China At Risk of Food Price Hikes – Analysis
By He Jun
At a time when the capital markets are closely monitoring the banking risks in the United States and Europe, consumers in many countries around the world are concerned about rising food prices. Among developed countries, Europe is experiencing the most severe increase in food prices.
According to data from the Eurostat, the harmonized index of consumer prices (HICP) for the eurozone in February showed that among the items, food and beverage inflation was the most severe, with a year-on-year increase of 17.3%, reaching a historical high. In terms of individual countries, food inflation in the three leading economies of Germany, the UK, and France remains steep. Food prices began to rise since the outbreak of the Russia-Ukraine conflict, and the year-on-year growth rate has been increasing. The February report showed that the price of food and non-alcoholic beverages in France increased by 15.8% year-on-year, while in Germany, it increased by 20.8%, and in the UK 18.2%.
In the United States, the year-on-year increase in food CPI has continued to decline since it peaked in August 2022, but it remains at a high level of over 9%. Food accounts for a significant portion of the CPI weight in the U.S., reaching 13.5%. Specifically, grains and bakery products, as a category of food, have experienced the most noticeable price increases. According to a report by the New York Post on March 23, prices of essential items such as “pretzels, bacon egg and cheese sandwiches, cans of soda and coffee, and coffee” have skyrocketed in New York City. The price of eggs has increased from USD 27 per case at the beginning of this year to USD 158 per box, almost a five-fold increase. As of early March this year, egg prices in the U.S. have risen by over 70% in the past year, flour by 20.4%, bread by 14.9%, and baby formula by about 10%.
Over the past few years, there has been a global trend of increasing food prices. According to a research report by the Eurasian Bank, food prices have surged by 46.5% in the last two years alone. The food price index of the Food and Agriculture Organization (FAO) of the United Nations shows an increase from 98.1 in 2020 to 125.7 in 2021, and further to 143.7 in 2022. Although there has been a decline in food prices since the latter half of 2022, they are still notably higher than in 2021.
The question arises as to why such a widespread hike in food prices has occurred at a time when productivity is at an all-time high. While some may argue that food is just another commodity and its market prices are subject to normal fluctuations, the degree of increase over the past two years seems to exceed the usual market trends, becoming a critical contributor to inflation across several nations.
Researchers at ANBOUND believe that two main factors have led to a significant rise in food prices in the past two years if the excessive liquidity injected by major central banks since the 2008 financial crisis is not considered. The first factor is the impact of the war in Ukraine on food supply and markets, which has driven prices up due to geopolitical factors. The second factor is the problem of food production caused by droughts resulting from climate change, which has also affected food prices.
Ukraine is a major global exporter of grains, touted as the “breadbasket of Europe,” with exports of corn and wheat accounting for more than 10% of the global market. Due to the war, its grain harvest for 2022 is estimated to be 54 million tons, lower than the record 86 million tons in 2021. According to data from the Ukrainian Ministry of Agriculture, as of March 24, the total grain exports for 2022/2023 were 36.6 million tons, of which 4.29 million tons were exported in March. As of March 27, 2023, Ukraine has already exported 44.8 million tons of grain. It is estimated that its grain planting area in 2023 will be 45% lower than the previous year. The National Academy of Agrarian Sciences (NASS) of Ukraine predicts that due to a decrease in planting area and yield, the country’s grain harvest in 2023 may only be 34 million tons, a 37% decrease compared to the previous year and a 60% decrease compared to 2021.
The war in Ukraine has directly impacted the global food supply chain, which in turn has exacerbated food inflation. The World Bank warns that the food trade restriction that emerged after the Russia-Ukraine conflict has intensified the global food crisis, and countries are attempting to increase domestic food supplies and curb inflation. As of December 2022, 19 countries have implemented food export bans, and 8 countries have implemented food export restrictions.
Climate change is another important factor that affects global food production. In 2022, rare extreme heatwaves and droughts threatened the planting and inventory of food in most parts of the world. Climatologists noted that 2022 was the most severe drought year on the European continent in 500 years. In Italy, the Po Valley region provided 30%-40% of the country’s crop output, and local rice growers reported crop losses of up to 60% due to the drought last year. Germany, France, and other countries also experienced varying degrees of drought and harvest losses last year. Additionally, fertilizers have worsened the food crisis. Market data shows that urea prices, a common material for nitrogen fertilizer, rose by more than twice as much in 2022 compared to 2021. Natural gas shortages have also caused European fertilizer plants to announce production cuts or shutdowns, which has led to a shortage of fertilizers available for global farmers. The European Parliamentary Research Service (EPRS) report stated that the Russia-Ukraine crisis has led to a tightening of the supply chain for grains, oil, feed, and fertilizers. Rising energy prices have also increased production costs for the agricultural sector.
It is worth noting that this year’s climate issues may bring new pressure to the food crisis. The dry and warm winter that has just passed has brought drought to southern and western Europe, with the situation being particularly severe in northern France, Spain, and Italy. Currently, the melting of snow in the Alps during spring and early summer is expected to significantly decrease the water levels of related rivers, and the climate in the southern and eastern Mediterranean regions is warmer and drier than usual. Some organizations estimate that in the summer of 2023, Europe and the Mediterranean may experience another extreme heat wave similar to that of 2022. Against the backdrop of global warming, the abnormal climate change that may occur this year will have a significant impact on agricultural production and food prices in Europe.
The climate drought problem not only affects Europe but also other major food-producing regions worldwide. On March 3, the latest report from the FAO stated that as of February this year, the FAO Food Price Index has fallen for 11 consecutive months, a decrease of 18.7% from its peak in March 2022, but still the highest in 12 years. In the same month, international wheat prices rose slightly, due in part to concerns over supply caused by dry weather in the U.S., and fierce competition among exporters offset some of the price increases. The FAO pointed out that climate change and environmental destruction, which lead to more severe drought and changes in precipitation patterns, have been the main factors causing food production to decrease over the long term, and it is unlikely to be effectively alleviated in 2023. Overall, global wheat production is declining, providing a basis for this year’s rising food prices.
The question of whether the recent surge in grain prices is linked to China, and how it might impact the country, has been raised by a number of people. In this regard, researchers at ANBOUND have emphasized the importance of ensuring stable food production and prices for China’s vast population of 1.4 billion and warned against any complacency on this crucial issue.
China’s market is separated from the international market to a certain extent, and the Chinese government has strong measures to control prices, which is why China has not experienced high inflation like the U.S. and Europe. The strict control measures during the COVID-19 pandemic period have greatly affected enterprises and the income of residents, and any significant rise in prices may lead to social unrest. China has not experienced a significant rise in prices in the three years of the pandemic due to its government’s high precautions against rising prices.
As of 2022, China’s grain production has been stable at over 650 billion kg for 8 consecutive years. With 9% of the world’s arable land and 6% of its freshwater resources, China has been able to provide for almost one-fifth of the world’s population. However, increasing grain production by another 50 billion kg to achieve a production capacity of over 700 billion kg will be a great challenge. It took China two years to increase its grain production from 550 billion kg to 600 billion kg, and three years from 600 billion kg to 650 billion kg, but it has remained at 650 billion kg for 8 years. This is because the higher the grain production capacity goes, the more difficult it becomes due to multiple factors such as natural resources. In recent years, the country has increasingly faced extreme weather that further constrains the increase in grain production and may even result in large-scale regional yield reductions. Therefore, China is facing a fragile balance, and if there is a fluctuation in food production, it is entirely possible to affect the Chinese domestic grain prices.
Final analysis conclusion:
Due to the impact of the war in Ukraine and climate-related droughts, there is a growing risk of a global rise in grain prices this year. China has been working hard to increase its domestic grain production capacity, but it cannot afford to take the risk of rising grain prices lightly.
He Jun is a researcher at ANBOUND