Four Facts about Soaring Consumer Food Prices

IMF Blog, June 24, 2021

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Four Facts about Soaring Consumer Food Prices

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Bibliographic details

• Authors: Christian Bogmans, Andrea Pescatori, Ervin Prifti
• Published: June 24, 2021

Overview and context

• Rising world food prices for producers are making headlines and causing concerns among the public.
• The most recent data show a moderation in consumer food price inflation globally, but that could change in the coming months.
• If prices eventually rise again, there will likely be sizeable differences between countries; consumers in emerging markets and developing economies are more vulnerable to food price shocks.

Fact #1: Food price inflation started increasing before the pandemic

• The increase in consumer food price inflation predates the pandemic.
• Summer of 2018: China was hit by an outbreak of African swine fever, wiping out much of China’s hog herd, which represents more than 50 percent of the world’s hogs.
• Pork prices in China reached an all-time high by mid-2019, creating ripple effects on the prices of pork and other animal proteins globally.
• The situation was compounded by the introduction of Chinese import tariffs on US pork and soybeans during the US-China trade dispute.

Fact #2: Early lockdown measures and supply chain disruptions induced a spike in consumer food prices

• At the start of the pandemic, food supply chain disruptions, a shift from food services towards retail grocery, and consumer stockpiling (coupled with a sharp appreciation of the US dollar) pushed up consumer food price indices in many countries.
• Consumer food inflation peaked in April 2020—even though producer prices of primary commodities, including food and energy, were declining sharply at that time.
• By early summer 2020 various consumer food prices had moderated, pushing down consumer food inflation in many countries.
• Key transmission details:
  • It takes at least 6-12 months before consumer prices reflect changes in producer prices.
  • On average, the pass-through from producer to consumer prices is only about 20 percent.
  • Consumer food prices include shipping costs of primary food commodities, processing, marketing and packaging, and final distribution costs such as transport.

Fact #3: Soaring shipping and transport costs

• Ocean freight rates as measured by the Baltic Dry Index have increased around 2-3 times in the last 12 months.
• Higher gasoline prices and truck driver shortages in some regions are pushing up the cost of road transport services.
• Higher transport costs will eventually increase consumer food inflation.

Fact #4: Global food producer prices have rallied reaching multi-year highs

• From their trough in April 2020, international food (producer) prices have increased by 47.2 percent, attaining their highest (real) levels on May 2021 since 2014 (highest level ever in current dollar terms).
• Between May 2020 and May 2021:
  • Soybean prices increased by more than 86 percent.
  • Corn prices increased by more than 111 percent.
• Three main factors behind the recent rally in producer prices:

1. Demand for staples for both human consumption and animal feed has remained high, especially from China, as countries have stockpiled food reserves due to pandemic-related worries about food security. 2. The 2020-2021 La Niña episode led to dry weather in key food exporting countries, including Argentina, Brazil, Russia, Ukraine, and the United States, causing some harvests and harvest outlooks to fall short of expectations; as demand outpaced supply, US and world stocks-to-use ratios reached multi-year lows for some staples. 3. Strong demand for biofuels increased speculative demand by non-commercial traders, and export restrictions are additional factors supporting world producer prices.

Outlook and projected impacts

• It is plausible that consumer food price inflation will pick up again in the remainder of 2021 and 2022.
• Recent sharp increases in international food prices have already slowly started to feed into domestic consumer prices in some regions as retailers pass on rising costs.
• Projection details:
  • International food prices are expected to increase by about 25 percent in 2021 from 2020, stabilizing in 2021.
  • A pass-through of 20 percent (13 percent in the first year and 7 percent in the second) would imply an increase in consumer food price inflation of about 3.2 percentage points and 1.75 percentage points on average in 2021 and 2022, respectively.
  • An additional 1 percentage point to the 2021 global consumer food inflation could be added by the higher freight rates.

Differential country impact and vulnerabilities

• The impact will vary by country; consumers in emerging markets could experience even higher increases due to higher dependency on food imports (e.g. countries in sub-Saharan Africa and the Middle East and North Africa).
• The pass-through from producer prices to consumer prices tends to be larger for emerging markets.
• Low-income countries struggling from the pandemic face dire effects from further food inflation, risking a backslide in efforts to eliminate hunger.
• Emerging markets and low-income countries are more vulnerable because consumers in these countries typically spend a relatively large proportion of their income on food.
• An additional risk factor for emerging markets and developing economies is currency depreciation against the US dollar—possibly due to falling export and tourism revenues and net capital outflows—since most food commodities are traded in US dollars and weaker currencies raise the food import bill.

Christian Bogmans, Andrea Pescatori, Ervin Prifti — June 24, 2021 (IMF blog)