The 40% rise in food prices triggers a panic over a wave of inflation

FAO’s Food Index hits 10-year highs

Amid inflationary fears, the UN Food and Agriculture agency, FAO, has issued a serious warning about rising food prices around the world. Its price index increased by 39.7% in May in annual terms, reaching 2011 levels. The warming of raw materials also affects the prices of food production.

The reopening of developed economies only adds pressure to food producers around the world. The pandemic only temporarily averted the perfect storm over the food sector. China’s voracity for basic grains, such as wheat, or soybeans, products that serve as a food base for much of the world and for the meat industry, the severe drought in Brazil, one of the main food pantries on the planet, and soaring prices of vegetable oils to respond to the energy demand for biodiesel are behind a historical increase in food prices.

The FAO index , which for many products tends to mark the selling price in many wholesale markets, is made up of various sub-indices of prices for oils, sugar, cereals, prices for meat and dairy products. The main index averaged 127.1 points in May 2021, that is, 4.8% more than in April and 39.7% more than in the same period last year . To find the index so high you have to go back to September 2011.

The fear of uncontrolled inflation has been brewing for months . First it came to the financial markets. The resounding recovery at the end of last year in the US and the new fiscal package triggered inflation expectations in the medium term . It is having its reflection in the interests of the debt of the whole world. 

Second, inflationary pressures have been transferred to the price of raw materials and energy. The CPI of most of the economic powers has risen strongly , but there is not a general increase in prices. It is energy that is pulling inflation up .

The deployment of vaccines together with the forecast of the reopening of the European economies for this summer has generated a strong expectation of growth in demand in the markets of raw materials. The commodities are the first to respond and adapt to changes of supply and demand.

Until now inflation was only a threat. The real fear is that it will end up leaking into the real economy, with an increase in prices without ever accompanying growth. Central banks are still confident that these inflationary pressures are temporary . 

Today’s FAO report is a real warning to boaters. The institution’s economists warn that the increase in prices will be suffered by the poorest economies, which are highly dependent on imports of raw materials; but so will advanced economies. The dreaded second-round effect of inflation will be felt in supermarkets and restaurants. In the end, companies end up transferring the increased costs that it entails.

The largest price increases occurred in oils. FAO explains that the sub-index reflects the rise in the values ​​of palm, soybean and rapeseed oils. International prices for palm oil remained on an upward trend in May and reached their highest level since February 2011. Regarding soybean oil, the robust outlook for world demand, especially from the biodiesel sector, favored the rising prices, while international rapeseed oil values ​​were sustained by continuing shortages in global supply. The vegetable oil index has shot up practically 100%, compared to a year ago. While cereals registered a rise of 6% more than in April and 36.6% above their level of May 2020.

The FAO Sugar Price Index increased 6.8% from April, mainly due to delays in harvests and concerns about lower crop yields in Brazil, the world’s largest sugar exporter, However, the large volumes of exports from India helped to moderate the sudden increase in prices.

The FAO meat price index increased by 2.2% compared to April, due to the rise in prices of all types of meat as a result of the acceleration of the pace of imports in China, as well as well as the growth in domestic demand for poultry and pork in the main producing regions.

The FAO Dairy Price Index rose 1.8% on the month, averaging 28% above its year-ago level. The increase was driven by strong import demand for skimmed and whole milk powders, while butter prices fell for the first time in nearly a year due to increased export supplies in New Zealand.

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