiative—a deal brokered by Turkey and the United Nations—that had ensured the flow of Ukrainian food exports.3 The deal had eased supply concerns, especially for low-income, food-importing nations after global cereal prices spiked in 2022. Now, with the deal collapsing, wheat prices are on the rise again in major global commodity exchanges. The second shock was India’s export ban on certain qualities of rice to protect domestic supplies and curb rising prices at home.4 Both these events have stoked fears about the supply of two key staples—rice and wheat—and with it, a return to worries about the cost of buying food.
Global food prices are down from their peaks in 2022
Food prices had gone up sharply last year following Russia’s invasion of Ukraine. Russia and Ukraine are major producers of grain and sunflower; hence, the war prompted an upward spiral in global food prices in 2022.5 Transportation costs also shot up at that time due to a surge in energy prices. The rise in prices of natural gas, in turn, pushed up prices of fertilizers, especially nitrogen-based ones. Other factors also drove up global food prices in 2022. Major food producers like India (rice) and Indonesia (palm oil) restricted certain exports to protect economically vulnerable households at home. Changing weather patterns didn’t help either, impacting agricultural production.6 Finally, widespread avian flu in late 2022 and early 2023 added surging egg and poultry prices to the list.7
Much has changed, however, since the peak of global food prices in March last year. One of the biggest contributors to easing worries about a food crisis was the Black Sea Grain Deal. Signed in July 2022, the deal allowed exports of food and fertilizer from three key Ukrainian ports in the Black Sea.8 Russia too could export food and fertilizers under this deal without inviting sanctions. As a result of this initiative, the three Ukrainian ports have shipped 32 million tons of food items over the past year. Of this, nearly 750,000 tons of grains were used by the World Food Program (WFP) as aid to Afghanistan, the Horn of Africa, and Yemen—regions that have seen hunger rise the most in recent years due to conflict and droughts.9 The program also played a key role in bringing down global cereal prices, especially for wheat: According to the FAO, cereal prices declined by 27.4% between May 2022 and June 2023.
While the Black Sea deal helped, other factors have also eased pressures on global food prices. Energy prices have declined from the highs of mid-2022. The World Bank’s natural gas price index in July, for example, is down 81.3% from its peak in August of last year.10 Production of key cereals like maize in Latin America and the United States has been strong, thereby easing pressures on supply.11 Prices of meat, especially beef and sheep, and even poultry, have also been easing in recent months.12 All of these, in turn, have helped bring food inflation down.
In the United States, inflation for food at home13 fell to 4.7% year over year14 in June from a peak of 13.5% in August last year. In Europe too, food inflation has been showing signs of easing in recent months, although figures are still much higher than prepandemic levels and compared to the United States (figure 1). That’s primarily due to higher energy prices in the bloc compared to the United States, as the region had to break away from years of dependence on cheap Russian gas last year. High wage growth amid a tight labor market has also likely contributed to keeping food inflation elevated.15 In emerging economies too, the spike in food prices has eased, on average, but there is strong variation within this bloc (figure 2).
Two shocks sour the mood in July
If consumers across the globe thought that food inflation had eased, July had two shocks in store.
The first of these came on July 17 when Russia walked out of the Black Sea Grain Initiative.16 If that wasn’t enough to worry global food markets, it also bombed grain storage facilities and ports in Ukraine along the Black Sea.17 Can Ukraine use alternative routes? It certainly can. But it’s going to be more expensive, which means that prices may increase even if Ukrainian food items reach international markets. And the route isn’t without risks either, as Russia has targeted port infrastructure along the river Danube as well—a key transit point for shipments, including grain, to Poland.18
With the Black Sea initiative collapsing, global wheat prices have gone up. Between July 12 and July 25, the S&P GSCI wheat index rose 16.3%.19 Unsurprisingly, the FAO’s wheat price index was up 1.6% in July from the previous month—the first such monthly increase since October 2022.20
The second shock to global food markets came from India. On July 20, the country restricted exports of non-Basmati varieties of white rice due to worries about high domestic rice and wheat inflation (figure 3).21 The two staples account for about 6% of the average consumer basket; for low-income households, the share is likely much higher. Worryingly, prices of other staples like milk and tomatoes have also risen in India in recent times, sparking worries among policymakers who have warned about risks to agricultural output from El Niño.22 This isn’t India’s first restriction on rice esports; in September 2022, the country had imposed a 20% export duty on white rice, paddy, and husked rice.23
India accounts for nearly 40% of global rice exports, followed by Thailand, Vietnam, and Pakistan (whose combined share in 2022 was less than that of India).24 The latest ban would effectively take out a little over five million tons or 25% of Indian rice from international markets.25 That figure is about 4% of India’s total production of rice in the fiscal year from April 2022 to March 2023 and is expected to replenish declining domestic stocks this year.26 Unfortunately, India’s ban comes at a time when the preexisting rice supply is already stretched due to weather-related disruptions this year. Rice prices have, therefore, gone up with the FAO’s rice price index, rising 2.8% in July from June to levels last witnessed nearly 12 years back.
Low-income economies will bear the brunt
Whether these shocks push global food inflation up depends on their longevity. India’s rice export ban is unlikely to be reversed till food inflation declines. Moreover, in India, high food prices are a key political sticking point, given the large number of low-income households in the country and their voice in the electorate.27 With national elections due in the first half of 2024, it is unlikely that the federal government will prioritize global supply concerns over domestic price pressures.
Similarly, Russia is not expected to return to the negotiating table soon with the war in Ukraine intensifying. Food exports from Ukraine will, therefore, not resume to levels that existed before the deal broke down. That’s unless the warring parties sign a peace accord, or at least revive the Black Sea initiative in its original form or create a new one. Currently, both scenarios appear highly unlikely in the short term.
Food-importing nations, especially developing ones, will be the most worried about these supply shocks. According to the International Rescue Committee, the breakdown of the Black Sea initiative puts at risk East Africa’s grain imports, nearly 80% of which comes from Ukraine and Russia, at a time when close to 50 million people in the region face food shortage.28 India’s export ban only adds to these worries, given that Africa accounted for more than 60% of India’s rice exports in 2022.29 And African countries primarily import non-Basmati rice, which will be impacted most by the new restrictions.30 It’s not just food security that is at risk. Often, rising food and energy prices combine with structural deficiencies and depreciating currencies to heap economic and political pain on nations—like what happened in Egypt and Sri Lanka last year.31 Egypt had to tap international agencies for help, while Sri Lanka had no option but to default on its debt.32
That’s not to say that richer nations will escape unscathed from any surge in food prices. Singapore is a major importer of Indian rice, while China accounts for a large share of Ukrainian wheat sales. Yet, it is likely that these countries—along with many Western nations—will be better placed to tide over temporary food-price spikes than their poorer counterparts in Africa and Asia. Even within advanced economies, however, a long-term price surge, will hit poorer households more—just as it happened last year.33
Don’t forget the climate
Unfortunately, political challenges are not the only factors weighing down on food security. Changing climate patterns pose major risks for agricultural output and yields across nations.34 The world over—and more so in poorer nations—farmers are dependent on the weather. With the growing number and severity of extreme events like floods, unseasonal rains, droughts, storms, and extreme heat, food supply shocks will likely increase. Maybe that’s where the elusive global coordination on climate can start. After all, families in the 21st century shouldn’t have to worry about putting food on the table.