Food prices will eventually be hit by fuel prices

The rising prices of international crude oil is ultimately being passed on to Indian consumers. This has given rise to the concern of food price rise.

 Food prices will eventually be hit by fuel prices

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• The story: The rising prices of international crude oil is ultimately being passed on to Indian consumers. This has given rise to the concern of a consequent increase in food prices in coming weeks. In light of the widespread pandemic-induced depression, this would be a double-whammy.
• Global food prices: For many of the major agricultural commodities, prices are higher than their levels a year ago. The UN Food and Agriculture Organization’s (FAO) world food price index (FPI) touched 127.1 points in May 2021, its highest value since September 2011.
• Indian food prices: Unlike fuel, the increase in global food prices is not getting reflected in India. The annual consumer food price index (CFPI) inflation in India was 5% in May 2021, far lower than the 39.7% year-on-year rise in the FAO-FPI for the same month. Both the CFPI and FAO-FPI inflation rates moved more or less in tandem till about February 2020. The period thereafter has seen a divergence.
• Explaining the divergence: The spike in international food prices from September-October 2020 has been due to demand resuming with economies unlocking. The demand rise has been further aided by Chinese stockpiling (for building strategic reserves, and in anticipation of fresh corona outbreaks.) There are also dry weather-induced production shortfalls in Brazil, Argentina, Ukraine, Thailand and even in the US. India, by contrast, has had good monsoons in 2019 and 2020. The forecast for 2021 too is benign, giving lot of confidence.
• A good 2021: Food inflation started falling from December 2020 with a bumper post-monsoon kharif crop being harvested and arriving in the markets. Also, there is collapse of demand from successive Covid-triggered lockdowns. There is relatively low domestic inflation in food items other than edible oils and pulses that are imported. But international food prices will be one of the determinants for food inflation in India in the coming months. This should encourage plantings by farmers and, moreover, expand acreages under oilseeds and pulses. A third successive good monsoon should effectively control food inflation.
• The future: Since it's unclear if the current surge in global food prices is a result of temporary supply-side disruptions or a sign of a larger "commodity super-cycle", the duration of the hike is unclear. A "commodity super-cycle" is a sustained period of abnormally strong demand growth that producers struggle to match. So prices rise sharply, and can last years or in some cases a decade or more. It was witnessed during 2007-2013.
• Summary: In today’s demand-constrained environment, the govt. too won't be able to pass through all price hikes in fuel to consumers, indefinitely. When demand revives, there is a likelihood of processors, transporters and even farmers passing on the increase in fuel costs to consumers, which in turn may lead to inflation.

 

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