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November 08, 2022 Aran Shaunak By Aran Shaunak My Articles

Who Pays the Price of Food Inflation?

I don’t need to tell you that we’re in the midst of a cost-of-living crisis. The food sector is seeing raised prices across the board, with the cost of food in the EU rising just over 10% in the past year alone. That’s the largest one-year rise in food prices since the creation of the Eurozone. But why are food prices rising so fast, where is all that extra money going, and what does the future hold for the price of your weekly shop?

The word “inflation” is now a regular feature in headlines across Europe, and for good reason: the European Central Bank aims to keep inflation across the EU at around 2% each year.2 In August 2022, it was sitting at 9% - four and a half times where it should be. Despite some countries managing to avoid the worst of it, some regions are being hit even harder: France and Malta are still seeing inflation below 7%, while Eastern Europe is being hit the hardest, with Estonia, Latvia and Lithuania all currently experiencing inflation rates over 20%.3 Inflation can sometimes feel like an abstract concept, but for citizens in Eastern Europe who are paying a fifth more for their food, warmth and shelter than they were in August last year, the pain is all too real.

What is “inflation”?

In economics, ‘inflation’ is the rate at which something becomes more expensive over time - meaning you get less for your money. It’s often measured annually, meaning we compare today’s prices with prices for the same goods and services one year ago. For example, if a bar of chocolate cost 1 EUR a year ago, and the annual inflation of chocolate bars is currently 10%, that same bar of chocolate would now cost 1.10 EUR - an extra 10 cents, or 10% more. 

When you break it down, the biggest contributors to the rising cost of living in Europe are coming from just two sectors: energy and food. Unsurprisingly, rising energy prices are currently the greatest contributor to overall inflation, with costs spiralling a massive 40.7% since last September. But food is also a major contributor, showing the second-fastest price rises of all sectors of the economy (with an inflation rate in September 2022 of 11.8%).4 As of today, there are also no obvious signs of this rise in food prices slowing down. So where is this rise in food prices coming from, and where might we find ourselves a month, a year or a decade from now?


An outdoor fruit and vegetable market on October 29, 2022 in Vilnius, Lithuania. The Baltic countries currently have the highest annual inflation rates in Europe, with Lithuania at 21.2%, Latvia at 20.8% and Estonia at 25%. (Sean Gallup/Getty Images)

Why are food prices rising so fast?

In 2020, food prices jumped due to the COVID-19 pandemic and associated global lockdowns, the combination of which created huge challenges in both producing and transporting food around the world. By April 2022, this rise in food prices had stalled and food prices were stable - but unfortunately, the respite was short-lived. From its base of 0% in April 2021, food inflation crept up to 3.5% in January 2022, 7.5% in May 2022 and has now soared to over 15% - meaning food across the EU costs on average 15% more than it did just one year ago. So what made 2022 such a difficult year for food?

Read about how COVID-19 impacted global food systems

1. Energy Prices

As will have escaped no-one’s notice, energy prices are currently at record highs - and still rising rapidly, with the EU inflation rate for energy currently sitting at over 40%. But high energy prices have a knock-on effect on the cost of producing and transporting all kinds of other goods & services - including food. Higher fuel and electricity prices means it costs more to power the machinery used to grow, harvest, transport and process raw foods into consumer products - which in turn means higher food costs for us as consumers. 

A major contributor to the recent spike in energy prices was the Russian invasion of Ukraine in February 2022. Russia is a major energy producer – and one that Europe is particularly dependent on. In fact, despite widespread condemnation of the Russian invasion and the imposition of EU sanctions on Russia, the EU’s dependence on this major energy producer meant Member States still collectively imported more than half of all the fossil fuels that Russia exported over the first six months of the war in Ukraine.5 

Russia has now dramatically cut natural gas exports to Europe, a move that significantly increased energy prices for the EU. Formal EU sanctions on importing oil and some other energy products from Russia are now being phased in, which will help reduce the EU’s dependency on Russia for energy - but will likely also put even more upward pressure on energy prices in the months to come.6

2. Fertiliser Prices

Natural gas is an important energy source for Europe - but it’s also a key raw material for producing synthetic fertilisers. Global natural gas prices recently hit a 14-year peak, and together with Russia cutting its exports of fertilisers, this has led to a huge increase in the cost of fertilisers globally.7

While they remain a controversial topic, fertilisers are still an essential tool for modern farmers, who use them to achieve high crop yields. This enables economies of scale that help to both keep farmers in business and keep food prices low for consumers. Recent events in Sri Lanka provide a humbling warning of what a world without fertilisers looks like: after synthetic fertilisers were rashly banned without a plan to manage the effects, farmers saw their yields collapse - triggering social unrest and contributing to a national economic crisis.8 

If European farmers are to maintain the high yields they’re used to getting from their crops, they need to buy fertilisers. Today, these fertilisers are now far more expensive - further driving up the cost of producing our food. In some regions, the fertiliser crisis has become so bad that desperate farmers have resorted to using human urine as an affordable alternative source of nitrogen to replace natural gas!9 

Agriculutural sprayer on a field in the Netherlands on May 17, 2022. Analysts attribute the sharp rise in food prices to rising fuel and fertilizer costs, which have hit the agriculture sector acutely. (Photo by  Sjoerd van der Wal/Getty Images)

3. Supply Shocks

While the costs of producing our food have risen, we’ve also had major supply–side shocks that have reduced the world’s capacity to grow food. For example, unusually poor weather in some key food-producing areas this year has hit crop yields, reducing the supply of major food commodities and therefore driving global prices higher. 

The war in Ukraine has contributed here too, since Ukraine & Russia are both huge global staple food producers: together, they were responsible for almost  ⅔ of global sunflower oil exports, almost ¼ of global wheat exports, and around 1/5 of global maize and barley in 2019.10  

The Russian invasion has significantly hampered Ukraine’s ability to produce food, with 2022’s harvest volume expected to be 30% lower than 2021’s. This is still expected to surpass Ukraine’s domestic food needs – but the main challenge has been successfully getting this excess food out of Ukraine to the rest of the world. After Ukraine lost control of key territories containing their main ports used for exporting food to Russia, Ukrainian food exports fell by around 80% this year.11 

Food production in Russia has been far less affected by the war, and exports of food and fertilisers from Russia are currently exempted from EU sanctions in an effort to boost global food security and affordability. However, poor weather (leading to poor harvests) and reduced involvement by international agriculture companies in Russia due to trade sanctions have still led to the disruption of Russian agricultural trade and exports.11


A wheat granary in the Kyiv region on August 9, 2022. Ukrainian food exports fell by around 80% this year. (Photo by Maxym Marusenko/Getty Images)

4. Disrupted Supply Chains & Transportation 

It’s not just producing our food that’s contributing to rising costs, though - getting it to us is part of the problem too. 

Global transport infrastructure started 2022 on the back foot, with many supply chains yet to recover from the disruptions caused by COVID-19. In fact, the IMF estimates that the cost of shipping containers around the world rose as much as 10-fold in the 18 month period after lockdowns were put in place around March 2020.12 

But 2022 has brought even more headwinds for food supply chains. As mentioned above, food exports from Ukraine are down 80% this year - due mainly to challenges getting food out of the country. Limited exports are currently possible, but only thanks to a fragile truce with Russia - one which could collapse at any moment.13 And high energy prices rear their head here too, meaning even when we can move food, it’s costing us more on fuel and electricity to do so.

5. Increased Uncertainty

With the war ongoing, energy prices remaining high, and fertilisers still in short supply, the world’s food supply is currently in an even more fragile state than usual. As a result, some food-producing countries have become fearful and begun to place limits on food exports to ensure they retain enough to feed their own populations. “Food protectionism” helps to boost local food security and keep local food prices down, but it restricts global food supplies and so pushes up food prices in other parts of the world even further.

For example, India is the world’s largest exporter of rice, making up 33% of all rice exports. But with over 1.3 billion mouths to feed, Indian policymakers made the decision in September 2022 to restrict rice exports. While this move will help to keep rice prices down inside India, the World Bank estimates that rice has become 12% more expensive across the rest of the globe as a result. Meanwhile, Russia and Turkey’s export restrictions (on wheat and citrus fruits respectively) have raised global prices of those foods by around 9%.

6. A Strong Dollar

Even the financial markets are acting to drive up food inflation in Europe, thanks to the growing strength of the US dollar. Both energy and global food commodities (like wheat and vegetable oils) are traded on international markets, where they are all priced in US dollars. That means that even if prices remain stable, food and energy can become more expensive for Europeans simply through fluctuations  in currency exchange rates - like if the US dollar gets stronger, or the Euro weaker. 

With the global economic situation looking far from positive, many investors have put their faith in the US dollar. This drives up its value relative to the Euro, making food and energy both more expensive across the continent. Over the past year, the Euro has lost around 10% to the US dollar, translating into a roughly 1% rise in inflation that can be attributed to currency fluctuations alone.15
 

Who’s winning – and losing - from higher food prices?

So the price of food is rising for consumers at a record rate, which leads us to an important question: where is all that money going?

A natural thought is that farmers might stand to benefit from higher food prices – but a quick look at the numbers shows us that’s simply not the case. “Agricultural inflation” is a measure of how fast the cost of growing our food is rising: it captures the change in costs a typical farmer might bear as their input prices change (inputs like machinery, water, seeds, fuel, labour, fertiliser etc.) 

In the UK, for example, agricultural inflation is currently estimated at 23.5% - more than double that of food inflation.16 That means that even though food prices are rising at a record rate for us as consumers, the cost of growing that food is actually rising twice as fast for farmers. This is creating a “cost of farming” crisis which threatens to obliterate farmers’ already thin profit margins: to cite just one example, UK pig farmers haven’t made a profit since 2020, and this year pigs are selling for up to 70 EUR less than they cost farmers to rear and slaughter.17 

So in reality, farmers aren’t profiteering from the current food cost crisis – in fact, they’re actually protecting consumers by absorbing some of their rising input costs to grow our food.This a major concern long-term: farming is ultimately a business (albeit one that’s subsidised by the EU) - and the more farmers are squeezed, the more likely we are to see some forms of farming become unprofitable. In the absence of more government support, farmers could be forced to take on debt to survive with the hope that things improve next year - or simply stop farming entirely. Should that happen, it would reduce our ability to produce food long-term, potentially contributing to higher food prices for many years to come.


A discount grocery market on June 15, 2022 in Berlin, Germany. (Photo by Sean Gallup/Getty Images)

Who pays the greatest price for food inflation?

Ultimately inflation hurts everyone – but it doesn’t hurt everyone equally. Those at the beginning of supply chains providing essential basic goods and services (such as energy, or the natural gas used to make fertilisers) tend to be the most protected, since they directly benefit from price rises. Those further down the chain (such as farmers, retailers and consumers) tend to feel the squeeze more – which is one reason that many are calling for windfall taxes on energy giants. 

But as with many things, it’s the most vulnerable in our societies that tend to suffer the most – especially when prices are rising disproportionately in basic needs areas such as food and energy. Jack Leslie, Senior Economist at the Resolution Foundation, explained why in a press release: “On average the lowest income families spend twice as much on food and housing bills as the richest families. So increasing food price inflation… will disproportionately affect families already struggling to get by.”

Interestingly, Ukraine used to be one of the largest providers of wheat to the UN World Food Programme, estimated to provide 40% of their wheat stockpile – but thanks to the war, this flow of food has reversed. With the World Food Programme now working to support Ukrainians, rather than being supported by them, there’s more upward pressure on food prices and less surplus food available to help people in other parts of the world. It’s just another example of how the current global food price crisis is impacting the least fortunate in our society the most.10


An Asda supermarket on October 19, 2022 in Manchester, United Kingdom. The consumer prices index measure rose to a recent high of 10.1%. (Photo by Christopher Furlong/Getty Images)

What happens next? 

The current situation feels bleak – especially since food inflation is still rising and showing no signs of slowing down just yet. But perhaps the most important question is to ask, what happens next? Eventually food inflation will slow, and prices will stop rising so fast – but when? And will we see food prices fall in the future, or are higher food prices now an unavoidable part of life?

Attempting to predict the future is a fool’s errand, but there is some light on the horizon to give us hope. For example, the European Central Bank is starting to raise interest rates to combat inflation, which could help to bring down inflation rates generally – including food inflation.18 

However, the big elephant in the room is a resolution to the war in Ukraine. It’s far from the only cause of food inflation, but it is a major driver - so without the restoration of food and energy production and exports from both Ukraine and Russia, it’s hard to see how food prices can meaningfully come down. A bright future is especially hard to see given that we’re currently being shielded from more drastic food price rises by farmers and the Governments who subsidise their activities: they’re partially absorbing rising costs of food production on our behalf at the moment, but they can only do it for so long before something has to give.


"No one should be sitting hungry and cold this winter," said protesters demanding action against the high food and energy prices on September 5, 2022 in Leipzig, Germany. (Photo by Jens Schlueter/Getty Images)

The past shows us examples of food prices falling, so it is entirely possible that we’ll see a fall in food prices and life become more affordable - especially once we see a resolution to the war in Ukraine. However, it’s also possible that higher food prices are set to become the norm rather than the exception. So be prepared - we may all need to get used to setting aside more of our weekly budgets for groceries in the coming years. 

There could be one silver lining though: the opportunity for us, as a global community, to learn a valuable lesson. Rather than just assuming everything will be fine, we need to be prepared for the unpredictable. Of course we can’t possibly know what the next crisis will be - but we can diversify our energy and food systems to make them more robust, and therefore better able to respond to whatever the world throws at us. Perhaps then the next crisis won’t hit us quite so hard as this one has.

November 08, 2022 Aran Shaunak By Aran Shaunak My Articles

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References

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