Tuesday 09 February 2021

Points experts

Food inflation: what are the consequences?

In recent months, the price of some agricultural products, and in particular cereals, has been rising sharply. This sequence is obviously reminiscent of that of 2010. The causes and consequences of this acceleration of prices of agricultural raw materials are multiple. This is no doubt one of the topics to monitor in 2021.

The prices of some agricultural commodities are on the rise

Food prices have accelerated markedly over the past three months. Thus, the global food price index produced by the FAO (Food and Agriculture Organization) is at its highest since the end of 2014. This price increase does not affect all food products and it is above all the price of cereals and vegetal oils which has increased sharply recently. On the other hand, the pressures remained contained for sugar and meat for the moment. This streak is reminiscent of the rise in food prices that followed the 2008 financial crisis

Different reasons behind the price increases of agricultural commodities

In the long-run, agricultural commodity prices are determined by the conditions of supply and demand and their trend has been downward since their peak in the 1970s. On the other hand, in the short-run, other determinants intervene such as climatic conditions, and in particular droughts and floods, plant and animal diseases and changes in trade policies (customs duties, quotas, etc.). The African swine fever epizootic in China in 2018-2019 which decimated the hog population and which caused a sharp rise in pork prices provides a good illustration of this.

Climate change, which increases the likelihood of extreme weather events, could lead to larger variations in agricultural prices around the long-term trend. Incidentally, the African continent appears to be particularly affected by climatic phenomena , with longer and more severe droughts linked to the increase in the frequency and strength of La Niña events.

If we focus on the price increases of recent weeks, the factors differ depending on the commodity. Regarding edible oils, it is above all the price of palm oil that is soaring with the decision of Indonesia (where more than half of world production is located) to sharply increase the taxation of this commodity. Indeed, Indonesia increased both tariffs and export duties. The export tax is progressive All comments and analyses reflect CPR AM’s view of market conditions and its evolution, according to information known at the time. As a result of the simplified nature of the information contained in this document, that information is necessarily partial and incomplete and shall not be considered as having any contractual value. and ranges from $ 55 to $ 255 per ton depending on the price and was $ 180 for the month of December for example (to get an idea of the magnitude of the tax, the price per ton was $ 600 in mid2020). This is one way for Indonesia to finance its biofuels program. The price of palm oil is at its highest for 8 years.

Regarding cereals, the prices of corn, soybeans and wheat are back to levels not observed since 2013/2014. Several reasons explain the phenomenon:

Several countries are buying large quantities of cereals to rebuild strategic reserves, which they drew on during the Covid crisis.

  • China is rebuilding its pork production capacity (with swine flu, the number of pigs fell by two thirds between 2018 and 2020 and China had to import 10 million tonnes of pork in 2020, + 60% compared to 2019), which increases its demand for soybeans to feed livestock. In particular, US soybean exports to China have risen sharply in recent months.
  • The FAO indicated in its quarterly report “Crop Prospects and Food Situation” of December 2020 that the La Nina meteorological phenomenon had degraded culture conditions in the United States.
  • In order to limit domestic inflation, Russia has implemented an increase in export taxes for wheat of 50 euros per tonne from March 1 to June 30, while Russia is by far the world's largest exporter of wheat. Russia will also implement a tax of 10 euros per tonne for barley exports and 25 euros for corn exports. Russia would consider making these export taxes permanent, but possibly with a different formula.
  • Argentina has suspended its corn exports until February 28 (it is the 3rd largest exporter in the world), in part to ensure that the meat industries will have enough grain and to limit price increases...

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Laetitia Baldeschi

Head of Strategy, CPR AM

Bastien Drut and Juliette Cohen

Chief Thematic Macro Strategist ; Strategist