Why food inflation may ease faster than expected

International prices falling the most since Oct 2008 and a good monsoon makes it a possibility.

The UN Food and Agriculture Organization’s Food Price Index (FPI) has averaged 140.9 points, which is 8.6% down from its previous month’s level. This is the steepest monthly drop since October 2008.
Between March and July, the FPI has cumulatively declined by 11.8%. This has been led by vegetable oils and cereals, whose average prices have fallen even more, by 32% and 13.4% respectively.

Global factors leading to Inflation:

There were four major supply-side shock drivers of the great global food inflation from around October 2020: weather, pandemic, war, and export controls.

1. Weather: The weather-related shocks included droughts in Ukraine (2020-21) and South America (2021-22), which especially impacted sunflower and soybean supplies, and the March-April 2022 heat wave that devastated India’s wheat crop.
2. Pandemic: The pandemic’s supply-side impact was felt the most in Malaysia’s oil palm plantations

- - During the pandemic many migrant labours flew back, they were engaged in the harvesting of fresh fruit bunches, and no new work permits were issued, resulting in low output, translating into a decline in exports.

1. War: The Russo-Ukrainian War led to supply disruptions from the two countries that, in 2019-20 (a non-war, non-drought year), accounted for 28.5% of the world’s wheat, 18.8% of corn, 34.4% of barley, and 78.1% of sunflower oil exports.
2. Export Controls: Export controls were first imposed by Russia in December 2020, prompted by domestic food inflation fears arising from record hot temperatures.

- - Shortage concerns at home triggered similar actions in palm oil by Indonesia (the world’s No. 1 producer-cum-exporter) and
  - in wheat by India during March-May 2022.

Relieving External Factors:

Resumption of exports from Ukraine via the Black Sea: The UN-backed agreement for unblocking the Black Sea trade route, provides for unimpeded shipments of Russian food and fertilizers.
Indonesia, since late May, has lifted its ban on palm oil exports.
US, Brazil, Argentina, and Paraguay are set to harvest bumper soybean crops.

Relieving Domestic Factors:

Good Southwest monsoon: The prospects for the coming days seem equally encouraging, with a low-pressure area forming over the northwest Bay of Bengal off the Odisha-West Bengal coasts – and another one forecast after mid-August.
Above average rainfall across the South Peninsula, Central and Northwest India has boosted acreages under most crops this Kharif (monsoon) season.
Rice stocks are well above buffer: Although the paddy transplantation has taken some hit due to deficient rains, the situation is manageable due to enough rice stocks in government godowns. Also, paddy being grown in the rabi (winter-spring) season as well, should make the overall rice situation manageable.
Duty-free Imports: The government’s decision to allow duty-free imports of arhar, urad, and Masur will keep prices under control.
International exportable surpluses, primarily from Canada and Australia, are also higher than last year’s by about 0.5 mt each for both pulses.
Higher water levels: Current water levels in the country’s major reservoirs are higher than a year back and above their last 10 year’s average storage. A good monsoon can better the rate of groundwater recharge, which could help rabi crops.

Downward Trend:

Due to global and domestic factors, there are compelling reasons for food inflation in India to “trend down”.
This is already being seen in edible oils.
A good monsoon would also mean more fodder and water for animals, further reducing livestock input costs and inflationary pressures on milk, egg, and meat.