Food Inflation: Rising cost of food – it’s only just begun

The 30-year improvement in living standards due to stable/reducing food prices is reversing sharply, with food returning to a material proportion of consumer spend as inflation is likely to top 10%.

This will result in a sharp increase in food poverty in the UK, but far worse in many other countries. Riots and regime change are already occurring and we are only at the start of the increases. Food security will become increasingly pressing and countries are likely to focus on their own requirements rather than allow free trade. We look at the impact of the war on food supplies and prices across our sector coverage.

Reduction in supply from Ukraine and Russia
There is no doubt that the war has caused a major jolt to the supply of food given
how important Ukraine and Russia are in the global system. Normally, demand/supply for food are largely in balance and it only takes a minor shift to
cause a material change in pricing – this is far larger than a minor shift and will
last far longer than previous price spikes (eg 2009-11).

Unhelpful weather conditions
Food prices were generally rising ahead of the war due to unhelpful weather conditions in a number of areas (eg Great Plains, South-East Asia) and
constrained supply due to Covid-19. This will take time to reverse and yields will
not mitigate the pain in the short term.

Sharp price increases
The price increases are large, widespread and still coming through. We have
known about wheat (+35% YTD) and palm oil (+40%) for a while, but dairy and
pork increases (+20% in the UK over the last two weeks) are only now starting to
come through.

Severe impact in MENA and elsewhere
It may be painful in the UK, but that’s nothing compared to the increase in the cost of living in a number of countries, particularly those with a high level of imports from Russia and Ukraine. These have to contend with both price surges and insecurity of supply. Some countries have major exposures, with Eritrea getting 100% of its wheat from Russia and Ukraine and Turkey over 80%. Food is often a key driver of insecurity, protests and regime change. The issues in Sri Lanka are not down to Ukraine, but show what happens when food prices soar. In Peru last week, the government imposed a state of emergency and curfew responding to riots relating to food and fuel prices.

To view the full research note please click here