Strategy Note /

Food prices decelerate again but still near 10-year peak

  • Food prices down 1% mom in December (vs up 1% in Nov), up 23% yoy, up 47% from May 2020 trough, just off 10-year 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 decelerate again but still near 10-year peak
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
7 January 2022
Published byTellimer Research

The latest UN FAO World Food Price index (published on 6 January) showed a deceleration in food inflation in December: down 1% mom, up 23% yoy, up 47% from the May 2020 trough, and just off the 10-year peak set in November.

This is the fourth month in a row of deceleration in the yoy figure.

The index is still near the 10-year peak. The move up in the overall food index over the past year or so is of a similar magnitude to that seen prior to the 'Arab Spring' of 2011.

This latest reading suggests that indicates that pressure continues for countries with high household spending on food and dependency on imports of food — for example, Bangladesh, Egypt, Jordan, Lebanon, Nigeria, Pakistan and the Philippines — but there may be a glimmer of light at the end of the tunnel.

And within this subset, excluding Egypt and Nigeria, there is also net import exposure to high crude oil imports and the 20% increase in Brent since the start of December is clearly unfavourable for them.

Most components of the food index were down slightly mom, with Dairy an exception:

  • Vegetable oils down 3% mom and up 36% yoy, where Palm Oil is a key export for Indonesia and Malaysia;

  • Sugar down 3% mom and 34% yoy, exported mainly by Brazil, Thailand and India.

  • Cereals down 0.6% mom and 21% yoy, with Wheat, which is a key food import for Egypt, down after five consecutive monthly increases;

  • Meat flat mom and up 17% yoy, with emerging market exporters including Brazil, India and Argentina.

  • Dairy – up 2% mom and 17% yoy, where developed markets are the main exporters;

The next update of this index is due on 3 February.

Food prices down 1% in December, decelerating from peak

Policy makers, when determining interest rates, 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