Explained: How COVID-19-hit supply chains, stockpiling and climate change are pushing up food prices

Increase in transportation costs due to surge in fuel prices are likely to push prices of vegetables and fruits in the coming weeks, traders in Delhi warned on Wednesday as prices of consumables rose further this week.

The warning, though may seem banal, has come days after International Monetary Fund experts said that food prices are expected to increase by about 25 percent in 2021 from 2020, and that too at a time when food prices having rallied to multi-year highs in both developing as well as developed countries (for example, the spike in cooking oil prices in India).

According to IMF experts Christian Bogmans, Andrea Pescatori and Ervin Prifti, from their trough in April 2020, international food prices have increased by 47.2 percent attaining their highest levels on May 2021 since 2014.

The IMF experts pointed out several factors behind the rise, including how COVID-19 pandemic disrupted supply chains, rise in transporting costs due to rise in fuel prices (India, for example), as well as climate change. Let's take a look at these one by one.

How COVID-19 woes aded to food inflation

The IMF experts say that at the start of the pandemic, food supply chain disruptions, a shift from food services (such as dining out) towards retail grocery and consumer stockpiling (coupled with sharp appreciation of US dollar) pushed up consumer food price indices in many countries.

Consumer food inflation peaked in April 2020 even though producer prices of primary commodities, including food and energy, were declining sharply as demand for primary food commodities was disrupted.

Though by early summer 2020, the various consumer food prices had moderated, pushing down consumer food inflation in many countries. As a result, consumer price inflation slowed down at the global level from about 4 percent in the first quarter of 2020 to about 2.5 percent in the second quarter.

As lockdown measures were subsequently eased, consumer price inflation picked up slightly but still remained below the pre‑pandemic level.

However, in August 2020, the food component of the CPI increased at a much faster rate than the overall CPI in all regions of the world. Globally, in August 2020, the prices of food products were on average 5.5 percent higher than in August 2019. This was largely due to stockpiling of food by countries as well as individuals.

COVID-19 has exposed the vulnerabilities in the food system, impacting both production as well as supply from the farm to the fork. These vulnerabilities continue even today.

Besides, coupled with increase in ocean freight rates (rates have increased two to three times in the last 12 months), higher fuel prices (both diesel and petrol) and shortage in truck drivers (again due to COVID-19) are pushing up the cost of road transport services.

Higher transport costs will eventually increase consumer food inflation, expert say.

The recent sharp increase in international food prices has already slowly started to feed into domestic consumer prices in some regions as retailers, unable to absorb the rising costs, are passing on the increases to consumers.

The impact of these factors is already visible in New Delhi, where the price of vegetables like onion and tomato, and fruits like pomegranate which comes mainly from Maharashtra, is higher this year.

Attributing the price rise to a hike in transportation cost, traders told PTI that if wholesale rates of any vegetable go up by Rs 5 per kg, it translates into a retail hike of Rs 10-12 per kg of that vegetable.

Unlike pomegranate, traders say that there has not been much impact of fuel price hike on seasonal fruits like mango as those are perishable items and also come from shorter distance like Haryana and Uttar Pradesh.

The other side: How climate change impact food prices

While it's easy to lay the blame for rising food inflation on the pandemic and its impact on global supply chain, according to IMF, food prices have been rising before the pandemic. And this is where climate change comes in.

In the summer of 2018, China was hit by an outbreak of African swine fever, wiping out much of China's hog herd, which represents more than 50 percent of the world's hogs.

This sent pork prices in China to an all-time high by mid-2019 creating a ripple effect on the prices of pork and other animal proteins in many regions around the world. This was compounded by the introduction of Chinese import tariffs on US pork and soybeans during the US-China trade dispute.

If one keep the politics aside, given the relation between diseases and climate change, the latter's role in the rise in food inflation becomes clear.

For those, who are still not convinced, let's take another example. In 2010, the floods in Pakistan not only led to loss of human lives, but also resulted in a loss of 2.5 million tons of rice, 7.5 million tons of sugarcane, 0.7 million tons of cotton and 0.3 million tonnes of maize. The flood inflicted over $16 billion in economic loss. The same year, severe heat wave and drought in Russia caused a grain embargo.

According to a Cornell University study published in the journal Nature "climate change cost the world seven years of farm productivity increase since the 1960s". The global farming productivity is 21 percent lower than it could have been without climate change, the study said.

The loss is "equivalent to pressing the pause button on productivity growth back in 2013 and experiencing no improvements since then" economist Ariel Ortiz-Bobea who led the study was quoted as saying in a report published in Cornell University's official website.

The effect is substantially more severe (a reduction of ~26–34 percent ) in warmer regions such as Africa and Latin America and the Caribbean, the study added.

As per a report Mongabay, climate change is one of the main reasons for depleting fishing stock in the Sundarbans, besides harmful fishing practices and pollution.

The future doesn't seem bright either if countries fail to act on climate issues now.

Recently, a new World Bank Report, 'Turn Down The Heat', projected future scenarios in a world warmer by 2-degree and 4-degree Celsius, and the likely impact on agriculture production.

"Dry years will become drier and wet years will become wetter, making the summer monsoon extremely unpredictable. It will trigger massive losses in agricultural production," according to a report in The Daily Pioneer.

The World Bank report also outlines some of the possible impact of climate change in food resources such as decline in fish stocks (due to decline in coral reefs), reduction of land available suitable fo crops and econsystems, reduction in crop productivity especially of wheat and maize and negative yields for fruits and nut trees, as well as disrutpion to fishery and shellfishering production as well as fish migrations.

The Sundarbans in India are already facing some of these threats. As a result, fishermen in the area have migrated to other coastal areas in the country.

The impact of climate change finds a mention in the IMF report as well. According to the IMF experts, the "recent 2020-2021 La NiƱa episode — a global weather event occurring every few years — has led to dry weather in key food exporting countries, including Argentina, Brazil, Russia, Ukraine, and the United States. This has caused, in some cases, harvests and harvest outlooks to fall short of expectations."

But the global demand for food has remained high. The latter could be largely due to stockpiling of food by countries as well as individual consumers, it said.

What other factors causing rise in food prices

Besides COVID-19, transportation and climate change, the IMF economists, say that for emerging markets and developing economies like India, an additional risk factor is the currency depreciation against the US dollar, possibly due to falling export and tourism revenues and net capital outflows.

Since most food commodities are traded in US dollars, countries with weaker currencies have seen their food import bill increase.

With inputs from agencies