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Emerging Market Policy Makers Scramble To Tame Soaring Food Inflation As Unrest Looms

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by Tyler Durden
Thursday, Sep 16, 2021 - 02:45 AM

SocGen's market skeptic Albert Edwards pointed out last year why he started to panic about soaring food prices and how it may cause social unrest in emerging market economies. In July, Bloomberg acknowledged the same phenomenon, and now they point out politicians are searching for policies to neuter the effect of surging costs to thwart unrest. 

Pandemic-driven hunger is sweeping the world as global food prices jumped 33% in August from a year ago. According to United Nations Food and Agriculture Organization data, vegetable oil, grains, and meat prices are surging. Extreme weather, record-high shipping costs, soaring fertilizer costs, labor shortages, and port congestion are also aiding in increasing prices. 

As a reminder to readers, emerging markets are more vulnerable to food insecurity since working poor spend a far greater share of their income on food than those in the developed world. This makes it easier for large price swings to cause political pressure on elected officials to tame inflation.

Politicians have one job and one job only: get re-elected. So amid a period of food inflation, it doesn't come as a surprise that elected officials in India, Turkey, Europe, and other at-risk countries are requesting food wholesalers to slash prices and tweak trade rules to mitigate the impact on consumers. 

Source: Bloomberg 

"Governments can intervene and commit to supporting lower consumer prices for a while," said Cullen Hendrix, non-resident senior fellow at the Peterson Institute for International Economics, a Washington-based think tank.

"But they can't do it indefinitely."

Bloomberg must have read the script from Edwards' warning last year. They said, "food inflation spurred more than two dozen riots across Asia, the Middle East, and Africa, contributing to the Arab Spring uprisings ten years ago." Already, there have been riots in Cuba and South Africa, areas that have extreme wealth inequality and soaring food inflation. 

Source: Bloomberg 

Alastair Smith, senior teaching fellow in global sustainable development at Warwick University in the U.K., said, "food is more expensive today than it has been for the vast majority of modern recorded history," and that is a recipe for unrest. 

Bloomberg lists some countries where politicians are preemptively adjusting policy to alleviate consumers:  

  • Tunisia: Crisis Management

The ground zero for the Arab Spring protests, Tunisia has raw memories when it comes to food and politics. Just a few days after dismissing the government and suspending parliament in July, President Kais Saied urged producers and retailers to slash prices of selected produce.

Red meat prices fell by about 10% almost instantly, with the nation's main business lobby group Utica announcing unspecified cuts in prices for staples ranging from wheat flour, meat, to dairy, coffee and soft drinks. Fruit prices fell by as much as 20%, Tunisian media reported. Still, consumer prices overall rose at an annual rate of 6.2% in August.

Then there's the prospect of subsidy cuts. A debate is raging about a long-planned shift to focus spending on the neediest citizens as Tunisia tries to secure a new financing program from the International Monetary Fund. That will likely lead to reduced support for items likes flour and sugar as well as electricity for a substantial number of households.

North African neighbors are also looking at subsidy cuts to help fix public finances. In Egypt, President Abdel-Fattah El-Sisi called for a rise in bread prices. Algerian bakers have already hiked prices of subsidized bread in an act of defiance amid a shortage of wheat or shrunk the size of loaves. In Morocco, authorities announced in July a plan that will see cuts to subsidies on sugar and low-cost wheat flour starting next year, subject to the approval of parliament.

  • Romania: Rethinking Trade

The cost of bread is not just political for grain-importing countries in North Africa and the Middle East. Romania is Europe's top exporter this season, and yet prices have soared at a double-digit pace. Overall inflation is set to be the fastest in eight years in 2021.

The former eastern bloc country also has a dark history when it comes to feeding its population. Severe shortages were a hallmark of communist dictator Nicolae Ceausescu before he was overthrown and executed in 1989.

Prime Minister Florin Citu's government wants to cut dependence on imported processed food products as a way to reduce costs and narrow the trade deficit. He is already under pressure after the collapse of his coalition and faced a backlash over his answer to a question about the cost of a loaf of bread. "I don't eat bread," he answered.

Romania earmarked 760 million euros ($896 million) for investment in farm storage and processing, Agriculture Minister Adrian Oros said. "We're one of the biggest exporters of cereals and yet we import frozen bread products," he said. As of this month, the government is waiting for farmers to submit eligible projects to tap the money over the next two years. However, while Romania's agricultural potential is one of the biggest in Europe, it so far failed to use EU money to improve its local production.

  • India: Cutting Duties

With one of the largest malnourished populations, India is also dispersing more aid. Prime Minister Narendra Modi's government is distributing 20.4 million tons of free rice and wheat, spending 672.7 billion rupees ($9.1 billion) on extra grains subsidies to reach potentially more than 800 million people.

The country has also implemented trade measures to shield consumers from spikes in global prices. The government has cut duties on palm, soybean and sunflower oils as well as lentils.

India isn't the only nation to use trade to intervene in the food market. War-torn Syria has tightened imports of items ranging from cheese to cashew nuts to safeguard its dwindling foreign currency reserves for wheat purchases. Argentina and Bolivia have curbed exports of beef to keep prices at home in check, as has drought-hit Kazakhstan, which forbade exports of oat, rye and forage and added quotas for forage wheat.

  • Turkey: Market Action

In Turkey, President Recep Tayyip Erdogan's popularity has slumped because of the economy and cost of living. Food inflation accelerated for a fourth month in August, to 29%.

The government is making another attempt to control prices through threats of fines for businesses selling at elevated prices to an investigation into higher costs. Trade ministry officials are ordered to inspect allegations of excessive price increases in food products at wholesale markets in major Turkish cities, including Istanbul, Ankara and Izmir.

Erdogan's government is also working on some legislative changes to curb food inflation. From October, fresh fruit and vegetables that may have been wasted on farms will be brought to an online market, and an early weather warning system will be put in place to spot potential supply shocks. There's also the prospect of tax incentives and more trade measures. Turkey removed import duties on grains and lentils on Sept. 8.

  • Russia: Losing Battle

The world's top grains exporter shows the limitation of adjusting trade rules to curb prices. Russia introduced a wheat export tax in February, but it's also paying with a loss of market share. The nation's wheat is no longer as competitive, derailing exports to Egypt, one of its biggest customers.

At home, the measures haven't helped curb food inflation, either. It's hovering at a five-year high. Domestic wheat prices jumped in August to levels typically not seen this time of year as farmers and traders were reluctant to sell.

If food inflation remains persistent and not "transitory," measures to tame inflation may become exhausted, and unrest could follow. Perhaps, what happened in Cuba and South Africa is a taste for what's to come. 

 

 

 

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