Commodities

Soaring Food Prices

30 May 2022 • 5 mins read
  • Agricultural prices continue to rise, driven not just by supply side challenges posed by Covid-19 labour restrictions and drought but also the Russia-Ukraine war.
  • Food security has emerged as the next crisis alongside energy security, raising the risk of heightened social tensions in EM countries.
  • Rising food protectionism risk exacerbating food inflation.

As agricultural prices continue to rise, food inflation has become just as pressing as oil price increases. Food security has emerged as the next crisis alongside energy security, raising the risk of social unrest in low-income emerging market (EM) countries. Low-income EM countries are particularly affected by rising food prices since these constitute relatively large shares of consumption baskets.

Food inflation has become just as pressing as oil price hikes, especially for EM countries

Source: FAO, Bloomberg, Bank of Singapore

Agricultural prices have been rising throughout the pandemic, driven by supply side challenges posed by Covid-19 labour restrictions and drought. Russia’s invasion of Ukraine has caused further significant supply disruptions of agricultural commodities, not just in the form of supplies of grain and sunflower oil but also affecting food prices by curtailing exports of fertilisers. High food inflation is likely to weigh more on EM consumers, particularly in North Africa and the Middle East, given currency depreciation and import share from the Black Sea region.

Russia and Ukraine collectively supply nearly 30% of globally traded wheat and 15% of global corn exports. The war has disrupted Ukraine’s grain shipments as seaports remained closed while new crop production is jeopardised by the conflict. Fewer grain shipments are also leaving Russia now, due to reduced trade finance, market boycotts and constrained routes. A sharp rise in the price of fertilisers – of which Russia is the world’s largest exporter – is likely to affect agricultural yields elsewhere during the coming season. Apart from a few European countries, a big chunk of Russian fertiliser exports goes to major agricultural producers such as Brazil, the US, and China, magnifying the risks to world food supplies.

Soaring food prices have led to an increase in exporters restricting overseas sales to cope with high prices that have been exacerbated by the war in Ukraine. These protectionist steps have only driven up the food import bill further for countries dependent on international markets for important food commodities. A range of policy interventions, impacting the trade of agricultural commodities, have been introduced, now covering more calories (as a percentage of global trade) than in the 2008 crisis, according to the US think-tank International Food Policy Research Institute.

Export restrictions have risen to levels not seen since the 2007-08 food crisis

Source: IFPRI, Bank of Singapore

The impact of higher grain prices is mitigated for EM Asia by its key staple being rice, as rice price pressures have been more subdued. But food security concerns are not any less pressing across EM Asia. An early summer heatwave prompted the Indian government to lower its estimate of wheat production and impose export controls on wheat. India also added sugar export restrictions. Malaysia has restricted poultry exports. Indonesia, which accounts for about 50% of global exports of palm oil, has also temporarily stopped its outgoing shipments. Export restrictions on agricultural goods often lead to market price speculation on scarcity, exacerbating food inflation.

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Author:
Sim Moh Siong
Commodity Strategist
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