Global food prices hit all-time high amid Covid, Ukraine war; supply shortages worsen

The release of the benchmark gauge for international food prices came on a day when the Reserve Bank of India kept its key policy interest rates unchanged. This, even as its monetary policy committee warned about “elevated global price pressures in key food items” imparting “high uncertainty” to the inflation outlook and “warranting continuous monitoring”.

The FAO index, which is a weighted average of world prices of a basket of food commodities over a base period value (in this case, taken at 100 for 2014-16), has exhibited huge volatility in the last two years through the Covid-19 pandemic and now the Russia-Ukraine war.

The index had crashed to a four-year-low of 91.1 points in May 2020, due to demand destruction triggered by the pandemic-induced lockdowns across countries. But as demand returned with governments lifting economic activity and movement restrictions, supply chain disruptions – from shortages of everything, from harvesting labourers to packaging materials and shipping containers – came to the fore.

The supply shortages have worsened with the Black Sea region tensions, leading to the index moving up almost 24 points or 17.5% between January and March (see chart).

The FAO’s cereal and vegetable oil price indices hit record highs of 170.1 points and 248.6 points, respectively, in March. That isn’t surprising, given Russia’s and Ukraine’s combined share of 28.3%, 19.5%, 30.8% and 78.3% in global exports of wheat, corn (maize), barley and sunflower oil, respectively. All these were projections for 2021-22 made by the US Department of Agriculture in early-February, before the Russian invasion happened.

Since then, port closures in the Black and Azov Seas, plus Russian banks being cut off from the international payments system, have resulted in massive shipping disruptions from this key agri-commodities supply region.

FAO’s meat and dairy price indices, too, averaged 120 points (an all-time-high) and 145.2 points (highest since April 2014), respectively in March. These have possibly been driven by the increased cost of cattle feed ingredients (maize, soyabean, groundnut, mustard and cottonseed oilcake) and prices of animal fat (butter, ghee, beef tallow and pork lard) tracking vegetable fats (especially palm oil). Besides, lower milk production has been reported from major suppliers, including New Zealand, Western Europe and the US.

From India’s standpoint, the comfortable level of public wheat and rice stocks – way above the required minimum buffer norms – should provide some insulation against soaring international food prices. Further, high global prices have enabled the country’s agricultural exports to grow by 19.9% and reach a historic high of $50.21 billion in 2021-22.

But the downside to this is that farmers are also paying much more for diesel, fertilisers and crop protection chemicals – whose prices have also gone up alongside Brent crude and other international commodity prices. The real challenge – whether it is to do with availability of fertilisers or monsoon rains – will come in the ensuing kharif planting season from June.