Data Focus

FAO Food Price Index at six-year peak

Annapurani V Chennai | Updated on December 22, 2020

Global trade slowing down during the pandemic, revival of demand with economies opening up among key reasons

The value of the FAO Food Price Index (FFPI) from the Food and Agriculture Organization of the United Nations stood at 105 points in November 2020.

This is the highest level of the index since it hit 105.15 in December 2014.

Furthermore, the index was up 3.9 per cent in November compared to the previous month, the biggest month-on-month rise since July 2012 when it increased 5.4 per cent.

 

Madan Sabnavis, Chief Economist, CARE Ratings, said that this surge is because of a demand-supply imbalance. Global trade had slowed down because of the restricted policies from different countries, goods did not move freely, which has created an artificial demand-supply imbalance, he noted.

But, as countries started opening up and economic activities resumed, the demand in the service sector such as hotels started going up, says Sabnavis. This led to the stock of food that had helped tide over the problem to begin with, getting depleted. Consumption, which had tapered during the lockdown, has also started picking up gradually. So, it is a combination of demand inflating, stocks getting depleted and revival of consumption.

Sabnavis added that there prices have a tendency to move up in this kind of a situation because of producers increasing prices to make good the losses due to lower activity.

According to the FAO of the United Nations, the FFPI is “a measure of the monthly change in international prices of a basket of food commodities”. It is calculated as the average of the five commodity price indices, which include meat, dairy, cereals, vegetable oils and sugar, weighted with the average export shares of 2014-16. All the above sub-indices registered gains last month, with the vegetable oil sub-index rising the most.

The India scenario

This trend is mirrored in India too. The food index in wholesale price index (WPI) for October 2020 stood at 159.3, and the food and beverages index in CPI stood at 164.7. This is the highest value of the indices in the last 100 months.

Among the sub-indices in CPI, vegetables and eggs saw the highest surge month-on-month in October. The vegetable index jumped 10.3 per cent to 230.8 in October from 209.2 in September, while the eggs index climbed 7.6 per cent to 173.7 in October from 161.4 in September.

The WPI food index November value has cooled slightly; to 158.9. However, for CPI, the food and beverages index increased to 165.2.

Rajani Sinha, Chief Economist and National Director – Research at Knight Frank India, said that a large part of the inflation is due to supply chain bottlenecks that happened during the lockdown and also because the monsoon withdrawal was late, which impacted some crops and resulted in inflation rates going up.

She added that that even when the economy returns to normalcy, it will take a while before the prices correct. Because even when all the supply-side constraints are taken care of, the prices will remain sticky at those levels, as inflationary expectations would have inched up.

Published on December 18, 2020

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