The public is concerned about rising world food prices as a result of the concern expressed by producers.Although the most recent data shows a moderate increase in global consumer food price inflation, we will explain why this could change in coming months. This would only increase the high prices consumers experienced last year in many countries.There will be significant differences between countries if prices rise. It is possible that consumers in emerging markets, as well as developing countries still dealing with the effects of the pandemic, would feel the most the effects."Emerging markets, low-income countries and emerging markets are more susceptible to food price shocks."Fact 1: The pandemic caused food price inflation to increase before it became widespread.The pandemic was preceded by an increase in food prices. China's hog herd was decimated by the outbreak of African Swine Fever in the summer 2018. This virus has now wiped out more than half of all the world's hogs.The result was that pork prices in China reached an all-time high in mid-2019, which had a ripple effect on prices for other animal proteins in many parts of the world. This was made worse by Chinese import tariffs on US pork, and soybeans, during the US-China trade dispute.Fact #2: Consumer food prices rose due to early supply chain disruptions and lockdown measures.Food supply disruptions at the beginning of the pandemic led to a shift away from dining out and towards food retail, which pushed up consumer food prices in many countries. Consumer food inflation reached its peak in April 2020, even though primary commodity producer prices, including energy, were falling sharply due to the disruption in primary food commodities demand.However, consumer food inflation had dropped in many countries by the beginning of summer 2020.While food prices in your grocery store (i.e. consumer food prices) have increased slightly, it's not accurate to say they are rising at the fastest rate in years. They are not contributing to inflation at the moment, but they could in the future (see the outlook below). However, producer prices have risen in recent months (see fact #4). It takes 6-12 months for consumer prices to reflect changes in producer price.On average, only 20 percent of the cost pass through from consumer to producer prices. Because consumer food prices include shipping costs for primary food commodities, processing, marketing, packaging, and final distribution costs like transport costs.These two facts will help you understand what to expect from consumer food prices.Fact #3: Rising shipping and transport costs.The Baltic Dry Index, which measures shipping costs, has seen ocean freight rates rise around 2-3 times over the past 12 months. However, higher gasoline prices and shortages in certain regions have pushed up the cost for road transport services. Consumer food inflation will increase if transport costs rise.Fact #4: The global food producer prices reached multi-year highs.International food (producer), prices have increased 47.2 percent since April 2020's trough. They reached their highest (real) levels in May 2021, their highest level since 2014. This is the highest dollar value ever. Soybean and corn prices rose by more than 86 percent and 111 percent between May 2020 and 2021.The recent rise in producer prices is due to three factors: (1) China's demand for staples has remained strong, particularly from animal feed, and (2) countries have built up food reserves in response to concerns about food security due pandemic-related fears. (2)The La Nia event, a global weather phenomenon that occurs every few years, has caused dry weather in key food exporting nations, such as Argentina, Brazil and Russia. In some cases, this has led to harvests and harvest forecasts falling short of expectations. The US and global stocks-to-use ratios, a measure of market tightness, reached multi-year lows in some staples due to out-pacing demand. (3) The strong demand for biofuels has increased the speculative demand of non-commercial traders. Export restrictions are another factor that supports world producer prices.OutlookThe four facts above suggest that inflation in consumer food prices will continue to rise over the next two years. The recent sharp rise in international food prices has already started to affect domestic consumer prices in certain regions. This is because retailers are unable to absorb these rising costs and pass them on to consumers.However, more is expected as international food prices are forecast to rise by approximately 25 percent in 2021, starting in 2020. They will stabilize in 2021. A 20 percent pass-through (13 percent in year one and 7 percent the following year) would imply an increase of consumer food price inflation of around 3.2 percentage points in 2021 and 1.75 percentage point on average in 2022. The higher freight rates could add 1 percentage point to global consumer food inflation in 2021.However, the impact will differ from one country to another. Due to their higher dependence on imports, consumers in emerging markets may experience higher prices. Sub-Saharan Africa, the Middle East, and North Africa are all affected. Emerging markets also have a higher rate of pass-through from producer to consumer prices. Further food inflation could have dire consequences for low-income countries that are suffering from the pandemic. It may also lead to a slowdown in efforts to eradicate hunger.Low-income and emerging markets are more susceptible to price shocks in the food market. This is because these countries have a high proportion of their income spent on food.The currency depreciation against US dollars is another risk factor for emerging markets or developing economies. This could be due to falling tourism and export revenues, as well as net capital outflows. Due to the fact that most food commodities can be traded in US dollars, countries with weaker currencies have seen an increase in their food import bills.Christian Bogmans works as an economist at the IMF's Research Department (Commodities Unit). His research areas include international trade and environmental and energy economics. He is particularly interested in the interplay between trade and natural resources. Prior to joining the IMF, He was an assistant professor at the University of Birmingham. He is a Tilburg University PhD in economics.Andrea Pescatori works as an economist at the Western Hemisphere Department (IMF) of the IMF. His research interests are in the areas of monetary policy and fiscal policy as well as commodity prices. His publications include the Journal of Money Credit and Banking and the IMF Staff Papers, Economic Journal, and the Journal of European Economic Association. Before joining the IMF, he was a fellow of the EnteEinaudi (Bank of Italy), and Economist at Federal Reserve Bank of Cleveland. He also served as visiting economist at the Division of International Finance of the Board of Governors of Federal Reserve System. He holds a PhD in economics from Universitat Fabra (Barcelona), Spain.Ervin Prifti, a Senior Economist at the International Monetary Fund's Research Department, works on issues related to food security and the agricultural commodity markets. He previously worked as an economist for the United Nations Food and Agriculture Organization, where he generated evidence and knowledge to support agricultural policy advocacy and social protection. Prior to that, he was a Quant in financial services. His research has been published in leading academic journals. It covers topics related to development, labor and agricultural economics. He is a PhD candidate in Econometrics, and Applied Economics at University Tor Vergata, Rome.This article was first published at the IMFBlog. It is a forum where staff and officials of the International Monetary Fund (IMF), discuss pressing economic and policy issues. These views are solely those of the authors and do not necessarily reflect the views of IMF or its Executive Board. Reprinted with permission
