The latest UN FAO World Food Price index (published on 3 June) declined slightly again from the March all-time high: down 0.6% in May, but up 23% yoy, and up 73% from the May 2020 trough.
This is the second consecutive month of slight moderation. Persistent high crude oil prices and increasing signs of protectionism in food trade (eg China fertilisers, Indonesia palm oil, India wheat, and Malaysia poultry) suggest that this modest relief will not last.
The past two months come after a very sharp yoy acceleration in February and March, following the Russia-Ukraine war. Both countries are major global exporters of specific food commodities – for example wheat, at 18% and 11%, respectively. Although military setbacks, sanctions, and domestic pressure on President Putin may lead Russia to de-escalate, the moment of any lasting negotiated settlement still appears far off.
The index had reached a new all-time high in March: the move up in the overall food index over the past year or so is much greater than that seen prior to the 'Arab Spring' of 2011 (a 73% increase compared with a 42% increase).
This latest reading suggests that while conditions have not deteriorated further, they remain acutely difficult 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 44% 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
Among the components of the food index, vegetable oil and cereals were down, whereas sugar, meat, and dairy were up.
Vegetable oils – down 4% mom and up 31% yoy, driven by demand destruction (rationing) amid such higher prices, and the removal of the temporary palm oil export ban in Indonesia. In emerging markets, palm oil is a key export for Indonesia and Malaysia.
Dairy – down 4% mom and 17% yoy, driven mainly by demand weakness from China, related to zero Covid lockdowns. Developed markets are the main exporters of dairy.
Sugar – down 1% mom and up 13% yoy, driven partly by a bumper harvest in India and currency depreciation in Brazil. The main emerging market sugar exporters are Brazil, Thailand and India.
Cereals – up 2% mom and up 30% yoy, driven by the impact of India's export ban and disruption in Ukraine for wheat, which is a key food import for Egypt.
Meat – up 1% mom and up 14% yoy, driven by disruption in Ukraine and avian flu outbreaks. The main emerging market exporters include Brazil, India and Argentina.
The next update of this index is due on 8 July.
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.
Our Country Index in this context
Exposure to net fuel and food imports are factors incorporated into our EM Country Index, where the weight attached to these factors can be customised.
Related reading
Food security in EM in the time of inflation, disruption, and now protectionism, May 2022
Emerging-Frontier Equity Monthly – May: US recession, food protectionism fears, May 2022
Emerging-Frontier Equity Monthly – April: Wall of Worry, Apr 2022
Indonesia Palm Oil export ban cannot last, Apr 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