The world economy has “past its peak of inflation”, according to Elon Musk. The CEO of Tesla believes that “inflation will drop rapidly” and that the prices of raw materials used in the manufacture of electric vehicles “will tend to fall in six months”.
What he projects is already happening in the food. The United Nations Food and Agriculture Organization’s Food Price Index (FPI) averaged 140.9 points in July, down 8.6% from its level in July. previous month and marking the largest monthly decline since October 2008.
The FPI – a trade-weighted average of international prices of major food commodities over a base period, taken as 100 for 2014-16 – reached a record high of 159.7 points in March, the month after the Russian invasion of Ukraine on February 24. The latest index is the lowest since January’s 135.6 points, before the ongoing war.
Between March and July, the REIT accumulated a decline of 11.8%. This was driven by vegetable oils and cereals, whose average prices fell even more, by 32% and 13.4% respectively. The vegetable oil price index has been particularly volatile, rising from a Covid-induced demand crash-induced low of 77.8 points in May 2020 to 251.8 in March 2022, before falling back to 171.1 in July (see graph).
There were four main supply-side shock factors of the Great Global Food Inflation around October 2020: weather, pandemic, war, and export controls.
Weather-related shocks included droughts in Ukraine (2020-21) and South America (2021-22), which particularly affected sunflower and soybean supplies, and the March-April 2022 heat wave which devastated India’s wheat crop.
The impact of the pandemic on supply has been felt most in oil palm plantations in Malaysia, where the harvesting of fresh fruit bunches is mainly done by migrant workers from Indonesia and Bangladesh. As Covid-19 caused many of them to return and no new work permits were issued, production at the world’s second-largest palm oil producer and exporter plummeted.
The Russian-Ukrainian war led to supply disruptions for the two countries which, in 2019-2020 (a year without war or drought), accounted for 28.5% of world wheat, 18.8% of corn, 34.4% barley and 78.1% of sunflower oil exports.
Export controls were first imposed by Russia in December 2020, prompted by fears of domestic food inflation resulting from record high temperatures. The shortage problems in the country triggered similar actions for palm oil by Indonesia (the world’s largest producer and exporter) and for wheat by India between March and May 2022.
This perfect storm, resulting from the four successive shocks in a year and a half, now seems to be moving away. Its most obvious symbol is the resumption of Ukrainian exports via the Black Sea. This critical artery of global agricultural trade was blocked after Russia launched its so-called special military operation. The UN-backed deal to unblock the Black Sea trade route also provides for unhindered shipments of Russian food and fertilizer. Russia alone is expected to export 40 million tonnes (mt) in 2022-23 (July-June), up from 33 mt last year.
But it’s not just Ukraine and Russia. Indonesia, since the end of May, has lifted its ban on palm oil exports. This, even as the United States, Brazil, Argentina and Paraguay are expected to reap bumper soybean crops. Not for nothing, price sentiment has changed. This is most visible in edible oils, where around 60% of India’s annual consumption needs are met by imports. Over the past three months, the India-wide modal retail price (most quoted) has risen from Rs 175 to Rs 150 per kg for soybean oil and from Rs 165 to Rs 142.5 for Palm oil.
Not just global
Apart from the global level, there are internal reasons to expect a considerable slowdown in food inflation.
The most important is the southwest monsoon. Cumulative precipitation during the current season, from June to August 7, was 5.7% above the long-term historical average for this period. Almost all agriculturally important areas – except Uttar Pradesh, Bihar, Jharkhand and West Bengal – have so far received good rains. The outlook for the days ahead looks equally encouraging, with an area of low pressure forming over the northwest Bay of Bengal off the coasts of Odisha and West Bengal – and another expected after mid-August. .
Above-average rainfall in the southern peninsula, central and northwest India has increased areas under most crops this kharif (monsoon) season. The exceptions, as shown in the table, are rice (transplanting has been affected by poor rains in the Ganges plain states), pulses and groundnuts (their area is being diverted to cotton and soybeans which fetch better prices).
However, rice stocks in government godowns, at 47.2 tonnes as of July 1, were 3.5 times the needed “buffer” of 13.5 tonnes by that date. That, plus rice grown during the rabi (winter-spring) season, should make the overall rice situation manageable.
The same goes for the availability of legumes. Chana (chickpea) is selling in wholesale mandis at Rs 4,400-4,600 per quintal, below its minimum support price of Rs 5,320. Government agencies hold about 3 t of chana and 100,000 tons of masur (lentil red), against 2.2 t and 25,000 t respectively a year ago. International exportable surpluses, mainly from Canada and Australia, are also higher than last year by about 0.5 mt each for the two pulses. In urad (black gram), too, stocks at the end of July in Myanmar are estimated at 0.3 tonnes, about 0.1 tonnes more than a year ago.
“There could be problems in arhar (pigeon pea) due to declining area, low government stocks (0.1 tonnes vs. 0.4 tonnes last year) and lack of additional exportable supply (from Mozambique, Tanzania, Malawi and Myanmar). But the Narendra Modi government’s decision to allow duty-free imports of arhar, urad and masur until March 31 will maintain a cap on overall prices,” an industry source said.
All in all, there are compelling reasons – global and domestic – for food inflation in India to be “trending down”, even if it is not “falling rapidly”. This can already be seen in edible oils. The increase in soybean and cotton production, thanks to the monsoon, should improve the availability of meals. These, along with corn, are key ingredients in animal and poultry feeds. A good monsoon would also mean more fodder and water for animals, further reducing livestock input costs and inflationary pressures on milk, eggs and meat.
That’s not all.
Current water levels in the nation’s major reservoirs are 5.9% higher than a year ago and 25.1% higher than their average storage over the past 10 years. If the monsoon produces reasonably in the second half (August-September), the benefits of groundwater recharge will also benefit rabi cultivation. And assuming there are no further setbacks in the Black Sea, the Reserve Bank of India’s monetary policy committee may not have to raise interest rates further.