The world and India are witnessing a resurgence of food inflation. Between September 2021 and April 2022, consumer food price inflation in India has risen from 0.68% to 8.38% year on year. And with the UN Food and Agriculture Organization’s (FAO) food price index hitting all-time-highs, it has reignited memories of the last great commodity inflation. That was during the period from the mid-2000s till around 2012-13, briefly interrupted by the 2008-09 global financial crisis.
But there’s a difference between the two food inflationary episodes, especially in India.
The former was a structural, demand-led inflation, driven by rising incomes. Real incomes, including of poor and lower-middle class households, going up resulted in declining per capita consumption of cereals and sugar (which basically deliver calories) alongside growing demand for foods incorporating proteins (milk, pulses, egg, fish and meat) and micronutrients (fruits & vegetables). This dietary diversification also had a bearing on inflation. Between 2004-05 and 2012-13, the cumulative rise in the wholesale price index was 93.1% for sugar, 99.9% for cereals and a mere 48.1% for edible oils (1 gm of fat provides 9 calories, more than the 3-4 calories from wheat atta and sugar). The same amounted to 108.1% for milk, 110.1% for vegetables, 141.3% for pulses and 144.5% for eggs, meat & fish.
Now and then
The current food inflation, by contrast, is idiosyncratic and shock-driven supply. And it is more “calorie” than “protein” price inflation, a term coined by the former Reserve Bank of India deputy governor Subir Gokarn (https://bit.ly/3sObGKF).
Since August 2020, when global demand started returning with the gradual lifting of Covid-19 lockdowns, the FAO’s vegetable oil, cereal and sugar price indices have soared 141%, 71% and 50%, respectively. These exceed the 32% cumulative rise in the meat price index and 44% for dairy over the same period till April 2020.
Moreover, as Table 1 shows, much of the above inflation predated the Russian invasion of Ukraine. Even before the war, Ukraine had drought in 2020-21, while Russia, in December 2020, announced export curbs on wheat, corn, barley, rye, sunflower and rapeseed for quelling domestic inflation. The Ukrainian drought and Russian export controls – coupled with pandemic-induced shortages of migrant workers in Malaysia’s oil palm plantations – drove up global prices of edible oils and cereals.
The war, which began on February 24, only worsened things – by squeezing supplies from the two countries having a substantial share of the world’s wheat, corn, barley and sunflower oil exports. Adding fuel to the fire was Indonesia imposing restrictions (even a temporary ban) on palm oil shipments to contain local inflation (similar to what Russia did earlier in wheat) and surging petroleum crude prices, making it all the more attractive to divert sugar, corn , palm and soyabean oil for bio-fuel production.
There has been no such major inflation, though, in proteins. The FAO’s dairy and meat prices indices have gone up, but that has had more to do with increased cost of feed ingredients (corn, barley, rye and oilseed cakes), as opposed to demand-pull from rising incomes. Since mid-March, prices of skim milk powder (SMP) and anhydrous milk fat at the Global Dairy Trade fortnightly auction platform have eased by over 9.4% and 15%, respectively. It is indicative of demand destruction, with buyers resisting unsustainably high prices at today’s low, if not negative, real income growth rates.
Impact on India
The transmission of the higher global calorie inflation to prices in India has, however, been largely limited to vegetable fats. Not surprising, given that more than 60% of the country’s edible oil consumption requirement is met by imports. From the accompanying chart, it can be seen that retail edible oil inflation ruled at 20-35% levels all through 2021, well before the surge in the overall consumer food price index from January. Interestingly, inflation in the other two calorie food commodities – cereals and sugar – has been relatively muted, notwithstanding the significant increase in their global prices.
The main reason for no imported inflation, at least till recently, in cereals and sugar is because of the country being a surplus producer of both. India’s exports of cereals and sugar were valued at a record $ 12.9 billion and $ 4.6 billion, respectively in 2021-22 (April-March). Also, despite some 32.3 million tonnes (mt) of cereals being shipped out – including 21.2 mt rice, 7.2 mt wheat and 3.6 mt maize – overflowing stocks in government godowns still enabled an unprecedented 105.6 mt of grain (55.1 mt rice and 50.5 mt wheat ) to be sold through the public distribution system.
There has been a pick-up in late cereal inflation. But that inflation, basically in wheat, has come on the back of crop yield loss caused by the sudden heat wave from mid-March. In other words, desi and not imported. The transmission mechanism here has worked the other way round: With lower domestic production and depleting stocks prompting the Center to ban wheat exports from India, international prices have firmed up – translating into higher inflation for other (importing) countries.
What about proteins?
The present food inflation, as already noted, has been more about carbohydrates and fats than proteins and micronutrients. All-India modal or most-quoted retail prices of dals (split pulses) are lower now than a year ago. That includes chana (Rs 70 versus Rs 75 / kg), tur / arhar (Rs 97.5 versus Rs 110), urad (Rs 97 versus Rs 105) and moong (Rs 98.5 versus Rs 105). The only exception is masoor, whose modal price of Rs 90 / kg is higher than the Rs 85 at this time last year, according to the department of consumer affairs’ data.
In milk, the crash in international SMP and butter fat prices has forced some correction in the domestic market as well. Since mid-April, Maharashtra’s dairies have lowered their prices of SMP cow milk and yellow butter from around Rs 295 and Rs 400 per kg to Rs 270 and Rs 360-365 / kg. They have further slashed the procurement price of milk (containing 3.5% fat and 8.5% solids-not-fat) to Rs 33-34 per liter, from Rs 35-36 till the first week of May. Buffalo milk SMP and white butter prices are still ruling firm, but even these should ease with the arrival of the monsoon rains. Summer months are the peak “lean” season for buffalo milk. Production really picks up from August, when the animals begin calving, and peaks during the winter through the spring months.
One can expect a similar easing of egg and meat prices. The summer heat subsiding should help reduce growing time and mortality of both layer and broiler birds. The poultry industry faced a huge crisis last June-July, when the cost of feed given to egg-laying birds crossed Rs 40 per kg (from Rs 21-22 in March 2021) and that for broiler chicks to Rs 50-52 (from Rs 29-30). This was courtesy of soyabean de-oiled cake (DOC) – the protein-rich feed ingredient obtained as a byproduct of oil extraction – whose prices went through the roof. The Center’s decision in August permitting import of up to 12 lakh tons of genetically modified DOC has stabilized layer and broiler feed prices to Rs 30 and Rs 45 / kg levels.
On the whole, while there has been a recovery of demand from the reopening of hotels and other lockdown restrictions going, it is unlikely to trigger any “protein inflation”. The demand-pull from rising incomes isn’t strong enough this time round.
In fruits and vegetables, too, the drivers of inflation (Table 2) have been mostly supply shocks rather than demand-side factors. The mango crop this year was hit by a double whammy of unseasonal rains in December-January (causing flower drop) and early summer (not allowing adequate time for fruit formation and growth). The same happened to lemons, during flowering (in January) and towards harvesting (in March-April).
At the same time, there is not much inflation in onion, potato and also watermelons, cucumber, pumpkin, okra / ladies finger, gourds and other summer vegetables. Tomato prices are high, but not abnormally so for this time of year. Again, incessant rains have played a part in disrupting market arrivals, particularly in the South.
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Food inflation resulting from war, drought, unseasonal rains and heat waves is different from structural demand-pull factors. The inflation now is not only more of the former, but also in foods mainly delivering calories rather than proteins, vitamins and minerals. That, to some extent, makes it worse than the previous inflation, which, in Gokarn’s words, was “an inevitable consequence of rising affluence.”
While high prices would also induce supply response from farmers, a lot hinges on the monsoon. Last year’s monsoon was “normal” in an overall sense, but marked by an extended dry spell in July and then too much rain from late-August, followed by the heavy unseasonal showers of December-January. One has to see how normal the “normal” monsoon forecast by the India Meteorological Department turns out to be.
Meanwhile, the good news is the Center, on Saturday, cutting the excise duty on diesel by Rs 6 / liter and many states also announcing reductions. That should have a further salutary effect on food inflation in the coming days.