What’s Fueling Food Inflation?

When life gives you lemons: sell them! In India, prices of lemons have more than quadrupled from ₹75/kg ($1) to record highs of ₹350/kg ($4.50) in just a matter of weeks. This has left Indians with a sour taste, but the cost of a glass of lemonade is the least of our problems. A range of other important foodstuffs are also becoming dearer, in a country where half the population is living on less than $3.20 a day.

Higher costs of essentials are not confined to India. Short supplies and rising prices for food are reducing the weight of consumer wallets everywhere. The problem started off with the pandemic as a key underlying force, as logistic systems surrounding food distribution were significantly disrupted. While COVID-19 is less of an issue today in most parts of the world, problems in food supply chains have lingered.

The war in Ukraine has also added a massive strain. Moscow is the world’s largest exporter of wheat and fertilizer. Kyiv is the biggest supplier of sunflower seed oil and a significant source of wheat, maize and barley. Sanctions on Russia coupled with port blockades and the damage to railroad infrastructure in Ukraine have brought exports to a standstill. In March, Kyiv could export only a quarter of the grains it supplied in February. To keep domestic prices in check, Russia has suspended sales of fertilizer and grains to other nations. Ukraine has also limited their exports of sunflower oil, wheat, oats and cattle.

Chart: FAO food price index and oil vs. wheat prices

The conflict is driving a new wave of protectionism. Desperate to ensure adequate domestic supplies, governments are raising new barriers to exports. A total of 47 export curbs on food and fertilizers have been put in place by various countries this year, according to a professor at the University of St. Gallen. 43 of those 47 restrictions have coincided with the war.

The rules of the World Trade Organization (WTO) allow countries to impose temporary measures for national security or safety. But the restrictions are adding to the global pain. Indonesia, which produces more than half the world’s palm oil, has halted exports. Turkey has halted supplies of a host of food items such as butter, lamb and vegetable oils. Supply of fertilizers from China, a major producer of the commodity, has remained offline since last year to cater to domestic demand.