Rising oil prices, El Nino could bring back global food inflation  

Rising oil prices, appreciating US dollar and monsoon deficit in the wake of EL Nino put a formidable challenge to global economies to contain food inflation

While the central banks across the globe have been sweating it out to bring down inflation in the aftermath of the Russia-Ukraine conflict, still the biggest challenge before them seems to be how to control food prices. Another formidable challenge now comes in the form of El Nino, oil production cuts by Saudia Arabia and Russia, which will keep the oil prices on fire and, and finally the appreciating dollar.

More than a year into the Russia-Ukraine war now, parts of the world are still grappling with food supply uncertainties. Russia pulling out of the Black Sea Grain Initiative is a body blow to the efforts being put to ensure that the food prices remain down. According to media reports, Russia pulled out of the deal complaining that the West was not doing enough to bolster Russian export interests and Ukraine was purportedly given greater priority. Ukraine is among the leading suppliers of grain to the world, while Russia is among the major suppliers of food and fertiliser.
An arrangement was made by the UN to bring Russia and Ukraine together on the table to resolve the food crisis but the current situation looks far from getting resolved with China pulling its weight firmly behind Russia.

Weather Whirlwinds

If the Russia-Ukraine conflict was not enough, another blow comes in the form of El Nino and Madden-Julian Oscillation (MJO), climatic conditions which cause weakening of the monsoon. We are witnessing its impact already in many parts of the world, including India.  

Reports are already suggesting that the El Nino impact may stretch up to 2024 which appears to be bad news. Prices of food, vegetables, edible oil and spices remain vulnerable to the impacts of a dry monsoon.

From the Indian standpoint, the situation remains precarious despite scores of steps being taken by the government in the form export curbs on commodities like sugar, rice and wheat. The Centre is also monitoring the edible oil supply issues coming hard on the attempts to hoard edible oil. This has shown an impact as prices have come down somehow, as of now.

Few weeks ago the government intervened when the tomato prices had hit the roof going up to Rs 300 per kg at some places. The situation of onion remains precarious. Among the spices, zeera (cumin) prices have been on the boil amid fall in production in Gujarat because of the monsoon-deficit.          

The government has also reduced the price of LPG cylinders by Rs 200 and inflation can be a hot potato as we get nearer to the assembly election in four states viz. Rajasthan, Madhya Pradesh, Chhattisgarh and Telangana which will be followed by the general elections in 2024.

Not to mention the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) which has served free rations to millions of people year-on-year since the pandemic. According to media reports, the Centre has spent a total of Rs 3.43 trillion for the seven-phase implementation of PMGKAY between April 2020 and December 2022, as per provisional estimates.

Oil Prices

A situation where the oil prices hover between USD 100 and USD 105 per BBL, with a rising dollar, could be disastrous for oil importing countries. A price escalation in energy will potentially increase the price of the food plate.

With demand for crude oil expected to grow, the deficit is likely to be around 3 Mbpd as per estimates by OPEC (Organization of the Petroleum Exporting Countries) which will keep the prices up.

Dollar Strength

The dollar is currently near the 107 mark against a basket of 6 major currencies while crude oil hovering near USD 97, is already creating a furore. It is double whammy for oil importing countries in the form of high prices and dearer currency exchange rates.      

Economic Headwinds

According to estimates by OECD, global GDP growth in 2023 is projected at 2.7 per cent, which will be the lowest annual rate since the global financial crisis, with the exception of the 2020 pandemic period. Its estimates see global GDP growth at 2.9 per cent in 2024, which is a small improvement. The annual OECD GDP growth is projected to be below trend in both 2023 and 2024.

While OECD expects growth to gradually pick up through 2024 with inflation moderating and real incomes getting strengthened, the greatest worry comes in the form of food inflation across the world.

The Federal Reserve’s September policy outcome shows that it maintained a status quo on interest rate, which was on the expected lines. But the US central bank made it clear that the rate regime will remain higher for a longer period. Against an expectation of 100 bps cut, now it will be only 50 bps in 2024 which will maintain the federal rate at 5.1 per cent. This has been a trigger for uptick in greenback making all dollar price commodities expensive.  

In a unanimous decision, the Federal Open Market Committee (FOMC) also suggested at least one hike of a quarter percentage points, this year, before it goes for a long pause. Its commitment to price stability remains unflinching even as the most powerful Centra Bank has been able to bring down inflation from a near 10% to 3% now.

In its assertions, the Fed said that the danger of inflation striking back is not over and it cannot let its guards, off.

To its credit, the Fed has been able to bring down inflation which were at decadal highs an year ago, but the resilience of the US economy has kept it comfortably afloat and prevented the US economy from slipping into recession. During his latest policy speech, Fed Chair Jerome Powell said that it was highly unlikely now that the US will get into any recession.

Does other economy enjoy the same resilience? The answer is no and we can see the cracks happening in the second largest economy China and the rest of the developed world. The UK runs the risk of a recession greater than ever now while the majority of Eurozone countries are hanging in a similar fate.

The problem with almost all global economies is how to deal with high inflation amid slowing growth scenario and more so to mitigate food inflation risks.

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