Understanding the Factors Driving Global Food Prices

As we navigate through a time of rising food prices, it is important to consider the underlying factors driving this global polycrisis triggered by the pandemic and Russia’s war on Ukraine. The resulting seizures in supply chains have pushed up energy and food prices, not just in South Africa, but across the world.

It is crucial not to cry wolf, as the Competition Commission recently did in its Essential Food Price Monitoring Report, as raising a false alarm undermines credibility when danger is actually present. Instead, let us examine the real factors driving the recent increase in food prices.

The drought in South America during the 2019/20 season and the growing demand for grains and oilseeds in China were major drivers of global prices. China was on a path to rebuild its pork industry, which African swine fever had devastated, leading to increased volumes of grains and oilseeds. China’s growing demand had a consequential impact on global grain prices due to its large share of imports, importing approximately 60% of globally traded soybeans.

As Covid-19 spread in early 2020, several major grain producers, such as India, Kazakhstan, and Vietnam, worsened the increase in global prices by temporarily banning exports. As this unfolded, shipping costs soared, contributing to already elevated global grain prices.

Throughout this period, the drought in South America persisted, weighing on global supplies. Brazil and Argentina account for half of global soybean production and about 15% of global maize production, and when these countries face drought, the impact is visible in global grain supplies and prices. In summary, a combination of trade policy actions by other countries, logistics, and weather conditions placed upward pressure on food prices.

These are all important fundamentals that challenge food supplies, further exacerbated by the Russia-Ukraine war. Russia and Ukraine are substantial players in the grains and oilseeds market, with Russia producing approximately 10% of global wheat, and Ukraine accounting for 4%. Wheat is for domestic consumption as well as export markets. Together, the two countries account for a quarter of global wheat exports. Moreover, Russia and Ukraine are notable players in maize, responsible for 4% of production combined. However, their contribution is even more significant in exports, accounting for an average of 14%. Both countries are also among the leading producers and exporters of sunflower oil.

Before the war, Ukraine’s global exports of sunflower oil accounted for 40%, with Russia accounting for 18%. The start of the war led to a surge in grains and oilseeds prices for much of 2022. As the war intensified, the drought in South America continued.

During this period, there were also sharp increases in energy prices because of Russia’s major contribution to global energy supplies, which was suddenly disrupted. These events affected all countries, and food price inflation suddenly became a worldwide topic. Understanding the factors driving global food prices is crucial to managing the situation effectively.

The interconnectedness of global food supplies: Linkages to South Africa

Despite being a net exporter of agricultural products, South Africa was affected by the global food price shock. This highlights the interdependence of global food supplies. While some may suggest implementing export bans to curb domestic grain prices, this is not a viable solution. Agricultural production in South Africa is heavily reliant on global markets, with half of its output by value being exported and many farming inputs needing to be imported. The country imports over 80% of its annual fertilizer usage and 98% of agrochemicals, fuel, and equipment. With limited control over these prices, South Africa risks reduced competitiveness in maize production and ultimately lower plantings and output if policymakers limit grain exports.

In the past year, food producers and processors faced higher agricultural commodity prices, which raised costs throughout the food value chain. This includes logistics, processing, labour, energy, packaging, finance, and distribution costs. South Africa’s energy crisis, high crime rates, inflation-related wage increases, and load-shedding exacerbate the cost increases. However, food prices in South Africa only increased moderately, averaging 9.5% in 2022 compared to 6.5% YoY in 2021 and 4.8% in 2020. This suggests that food processors and retailers absorbed the costs to maintain competitiveness and benefit consumers.

The Competition Commission’s comments on food price increases being “unjustified” are irresponsible and misguided. The drivers of food prices are complex and global challenges, and food processors and retailers have to apply smart pricing strategies to remain competitive and benefit consumers. As the country faces rolling blackouts, food prices are likely to remain elevated but could soften in the second half of the year. However, public anxiety about high food prices should be reported responsibly, taking into account the lag between farm and retail prices and the critical role of regulating bodies like the Competition Commission in society.

Source: wandilesihlobo.com