A food price shock
Across the world, people are going to be affected by increasing world food prices in the coming months. The war in Ukraine has put a significant constraint on the supply of its major agricultural exports corn, wheat, and vegetable oil. This constraint is likely to get worse in the coming months. A fall in the supply of agricultural products from Russia is going to put further pressure on the price of food. In the last few days, the price of wheat, corn, and soya beans are the highest they have been for a decade.
Even before the start of the conflict in Ukraine, food prices have been rising around the world because of supply chain issues resulting from the Covid 19 pandemic and poor growing conditions which may be the result of climate change. When the supply shortages caused by the war in Ukraine are added to these issues it is clear that falling supply is an important cause of rising food prices.
The impact of rising world food prices is having significant economic and political implications for individual countries as well as the world economy.
Households are going to feel the squeeze on their incomes as food prices rise because food is a necessity. If the price of bread and pasta rise because of an increase in the price of wheat then consumers will find it difficult to find alternatives and the higher price will leave less income for them to spend on other goods and services. The poorest households, particularly in developing countries, are going to have problems maintaining their living standards. Higher food prices may well mean some of the world’s poor will struggle to feed themselves and there will be a rise in malnutrition
The increasing price of commodities such as wheat, corn, and soya will have a particular impact on the production costs of food manufacturers where commodities are key inputs. US food manufacturers have, for example, seen a 10 per cent rise in wholesale prices since the start of the year. It is not just food manufacturers who will be affected by rising food prices, it will also increase the costs of businesses such as supermarkets, restaurants, and hotels. All firms who experience rising costs because of higher food prices will have to choose between passing on these higher costs to their customers as higher prices or seeing their profits fall if they try to absorb the rising costs themselves.
Rising food prices are also a challenge for governments. In 2007 the spike in world food prices caused civil unrest in the Middle East and is said to be a trigger for the Arab Spring in 2010. The current rise in food prices has caused street protests in Albania and Iraq. Governments can put in place policies such as maximum prices on food to protect consumers. Egypt, for example, is offering incentives to farmers to produce wheat and is reducing the amount of wheat that can be exported.
The rise in world food prices as a result of the conflict in Ukraine is a good example of how events in one place have consequences that result from an interlinked chain of reactions that ripple out through the world over time.
Possible points for discussion with a class
1. Why are rising food prices so significant for the world's poorest households?
2. Research into a business that is going to be significantly affected by rising food prices.
3. To what extent can governments mitigate the problems caused by rising food prices?
4. Are there any benefits of rising world food prices?