International
Wall Street Journal: Other factors may have led to rise in global food prices
April 10, 2023 | 12:43 PM
Economists at the Food and Agriculture Organization of the United Nations (FAO) note that food prices at the global level are still very high and continue to rise in local markets, despite the international organization's announcement that the global food price index decreased for the 12th month in a row, by 20.5 percent in March 2023, compared to the same month in 2022, when the markets were witnessing the first consequences of the war in Ukraine.US' Wall Street Journal said that there might be other factors that led to a rise in global food prices, pointing out that most economists expect to see a cooling of food prices over coming months, but it is unclear why they rose so much to start with.In 12 months through March, prices of food, alcohol and tobacco were up 15.4 percent in the eurozone, while energy prices were down 0.9 percent. Food prices were up 10.2 percent in the US in the 12 months through February, well ahead of energy at 5.2 percent, the newspaper said.It added that in world commodity markets, the prices received by farmers are set. In most countries, food makes up the largest share of households' budgets.It explained that there are typically lags between movements in the prices farmers receive and the prices households pay, as raw commodity costs are just one part of the final price consumers are also paying for processing, packaging, transport and distribution. Nonetheless, the length of the current lags, and the size of the gap between the farm and the dining table, has led some economists to see other forces at play: Businesses in the food-supply chain might have raised their prices more than needed to cover higher costs.Claus Vistesen, an economist at Pantheon Macroeconomics, said "the only way to explain this in relation to what we have seen in some of the commodity price indices for food is that margins are being expanded."Some rate setters at the European Central Bank are now also looking at the inflationary potential of widening profit margins. Fabio Panetta, a member of the ECB's executive board, warned of a "profit-price spiral," adding that "opportunistic behavior by firms could also delay the fall in core inflation."According to the Wall Street Journal, Russia's invasion of Ukraine triggered a jump in the prices of globally traded food staples. Both are major exporters of grains and the raw materials needed to make fertilizer.In March 2022, an index of food prices compiled by the United Nations that includes cereals, vegetable oils, sugar, meat and dairy products hit its highest in more than half a century of records. The newspaper pointed out that the index stayed near that level through June, then fell sharply in July and has been declining since, by 18.7 percent in February from its peak. By contrast, the prices paid for food in both the US and European Union have kept rising.European governments are getting worried, as their primary concern following Russia's invasion was to protect households from energy costs. Many enacted costly price caps, both to limit hardship during the winter and maintain voter support for sanctions against Russia and military and financial aid to Ukraine.Food initially attracted less attention from European governments, in part because its price rose less than that of energy. That has changed in recent months. Already facing protests against its pension overhauls, the government of French President Emmanuel Macron last month sealed an agreement with leading retailers to keep food prices low."We are perfectly aware that today, what worries French men and women, what worries households, what worries families, what makes their daily life difficult, is the increase in daily prices, rising food prices," said French Finance Minister Bruno Le Maire. This agreement, which will last for three months through June, will involve a reduction of "several hundred million euros" in the profit margins of food suppliers, he added.The newspaper pointed out that there is some evidence that profit margins at food suppliers have risen since the start of the COVID-19 pandemic. According to economists at ING Bank, margins in Germany's agricultural sector (which excludes manufacturers of packaged food and retailers) rose by 63 percent between the end of 2019 and the end of 2022, almost entirely because of higher profits rather than higher wages.Experts stated "the rise in price margins in the agricultural sector, the construction sector, and in the trade, transportation, and hospitality sector can be mainly explained by an increase in profits, and is thus not due to higher energy and commodity prices."Profit margins across the whole of the economy are on the rise in Europe. The EU's statistics agency said the share of the operating surplus that was accounted for by profits rose to 42 percent in the final quarter of last year, the highest proportion since 2007. By contrast, the share going to workers fell slightly. In the US, profit margins remained near record highs in the fourth quarter, although they were down from the third quarter.The newspaper mentioned that the high food prices are also a problem for central banks, as most look to core inflation, which excludes food and energy, for underlying inflation trends. However, they recognize headline inflation, which includes food and energy, can affect public expectations, the paper added, noting that food is the one good that most households buy every day, which could lead workers to negotiate higher wages - possibly feeding back onto prices.Chief Economist of Bank of England Huw Pill said that whether food prices have risen because of weather, war or profit margins, central banks might have to respond with higher rates than otherwise."Persistent deviations of inflation from target, even if stemming from what are fundamentally a series of transitory inflation shocks, might prompt changes in behavior that generate more long-lasting inflationary dynamics," Pill added.
April 10, 2023 | 12:43 PM