Strategy Note /

Food prices boil to new peak as Russia-Ukraine War bites

  • Food prices were up 13% mom in March (versus up 4% in Feb), up 34% yoy, up 75% from May 2020 trough. All-time peak

  • High household spend on (and high imports of) food in Bangladesh, Egypt, Jordan, Lebanon, Nigeria, Pakistan, Philippines

  • Implies ongoing pressure on inflation, fiscal spend (where governments subsidise), trade balance and social stability

Food prices boil to new peak as Russia-Ukraine War bites
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
8 April 2022
Published byTellimer Research

The latest UN FAO World Food Price index (published on 8 April) showed a leap in food inflation in March: up 13% mom, up 34% yoy, and up 75% from the May 2020 trough.

After five months of yoy deceleration, the Russia-Ukraine war has prompted two months of very sharp acceleration. Both countries are major global exporters of specific food commodities – for example, wheat, at 18% and 11%, respectively. Although military setbacks and sanctions may lead Russia to de-escalate, the moment of any lasting negotiated settlement still appears far off.

The index has reached a new all-time high (the February 2011 peak has been surpassed by 15%): the move up in the overall food index over the past year or so is now much greater than that seen prior to the 'Arab Spring' of 2011 (a 75% increase compared with a 42% increase).

This latest reading suggests that pressure is again increasing substantially for countries with high household spending on food and high dependency on imports of food – for example, Bangladesh, Egypt, Jordan, Lebanon, Nigeria, Pakistan and the Philippines.

And within this subset – excluding Egypt and Nigeria – there is also net import exposure to high crude oil imports, and the 30% increase in Brent ytd is clearly very unfavourable for them.

The emerging market beneficiaries from high commodity food prices, at least from a trade perspective, are the following:

  • Asia: Indonesia, Malaysia, Thailand, Vietnam;

  • Africa: Ghana, Ivory Coast, Zimbabwe;

  • Europe: Iceland, Poland, (Ukraine prior to the Russian invasion);

  • LatAm: Argentina, Brazil, Chile, Peru.

Most components of the food index were up mom, with sugar an exception:

  • Vegetable oils up 23% mom and up 56% yoy, driven by Black Sea export disruption, the knock-on effect of high crude oil, and tight export volumes in LatAm, with palm oil a key export for Indonesia and Malaysia.

  • Cereals up 17% mom and 37% yoy, with wheat, which is a key food import for Egypt, hit both by Black Sea exports disruption and adverse US crop conditions, up 20% mom .

  • Sugar up 7% mom and up 23% yoy, driven partly by the prospect of greater use of of sugarcane for ethanol during prevailing high crude oil prices, with the main exporters Brazil, Thailand and India.

  • Meat up 5% mom and up 19% yoy, driven partly by avian flu outbreaks, with emerging market exporters including Brazil, India and Argentina.

  • Dairy – up 3% mom and 24% yoy, where developed markets are the main exporters.

The next update of this index is due on 6 May.

Food prices up 13% mom and 34% yoy in March, a new peak

When determining interest rates, policymakers tend to focus on core inflation and treat some of the variation in food items as seasonal or temporary. However, for governments that subsidise food items, this food price spike creates fiscal stress and, for countries reliant on food imports, it drives a deterioration in the trade balance.

Furthermore, for the mass, poorer segment of the population, food inflation is generally an acute concern – the 'Arab Spring' coincided with a c40% increase in 2010-11 – and this translates into risk for governments facing re-election or attempting to implement structural reforms that challenge vested interests. Recent protests in Tunisia, for example, are as much about frustration with cost of living increases, in the absence of employment growth, as they are about Covid management and corruption.

Countries with both a high proportion of household expenditure on food and a significant net import bill for food include Bangladesh, Pakistan and the Philippines in Asia, Egypt and Nigeria in Africa, and almost all of the Middle East (particularly, Jordan and Lebanon).

Food accounts for a large proportion of household expenditure in countries such as Argentina, Ghana, Ivory Coast, Kazakhstan, Kenya, Morocco and Ukraine but, at the macroeconomic level, this is offset by net exports of food. That, of course, does not mitigate the risk of social unrest from the poorer segments of these countries if the bump in export revenues does not trickle down.

Emerging market consumption exposure to food prices

Emerging market trade exposure to food prices

Related reading

Emerging-Frontier Equity Monthly - March: Roaring commodities meet rising rates, Mar 2022

MENA’s reliance on Russian/Ukrainian wheat imports raises risk of hunger (Curran), Mar 2022

Russian oil embargo impact, Mar 2022

Emerging market commodities hedge, Feb 2022

Commodities back on top of Technology in EM equities, Feb 2022