The looming food crisis has gigantic proportions.” Italian Prime Minister Mario Draghi was forceful last Thursday after a telephone conversation with Russian President Vladimir Putin. With more than 70 ships blocked in Ukrainian ports, warehouses and almost 30% of the cultivation territory devastated by the war, prices have skyrocketed 55% so far this year, despite having fallen from maximums of 7% in recent weeks.
And it’s not just wheat. Corn has yielded 5.1%, but even so it rises 30.8% in the accumulated annual… and the same happens with barley, soybeans or sunflowers. And the problem is not just Russia’s refusal to facilitate agricultural exports from Ukraine, Europe’s breadbasket. The problem is that the situation threatens to get even worse given the decision by India, the world’s second largest wheat product, to paralyze exports due to the severe drought that is aggravating the country.
Warning
Draghi has said it and the main international analysts certify it. The latest warning was issued yesterday by the Japanese investment bank Nomura. ” could put upward pressure on world wheat prices, which were already rising for other reasons (rising energy costs initially, and the Russia-Ukraine war later) and have risen further in anticipation of this ban. The impact will be felt most strongly in developing countries, although the Indian government has left open the option of exporting to vulnerable countries,” he said in a report.
The Indian government is open to allowing exports to neighboring countries and other highly vulnerable developing countries to meet their food security needs, but their respective governments will need to submit a separate application first. “As the world’s second largest wheat producer, India initially took advantage of rising world wheat prices to export more wheat. However, the ongoing heat wave in the country has hurt the standing wheat crop,” says Nomura.
In its second advance estimate in mid-February, the Indian government had calculated that aggregate wheat production would rise to 111.32 million tonnes in the 2021-22 season, from 109.59 a year earlier, but, as as Nomura warns, “the current heat wave is likely to reduce wheat production to about 105 tonnes, which would represent a 4.2% drop year-on-year.”
Nomura: “We calculate that food inflation will cost the European consumer about 243 euros on average”
All this without also forgetting that the increase in wheat exports reduced the national surplus and has caused an increase in the prices of this agricultural product by 11% year-on-year, which has contributed to increasing inflation in the country, which in April reached its highest level in eight years, 7.8%. Hence, India has decided to ban the export to ensure domestic food security. Faced with this situation, and like Nomura, at least the equivalent of 75% of the increase in production prices.
“We calculate that food inflation will cost the European consumer an average of 243 euros. This is how much the food basket will rise compared to 2021,” say its analysts. It may not seem exorbitant, but it is that food must be added to all the energy component that is already opening a deep hole in the pockets of the consumer and that of the rest of the goods and services that have begun to take off.
From Oxford Economics they explain, however, that the transfer and impact of food prices can vary greatly between countries. “While the larger Eurozone economies, such as Germany or France, typically see a small pass-through from world food price shocks to headline inflation, smaller countries, such as the Baltic states, but also Spain or Belgium, they see a three to five times greater impact.”
A 10 percentage point increase in world food prices translates into an increase of about 1.5 points in headline inflation, according to calculations by Oxford Economics. Ben Laidler, global markets strategist at the multi-asset investment platform eToro, warns that “wheat accounts for 20% of total global calories”, so the rise in prices could end up being very strong. Even the governor of the Bank of England, Andrew Bailey, acknowledged a few days ago that the situation could end up being “apocalyptic” for some countries.
The sharp rise in food prices and concerns about food security have, in fact, occupied a very prominent place at the meeting of the G7 countries in Stuttgart (Germany) and at the Davos Forum. The situation has become extremely complicated in recent weeks and food protectionism is hampering food flows between countries, while the fertilizer crisis is shooting up production costs. All eyes now turn to Putin.
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