The world and India are witnessing a upsurge in food inflation. Between September 2021 and April 2022, consumer food price inflation in India increased from 0.68% to 8.38% year-on-year. And with the Food and Agriculture Organization of the United Nations (FAO) food price index reaching historic highs, it has brought back memories of the last great commodity inflation. This was during the period from the mid-2000s to around 2012-13, briefly interrupted by the global financial crisis of 2008-09.
But there is a difference between the two episodes of food inflation, especially in India.
The first was demand-induced structural inflation, driven by rising incomes. Rising real incomes, including of poor and lower-middle-class households, have led to falling per capita consumption of cereals and sugar (which essentially provide calories) alongside growing demand for foods containing proteins (milk, legumes, eggs, fish and meat) and micronutrients (fruits and vegetables). This food diversification has also had an impact on inflation. Between 2004-05 and 2012-13, the cumulative increase in the wholesale price index was 93.1% for sugar, 99.9% for cereals and only 48.1% for edible oils (1 g of fat provides 9 calories, more than the 3-4 calories from wheat atta and sugar). The same proportion was 108.1% for milk, 110.1% for vegetables, 141.3% for legumes and 144.5% for eggs, meat and fish.
From time to time
Current food inflation, on the other hand, is idiosyncratic and driven by a supply shock. And it is more an inflation of the prices of “calories” than of “proteins”, a term coined by former Deputy Governor of the Reserve Bank of India, Subir Gokarn.
Since August 2020, when global demand began to return with the gradual lifting of Covid-19 lockdowns, the FAO vegetable oil, grain and sugar price indices have climbed 141%, 71% and 50% respectively. %. These exceed the cumulative rise of 32% in the price index for meat and 44% for dairy products over the same period to April 2020.
Moreover, as Table 1 shows, much of the above inflation predates the Russian invasion of Ukraine. Even before the war, Ukraine experienced drought in 2020-21, while Russia in December 2020 announced export restrictions on wheat, corn, barley, rye, sunflower and rapeseed to stifle domestic inflation. Ukraine’s drought and Russian export controls — coupled with pandemic-induced shortages of migrant workers in Malaysia’s palm oil plantations — have driven up global prices for edible oils and grains.
The war, which began on February 24, has only made matters worse – cutting supplies to the two countries that hold a substantial share of world exports of wheat, maize, barley and sunflower oil . Indonesia has added fuel to the fire by imposing restrictions (even a temporary ban) on palm oil shipments to contain local inflation (similar to what Russia did earlier for wheat ) and soaring crude oil prices, making it all the more attractive to divert sugar, corn, palm and soybeans for biofuel production.
However, there was no such significant inflation in protein. The FAO’s dairy and meat price indices have risen, but this has more to do with the rising cost of food ingredients (maize, barley, rye and oilseed meal), as opposed to demand driven by rising incomes. Since mid-March, prices for skimmed milk powder (SMP) and anhydrous milk fat on the bi-monthly auction platform Global Dairy Trade have fallen by more than 9.4% and 15%, respectively. This indicates demand destruction as buyers resist unsustainable prices at today’s low or even negative real income growth rates.
Impact on India
The transmission of higher global calorie inflation to prices in India, however, was largely limited to vegetable fats. No wonder, given that more than 60% of the country’s edible oil consumption needs are met by imports. From the attached chart, it can be seen that retail edible oil inflation reigned at levels of 20-35% throughout 2021, well before the surge in the overall price index. food for consumption from January. Interestingly, the inflation of the other two high-calorie food items – cereals and sugar – has been relatively moderate, despite the significant increase in their world prices.
The main reason for the absence of imported inflation, at least until recently, in grains and sugar is that the country is a surplus producer of both. India’s grain and sugar exports were valued at a record $12.9 billion and $4.6 billion, respectively in 2021-22 (April-March). Furthermore, despite the shipment of some 32.3 million tonnes (mt) of cereals – including 21.2 mt of rice, 7.2 mt of wheat and 3.6 mt of maize – the overflowing stocks in public administrations nevertheless allowed the unprecedented shipment of 105.6 mt of cereals (55.1 mt of rice and 50.5 mt of wheat). ) for sale through the public distribution system.
Cereal inflation has accelerated recently. But this inflation, mainly that of wheat, is due to the loss of crop yields caused by the sudden heat wave in mid-March. In other words, desi and not imported. The transmission mechanism worked the other way here: with lower domestic production and falling stocks prompting the Center to ban wheat exports from India, international prices firmed, which translated into higher inflation for other (importing) countries.
And the proteins?
Current food inflation, as we have already noted, is more about carbohydrates and fats than proteins and micronutrients. Modal or most quoted retail prices of dals (split pulses) across India are lower than a year ago. This includes chana (Rs 70 vs. Rs 75/kg), tur/arhar (Rs 97.5 vs. Rs 110), urad (Rs 97 vs. Rs 105) and moong (Rs 98.5 vs. Rs 105). The only exception is masoor, whose modal price of Rs 90/kg is higher than Rs 85 at the same time last year, according to data from the consumer department.
In the milk sector, the fall in international prices for skimmed milk powder and butterfat also led to some correction in the domestic market. Since mid-April, dairies in Maharashtra have lowered their prices for SMP cow’s milk and yellow butter from around Rs 295 and Rs 400 per kg to Rs 270 and Rs 360-365/kg. They have further reduced the purchase price of milk (containing 3.5% fat and 8.5% solids non fat) to Rs 33-34 per litre, from Rs 35-36 until the first week of may. Prices for SMP buffalo milk and white butter are still firm, but even these are expected to decline with the onset of the monsoon rains. The summer months are the peak “lean” season for buffalo milk. Production really picks up from August, when the animals begin to calve, and peaks through winter into spring.
We can expect a similar easing in the prices of eggs and meat. Less summer heat should help reduce growth time and mortality in laying hens and broiler chickens. The poultry industry faced a huge crisis last June-July, when the cost of feed given to laying birds crossed Rs 40 per kg (from Rs 21-22 in March 2021) and that of chicks meat at Rs 50-52 (from Rs 29-30). It was thanks to de-oiled soybean meal (DOC) – the protein-rich food ingredient obtained as a by-product of oil extraction – whose prices soared. The Centre’s decision in August allowing the import of up to 12 lakh tonnes of GM COD has stabilized layer and broiler feed prices at levels of Rs 30 and Rs 45/kg.
Overall, although there has been a recovery in demand since the reopening of hotels and other ongoing lockdown restrictions, it is unlikely to trigger ‘protein inflation’. The pull of demand through rising incomes is not strong enough this time around.
In the fruit and vegetable sector as well, the drivers of inflation (Table 2) were mainly supply shocks rather than demand factors. This year’s mango crop was hit by a double whammy of unseasonal rains in December-January (causing flower drop) and early summer (not allowing enough time for formation and growth fruits). The same thing happened for lemons, during flowering (in January) and towards harvest (in March-April).
At the same time, there is not much inflation in onion, potato and also watermelon, cucumber, pumpkin, okra/ladame, squash and other summer vegetables. Tomato prices are high, but not unusually high for this time of year. Here again, the incessant rains contributed to disrupting market arrivals, particularly in the South.
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Food inflation resulting from war, drought, unseasonable rains and heat waves is different from structural demand pull factors. Inflation no longer only concerns the former, but also foods providing mainly calories rather than proteins, vitamins and minerals. This, to some extent, makes it worse than previous inflation, which in Gokarn’s words was “an inevitable consequence of growing wealth”.
While high prices would also induce a supply response from farmers, much depends on the monsoon. Last year’s monsoon was “normal” overall, but marked by a long period of drought in July followed by heavy rains from the end of August, followed by heavy downpours out of season in December-January. One has to see how normal the “normal” monsoon forecast by the Indian Meteorological Department turns out to be.
Meanwhile, the good news is that the Center on Saturday cut excise duty on diesel by Rs 6/litre and many states also announced cuts. This should have an additional salutary effect on food inflation in the coming days.