Strategy Note /

Food prices up to new peak but at least decelerating

  • Food prices up 1% mom in November (versus 3% in October), up 27% yoy, up 47% from May 2020 trough, at a new 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 up to new peak but at least decelerating
Hasnain Malik
Hasnain Malik

Strategy & Head of Equity Research

Tellimer Research
2 December 2021
Published byTellimer Research

The latest UN FAO World Food Price index (published on 2 December) showed a continuation of food inflation: up 1% mom, up 27% yoy and up 47% from the May 2020 trough.

The silver lining is the deceleration in the pace of the increase (in October, the jump was 3% mom).

The index is at a new 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 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.

And within this subset, excluding Egypt and Nigeria, there is also net import exposure to high crude oil imports. They will hope that the over 10% drop in Brent over the past month persists.

Among the components of the food index, there were substantial monthly increases for:

  • Cereals up 3% mom and 23% yoy, with Wheat, which is a key food import for Egypt, up for the fifth consecutive month and at a decade high;

  • Dairy – up 3% mom and 19% yoy, where developed markets are the main exporters;

  • Sugar up 1% mom and 40% yoy, exported mainly by Brazil, Thailand and India.

Other components were slightly down on a monthly basis (but still much higher yoy):

  • Vegetable oils down 0.2% mom and up 51% yoy, where Palm Oil is a key export for Indonesia and Malaysia (and where the potential for returning Covid restrictions may constrain output);

  • Meat down 1% mom and up 18% yoy, with emerging market exporters including Brazil, India and Argentina.

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

Food prices up 1% in November, 10y peak but decelerating

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