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PORTSIDE CULTURE

WHY DO DOMESTIC FOOD PRICES KEEP GOING UP WHEN GLOBAL PRICES FALL?  
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C. P. Chandrasekhar and Jayati Ghosh
July 24, 2024
Networkideas.org
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_ Rise in food prices can be traced to profiteering by large
international agribusinesses and financial speculation in food
commodity futures. Countries need domestic food sovereignty, regional
arrangements to ensure supply, and volatility controls. _

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In the past three years, global food prices have been on a roller
coaster, rising rapidly especially in the first half of 2022 due to a
speculative bubble and then falling from July 2022 onwards (Figure 1).
The phase of rising food prices led to increasing food prices around
the world, especially in lower income countries—and this was
obviously associated with growing hunger. According to the FAO
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122 million more people faced hunger in 2022 than in 2019, before the
global pandemic. Around 42 per cent of the world’s population—more
than 3.1 billion people—were unable to afford a healthy diet in
2021.

The dramatic rise in global food prices (especially for wheat) in the
first half of 2022 was largely attributed to the Ukraine War, which
was supposed to have affected supply because of Russia and Ukraine
being major wheat exporters. But it is now clear that global supply
was largely unaffected in this period, because of increased production
in other countries. Instead, the rise in prices can be attributed to
the combination of profiteering by large agribusinesses in the
oligopolistic international food trade, and financial speculation in
food commodity futures (see UNCTAD’s Trade and Development Report
2023
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details).

Some observers have argued that, even if this is true, it should not
be such a big concern because the prices came down quite rapidly
thereafter—indeed, by early 2024 the FAO’s food price index was
back to the level of two years earlier. Unfortunately, however, the
transmission of global food prices to domestic prices tends to be
uneven: domestic prices rise when the global prices rise, but they do
not necessarily come down, and may even continue to increase, as
international prices fall.

This is evident from Figure 2, which shows the behaviour of domestic
food price changes during the recent period of global food price
decline.  The FAO’s global food price index fell by 11.5 per cent
in the year up to Sep-Oct 2023, but domestic prices across all groups
of countries continued to rise. Significantly, the food price
inflation was higher, the lower the per capita income of the country.
For the Low Income Countries, food prices increased on average by just
under 30 per cent in this period. Note that this came on the back of
earlier food price increases when global trade prices increased,
together providing real and continued blows to food security. In lower
income countries, between 30 to 60 per cent of consumer spending is
devoted to food (compared to 10-20 per cent in higher income
countries), and the proportion rises for the lower income categories
within each country.

This ratchet effect in domestic food prices means that even temporary
spikes can be dangerous and reduce food security over time. So we
cannot afford to be complacent about short-term price increases, since
they continue to have medium term effects. To address this, both price
volatility in the global food markets and the transmission of price
changes to domestic markets must be addressed.

So why do domestic food prices continue to increase? There are several
reasons, which reflect the interplay between physical supplies of food
and market behaviour. The domestic availability of food is determined
by local and national production (in which weather and climate shocks,
agroecology, and conflicts all play a part) as well as a country’s
ability to import food (which can be affected by transport shocks as
well as foreign exchange constraints). It is clear that, while both
have been important, external shocks have been the major drivers in
the recent period, particularly through factors that have caused
currencies to devalue in lower income countries.

Table 1 shows that countries that experienced particularly high food
inflation in the year up to September 2023 (that is, more than 20 per
cent) also suffered very large nominal currency depreciations (here
shown relative to the IMF’s SDR, which is a basket of five major
currencies).

Sources: Calculated from

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for domestic food inflation rates
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[[link removed]] for nominal exchange
rates (relative to SDR)

Why did these currencies depreciate so much? This mostly reflects
changes in the global economy rather than in these countries. The easy
money policies and low interest rates in rich countries in the 2010s
made banks and financial institutions flush with funds, and allowed
many LMICs that earlier were not attractive to private finance to
access credit and bond markets. But from 2020, a series of shocks (the
Covid-19 pandemic, Ukraine war, tighter monetary policies and higher
interest rates in advanced economies) meant a reversal of these
processes, causing net capital outflows. This also worsened the terms
on which capital flowed into these economies, with higher interest
rates on debt and much higher spreads on their sovereign bonds.

This created debt stress in at least 70 countries, and caused
currencies to depreciate across the board, making imported food
costlier. Even countries that are not net importers of food found that
their domestic prices were badly impacted by currency depreciation. 
So capital flows in lower income countries need to be regulated, if
only for reasons of food security!

However, if we exclude the hyperinflationary cases of Venezuela and
Argentina, in most cases (other than Nigeria and Pakistan) the
exchange rate decline was not enough to explain the continuing food
price rise, even though it surely contributed to it. (The other
outlier, Zimbabwe, is almost a dollarized economy because of domestic
hyperinflation, which is why food price inflation was comparatively
lower than the others in this group despite massive currency
depreciation.)

This means that for the worst affected countries, there are other
factors at play. One important factor is debt distress: many debtor
countries have to pay so much as debt service that they cannot import
sufficient food to keep domestic prices down. Egypt, Suriname, Ghana
and Nigeria fall into this category.

Then there is the effect of western sanctions in countries like
Venezuela, Iran, Syria. The worst impacts of sanctions are felt by the
poor, who are hungry because of domestic food (and medicine)
shortages.

But beyond these extreme cases, many other lower income and middle
income countries face similar problems. Reliance on global markets for
both food and finance is proving to be extremely problematic. For
minimal resilience in the face of such shocks, it is now important for
countries to protect themselves by striving for domestic food
sovereignty, regional arrangements to ensure supply, and capital
controls to reduce currency volatility.

* food
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* food security
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* global economy
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