After sharp increase for two consecutive years, food prices have recorded a decline of 14% in 2023 as per Food & Agriculture Organization (FAO). However, prices are still about 26% higher than 2020 figure. Of the five sub-groups, sugar continued to record inflation and is up 82% from its 2020 level now. Here is a look at the inflation breakdown and factor affecting it.
FFPI (FAO Food Price Index) comprises of five constituents – Cereals, Edible Oil, Sugar, Dairy and Meat. Cereals, the staple food, further comprises of three sub-groups – wheat, rice and coarse grains. As per FFPI, edible oil has recorded maximum decline of 33% followed by dairy products with decline of 17% and cereals by 15%. Cereals has recorded sharp divergence across sub-groups with wheat and coarse grains prices declining by 35% and 28% whereas rice prices rose by 22%. Interestingly, between 2020-22, while wheat and coarse prices had risen by 65-70%, rice prices had declined, although marginally by 3%. Edible oil prices, which showed maximum decline had risen by as much as 89% between 2020-22. The only commodity group to have recorded price increase in 2023 is sugar at 27%, up 82% since 2020. While monthly price rise has come down from 48% in Sept’23 to 15% in Dec’23, FAO projects a decline in production during 2023/2024 which may keep the price elevated. Meat prices, the livestock-based group, is less prone to output fluctuation and recorded moderate decline of 4%, after an increase of 24% in the previous two years. Across the five groups, edible oil shows maximum volatility in monthly inflation. Over last ten years, edible oil inflation has varied from 125% in May’21 to a decline of 48% in March’23. The lowest variation is for Meat with price varying from -23% to 24%. Standard deviation for edible oil is 29% whereas for meat, it is one-third of it.
The index is calculated based on the price movement of 23 commodities within these product groups. The index tracks the price movement of traded goods and not within different countries which could be different. The five groups are assigned a weight equal to their share in global trade and not total production. So, even if a food group’s share in total production is high, its weightage in index would be low if the amount traded is low. Thus, meat has the highest weightage at 33% against 29% for cereals even though global production of meat is just about 360 million tons against 2,800 million tons of cereals. The weights are revised periodically to incorporate the changes in trade pattern. Total food produced globally stands at about 5 billion tonnes of which, 982 million tons is traded fetching exporting nations nearly $2 trillion.
While higher production in major exporting countries has helped ease prices, it is also due to lower supply chain pressure, lower exports restrictions and high inventory across importing nations. However, some of the commodities like rice have recorded lower production and witnessing export restrictions. An important aspect of global food price inflation is that prices are more volatile in case of commodities where global trade as a proportion of total production is low. This becomes clear from an example. Assume a commodity where trade is 10 tons and domestic consumption of exporting countries is 90 tons. So, if production declines by just 2%, surplus available for trade would be only 8 tons after keeping aside domestic requirement of 90 tons. This would imply trade decline of as much as 20%. (For most food items, governments put export curbs in case of production decline to ensure that domestic availability is not affected and inflation does not go up. For instance, ban on onion exports imposed by the central government recently due to decline in production). The same logic applies even in case of excess production. The global market can, therefore, be termed as sellers’ market, much like crude oil except that there is no cartel here and sellers cannot reduce market supplies in case of surplus. Among major food groups, share of trade in rice is lowest at less than 10% of total global production followed by coarse grains and wheat at 16% and 25%. For edible oil and sugar, trade accounts for fairly large share at about 60% and 35%.
The hypothesis of lower trade share causing higher volatility is corroborated by the figures for 2022/23. As per FAO data, edible oil’s production increased by 20 million tons or 3.4% in 2023 (Nov’22-Oct’23). This was sufficient to generate significant surplus leading to increase in trade of almost 10% and bring down prices by over 30%. In contrast, in 2021 (Nov’20-Oct’21), trade fell by 1.8% leading to sharp price increase of as much as 60%. Similarly, in case of rice, production has declined by about 6 mn tons or 1.2%. As a result, trade, which is just about 10% of total production, declined by sharp 5.2% leading to jump of 22% in prices. With production projected to remain below 2022 level in 2024, prices may not see any significant decline going forward. However, the reasoning does not seem to working in case of sugar. Despite an increase of 2.2% in production, trade rose only marginally by 0.5% and prices have risen by sharp 27%. Possible reason for this is increase in consumption leading to higher demand both in exporting and importing nations and projection of lower production in 2024 keeping prices firm.