Surge in food prices hits developing countries

With the war in Ukraine there have been serious concerns about global food supply especially when you look at the graph below. Main points to consider:

  • Russia and Ukraine are both major grain and sunflower oil exporters
  • Spring planting near impossible for farmers in battle zones
  • Sanctions on Russia agricultural goods
Source: Thoughts from the Front Line – Another Strange Recession By John Mauldin | March 12, 2022

How will it impact developing countries.
The staple diet of many developing countries relies on imports of wheat and sunflower oil – for instance Egypt imports 85% of its wheat and 73% of its sunflower oil from the Ukraine and Russia. Countries in these circumstances have no choice but to not put sanctions on food imports. The Food and Agricultural Organisation of the UN Food Price Index – meat, dairy, cereals, oils, and sugar – rose 24.1% in February compared to a year ago. This price shock will impact developing countries as food takes up a greater percentage of a person’s income in the developing world. In the developed world food costs 17% of consumer spending in contrast to those in poorer countries where it takes up 40% of income.

IMF Blog

Many developing countries subsidise food prices to maintain law and order and avoid its population from starving but with higher food prices how are they going to afford subsidies? There is also the problem of repaying debt as feeding the population will the priority rather than servicing foreign debt. Furthermore there is an opportunity cost – money won’t be spent on eduction, healthcare, infrastructure etc which it was originally intended for.

In getting out a recession consumers and producers make adjustments sufficient to reinstate growth. I can’t see that happening soon. The entire world order is experiencing a shock adjustment — economically, geopolitically, and otherwise. John Mauldin

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on Inflation. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

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The Economics of Croissants

CroissantsPicking up from a piece in The Economist there are lessons to be learnt in managing supply and demand for perishable products. In one New York bakery it costs US$2.60 to make a croissants that sells for US$3.60. If it makes 100 but only sells 70 it loses US$15 (cost = US$260  and sales = US$245). Furthermore, the bakery loses money as it refuses to sell leftover croissants. However they have a couple of solutions to this problem:

  • Don’t just sell croissants but other food that has a much higher profit margin – fancy salads and sandwiches.
  • Use the information on sales to cut waste e.g. demand and supply
  • No sweet items on Monday or Tuesday as people are feeling the effects of enough sugar during the weekend.
  • With bad weather there are fewer customers therefore demand decreases
  • Note the school holidays as there is less demand
  • Supply more after fasting (Yom Kippur) by the Jewish customers
  • Fine tune supply after checking sales after each hour

“Also offer sugar treats at the end of the day and make them expensive. They add colour to the shelves and make them look full which attracts foot traffic at the end of the working day.”

Source: The Economist 29th August 2015

Bernanke denies that US Fed are causing food inflation

US Fed chairman Ben Bernanke has indicated that the US Fed is not responsible for increases in world food prices. Critics have argued that by driving down US interest rates with quantitative easing the Fed is pushing capital flows into commodities and emerging markets. He said that there are two reasons for higher foods prices in emerging markets:

1. There has been a growth in wealth in these countries and
2. A failure to tackle inflation.

To address the latter they have been reluctant to use a contractionary monetary policy (higher interest rates) and they can also adjust their exchange rate which some countries have been reluctant to do. Surging food prices have helped fuel protests that toppled Tunisia’s president in January. Food inflation has also been among the root causes of protests in Egypt and Jordan, raising speculation other nations in the region would hoard grain stocks to reassure their populations.

The United Nations Food and Agriculture Organization (UN FAO) measures food prices from an index made up of a basket of key commodities such as wheat, milk, oil and sugar, and is widely watched by economists and politicians around the world as the first indicator of whether prices will end up higher on shop shelves. The index hit averaged 230.7 points in January, up from 223.1 points in December and 206 in November. The index highlights how food prices, which throughout most of the last two decades have been stable, have taken off in alarming fashion in the last three years. In 2000 the index stood at 90 and did not break through 100 until 2004.