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Priciest food since 1970s is a big challenge for governments

Global food prices were up 33% in August from a year earlier.
Image: Bloomberg

Whether for bread, rice or tortillas, governments across the world know that rising food costs can come with a political price. The dilemma is whether they can do enough to prevent having to pay it.

Global food prices were up 33% in August from a year earlier with vegetable oil, grains and meat on the rise, data from the United Nations Food and Agriculture Organization show. And it’s not likely to get better as extreme weather, soaring freight and fertilizer costs, shipping bottlenecks and labour shortages compound the problem. Dwindling foreign currency reserves are also hampering the ability of some nations to import food.

From Europe to Turkey and India, politicians are now handing out more aid, ordering sellers to cut prices and tinkering with trade rules to mitigate the impact on consumers.

The issue is more acute in emerging markets where the cost of food accounts for a greater chunk of household spending, and in crisis-hit nations. In Lebanon, militant group Hezbollah has tightened its grip on the country by distributing food. But even the U.S. is taking action to address affordability made more urgent during the coronavirus pandemic.

“Governments can intervene and commit to supporting lower consumer prices for a while,” said Cullen Hendrix, non-resident senior fellow at the Peterson Institute for International Economics, a Washington-based think tank. “But they can’t do it indefinitely.”

Food inflation spurred more than two dozen riots across Asia, the Middle East and Africa, contributing to the Arab Spring uprisings 10 years ago. Pockets of discontentment are growing again. Unrest in South Africa triggered by the arrest of former President Jacob Zuma in July turned to food as people looted grocery stores and restaurants. Shortages in Cuba led to the biggest protests in decades.

Adjusted for inflation and annualized, costs are already higher now than for almost anytime in the past six decades, according FAO data. Indeed, it’s now harder to afford food than it was during the 2011 protests in the Middle East that led to the overthrow of leaders in Tunisia, Libya and Egypt, said Alastair Smith, senior teaching fellow in global sustainable development at Warwick University in the UK.

“Food is more expensive today than it has been for the vast majority of modern recorded history,” he said.

Tunisia: crisis management

The ground zero for the Arab Spring protests, Tunisia has raw memories when it comes to food and politics. Just a few days after dismissing the government and suspending parliament in July, President Kais Saied urged producers and retailers to slash prices of selected produce.

Red meat prices fell by about 10% almost instantly, with the nation’s main business lobby group Utica announcing unspecified cuts in prices for staples ranging from wheat flour, meat, to dairy, coffee and soft drinks. Fruit prices fell by as much as 20%, Tunisian media reported. Still, consumer prices overall rose at an annual rate of 6.2% in August.

Then there’s the prospect of subsidy cuts. A debate is raging about a long-planned shift to focus spending on the neediest citizens as Tunisia tries to secure a new financing program from the International Monetary Fund. That will likely lead to reduced support for items likes flour and sugar as well as electricity for a substantial number of households.

North African neighbors are also looking at subsidy cuts to help fix public finances. In Egypt, President Abdel-Fattah El-Sisi called for a rise in bread prices. Algerian bakers have already hiked prices of subsidized bread in an act of defiance amid a shortage of wheat or shrunk the size of loaves. In Morocco, authorities announced in July a plan that will see cuts to subsidies on sugar and low-cost wheat flour starting next year, subject to the approval of parliament.

Romania: rethinking trade

An agricultural worker shovels grain in a storage barn on a farm near the Danube Black Sea Canal in Agigea, Romania. Image: Evgeniy Maloletka/Bloomberg

The cost of bread is not just political for grain-importing countries in North Africa and the Middle East. Romania is Europe’s top exporter this season, and yet prices have soared at a double-digit pace. Overall inflation is set to be the fastest in eight years in 2021.

The former eastern bloc country also has a dark history when it comes to feeding its population. Severe shortages were a hallmark of communist dictator Nicolae Ceausescu before he was overthrown and executed in 1989.

Prime Minister Florin Citu’s government wants to cut dependence on imported processed food products as a way to reduce costs and narrow the trade deficit. He is already under pressure after the collapse of his coalition and faced a backlash over his answer to a question about the cost of a loaf of bread. “I don’t eat bread,” he answered.

Romania earmarked 760 million euros ($896 million) for investment in farm storage and processing, Agriculture Minister Adrian Oros said. “We’re one of the biggest exporters of cereals and yet we import frozen bread products,” he said. As of this month, the government is waiting for farmers to submit eligible projects to tap the money over the next two years. However, while Romania’s agricultural potential is one of the biggest in Europe, it so far failed to use EU money to improve its local production.

US: increasing aid

People line up for food at a food bank in New York on July 30. Image: Michael Loccisano/Getty Images

Rich countries are having their headaches too as the pandemic hits incomes. In the US, the world’s biggest economy, 8.6% of people said they sometimes or often didn’t have enough to eat during the prior week in a survey completed on August 30.

In a reversal from the Donald Trump administration, President Joe Biden is increasing government assistance to low- and middle-income Americans with the biggest long-term rise in food stamp benefits in the program’s history.

The increased dispersal of stamps to buy groceries adds to temporary pandemic measures such as child tax credits and broadened access to school meal programs. Critics have said the government subsidy is inadequate though.

The government in Washington has been showing concern about rising consumer prices as the economy rebounds from Covid-19. It’s taking aim at major meatpackers, charging that “pandemic profiteering” is squeezing consumers and farmers alike.

India: cutting duties

With one of the largest malnourished populations, India is also dispersing more aid. Prime Minister Narendra Modi’s government is distributing 20.4 million tons of free rice and wheat, spending 672.7 billion rupees ($9.1 billion) on extra grains subsidies to reach potentially more than 800 million people.

The country has also implemented trade measures to shield consumers from spikes in global prices. The government has cut duties on palm, soybean and sunflower oils as well as lentils.

India isn’t the only nation to use trade to intervene in the food market. War-torn Syria has tightened imports of items ranging from cheese to cashew nuts to safeguard its dwindling foreign currency reserves for wheat purchases. Argentina and Bolivia have curbed exports of beef to keep prices at home in check, as has drought-hit Kazakhstan, which forbade exports of oat, rye and forage and added quotas for forage wheat.

Turkey: market action

A cheese stall in Istanbul, Turkey. Image:: Nicole Tung/Bloomberg

In Turkey, President Recep Tayyip Erdogan’s popularity has slumped because of the economy and cost of living. Food inflation accelerated for a fourth month in August, to 29%.

The government is making another attempt to control prices through threats of fines for businesses selling at elevated prices to an investigation into higher costs. Trade ministry officials are ordered to inspect allegations of excessive price increases in food products at wholesale markets in major Turkish cities, including Istanbul, Ankara and Izmir.

Erdogan’s government is also working on some legislative changes to curb food inflation. From October, fresh fruit and vegetables that may have been wasted on farms will be brought to an online market, and an early weather warning system will be put in place to spot potential supply shocks. There’s also the prospect of tax incentives and more trade measures. Turkey removed import duties on grains and lentils on September 8.

Russia: losing battle

Combine harvesters drive through a wheat field during the summer harvest on a farm in Tersky village, near Stavropol, Russia. Image: Andrey Rudakov/Bloomberg

The world’s top grains exporter shows the limitation of adjusting trade rules to curb prices. Russia introduced a wheat export tax in February, but it’s also paying with a loss of market share. The nation’s wheat is no longer as competitive, derailing exports to Egypt, one of its biggest customers.

At home, the measures haven’t helped curb food inflation, either. It’s hovering at a five-year high. Domestic wheat prices jumped in August to levels typically not seen this time of year as farmers and traders were reluctant to sell.

© 2021 Bloomberg

COMMENTS   7

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“extreme weather, soaring freight and fertilizer costs, shipping bottlenecks and labour shortages compound the problem”

I see you have just copy-pasted the Bloomberg article.

Allow me to guide the readers to the REASON we are experiencing these catastrophic price increases (inflation) – please do not be fooled by the Bloomberg narrative of logistics bottlenecks and labour shortage.

The reason your groceries are unaffordable, is because of the COVID-19 stimulus by Governments/Central Banks worldwide. By printing money, they just kicked the can down the road and actually increased the pain for all of us. Instead of taking the economic pain of COVID lockdowns upfront, we printed a lot of money and ballooned inflation.

The layman does not understand inflation or its various sources but it is actually the most expensive way to fund stimulus. Increase in Govt spending could be done by increasing taxes (unpopular!) or taking on more debt or, God forbid, the Government having savings to then spend (Norway seems to have gotten this concept down, SA not so much). Money-printing is actually the most expensive way to fund increases in Govt spending…

We are all paying the price now, metaphorically and literally.

Very true, 20% of all USD was printed in 2020 by the Federal Reserve.

Our greatest challenge as investors is to hedge against poor monetary policy and poor governance.

The food inflation of the 1970s was the direct consequence of the Nixon Shock when the US unilaterally “closed the gold window to protect Americans against international currency speculators”. This severed the link between the supply of gold and the supply of dollars and removed all constraints on money printing. We also witnessed the oil embargo and the spike in the price after that. The Saudi Royal Family are no fools. They were used to selling oil in terms of gold and they simply converted the devalued dollar back to a gold price. They demanded more dollars, causing mayhem in the US and across the world.

The same situation explains the current price of food that is near record-high levels in dollar and rand terms, but at record-low levels in terms of gold. The combined efforts of the US Federal Reserve and the Treasury Department, where the Fed lends newly-printed dollars to the Treasury, to distribute via various social, and construction projects, flood the economy with devalued dollars, as it did in the 70s.

The price of a bushel of wheat was 1.2 grams of gold at the beginning of 1970. The current price is 0.1 grams of gold per bushel, or 99% cheaper. Food is the cheapest it has ever been in real terms. Yes, food has never been this affordable and abundant as it is now.

The current high price in terms of fiat currency does not point towards food shortages, it actually points towards an abundance of dollars. Grain producers should have been making lots of money if the prices were high in real terms. Grain farmers across the globe are struggling to make ends meet and US and EU farmers are dependent on subsidies. A farmer arbitrages the combined cost of inputs like fuel, fertilizer, chemicals, seed, labour, capital, and land, and the selling price of wheat. The profit margin is paper-thin and the small, family-size operations are disappearing in the continued push for operations of scale.

This simply tells us that we should get used to the current prices and that we should expect much higher food prices going forward. Where does this leave those countries that do not have access to the new dollars? This is a recipe for social unrest and anarchy. It is through this monetary mechanism that the US exports the factors that may lead to social unrest in the US, to African nations that need the dollar to purchase food. Every policy has a price, you know.

Which currency ultimately funds food-aid in Africa? Which currency causes the price spikes that makes food unaffordable in the first place? Which currency bankrupts farmers in Africa with food-aid, only to ensure food security in its own territories?

Who actually benefits from these distortions in the market mechanism? Those who enjoy the American Dream and has the ability to finance their dreams with cheap credit.

This tells us that the American dream is financed by the ability of people across the globe to afford food. The American Dream creates a nightmare of food insecurity for everyone who does not earn dollars.

The process by which the US is destroying themselves and pulling down the rest of the world is described in a book called Planet Ponzi by Mitch Feierstein.

US institutions try to convince their people that inflation is low because they have been able to import cheap goods from China.

Unfortunately food, house and energy prices cannot be contained by money printing. These are the most important items for the middle classes. The only beneficiaries are mega corporations, banks and individuals who have assets that were purchased with older money.

The average guy is bought off with stimulus cheques while the connected walk away with billions.

This is what happens when you delink your fiat currency from the gold standard and leaving little effort to just print money. The US is giving other countries a bad example of how to run proper capitalism.

End of comments.

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