Food prices were on the boil before Russia-Ukraine conflict

Between May 2020 and February 2022, FAO’s Food Price Index went up by 55.2%

Prices have been rising—and quite strongly—since mid-2020. Between May 2020 and February 2022, FAO’s Food Price Index went up by 55.2%, led by a 159.4% rise in prices of edible oils, followed by strong growth in prices of sugar, dairy, and cereals. Multiple factors can explain this surge.

Economic recovery to push up prices

In May 2020, food prices fell to their lowest levels in four years, partly due to the pandemic, as economic activity declined sharply in the wake of lockdowns and other social-distancing measures across the world. As global economic growth started to recover—global GDP is estimated to have grown by 5.9% in 2021 after a 3.1% contraction in 2020—commodity prices, including that of food items, started receiving a boost. The pandemic also severely impacted global and domestic supply chains, and food supply chains haven’t been spared either. This has aided the uptick in food prices and contributed to a rise in global hunger.

Higher freight costs

Freight costs have gone up sharply since the initial months of the pandemic. While shipping and logistical challenges due to lockdowns and safety restrictions (from the virus) are one reason for high freight rates, rise in fuel prices has also added to the misery. Since May 2020, the Baltic Dry Index—an indicator of freight prices—has gone up by nearly 400%, although this data point masks an even sharper spike seen in the second half of last year. It also shows the sharp recovery in crude prices after sliding in the first four months of 2020. Food transportation and energy used in food production are, therefore, much more expensive now than in early 2020.

Increase in fertilizer prices

A key reason behind rising food prices is higher fertilizer costs. Fertilizers are an essential ingredient in the food-production process and prices of major fertilizers have been going up sharply. For nitrogen-based fertilizers, the major cause of high prices is the rising price of natural gas—another key component in food production. Average monthly natural gas price, as indicated by the World Bank’s Natural Gas Index, went up by nearly 600% between June 2020 and December 2021. The high cost of transportation hasn’t helped either, as is evident in trends for the Baltic Dry Index. Export restrictions have also pushed up fertilizer prices. For example, China, which is one of the world’s leading exporters of phosphate, put restrictions on its export in 2021, amid tight domestic supplies.

Export restrictions amid the pandemic

As the COVID-19 pandemic intensified in 2020, there were increasing concerns about food availability, leading to grain-producing countries imposing export restrictions. Vietnam, which had a 16% share in global rice exports before the pandemic, held back on granting rice-export certificates till the end of April 2020. Kazakhstan suspended exports of several cereal products, oilseeds, and vegetables until June 30, 2020, while Russia placed restrictions on the export of items such as wheat, corn, and meslin. Consequently, food prices started picking in the second half of 2020, with the prices of cereals and edible oil witnessing strong growth since then.