Why China should worry about food price inflation despite November’s modest rise

Plummeting pork prices have helped offset increases in other foods. But with the rising cost of food a global issue, plus high energy prices that will hit food production, Beijing officials must remain vigilant

Neal Kimberley

Published: 6:45am, 15 Dec 2021

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It may be time to add food price inflation to the list of issues that keep policymakers in Beijing awake at night. That might seem like an odd assertion when food prices in China only increased 1.6 per cent year on year in November, but it is not where inflation is now that matters, but where it looks to be heading.

Food prices globally are soaring, as evidenced in data released by the UN’s Food and Agriculture Organization (FAO). Its Food Price Index averaged 134.4 points in November, a rise of 28.8 points (or 27.3 per cent) from a year earlier.

The latest increase marked the fourth consecutive monthly rise in the value of the index, the FAO said, putting it at its highest level since June 2011.

Given that in 2011, increasingly unaffordable food prices played a part in driving popular unrest in the Arab spring according to some analysis, it is to be expected that policymakers across emerging markets, including in China, will not be complacent when global food prices are now rising at such a quick pace.

Admittedly, November’s year-on-year 1.6 per cent increase in China might not seem too alarming but there are biases within the data that need to be considered.

First, the price of pork, a key constituent in the index of food prices in China, plummeted on an annualised basis by 32.7 per cent in November. However, arguably, it should be remembered that pork prices had previously been driven to extremely high levels after supplies were affected by the swine-fever outbreak.

Such high prices encouraged a post-outbreak expansion in China’s pig sector, only for producers to then see prices drop as the emergence of the Covid-19 pandemic, plus Beijing’s zero-Covid policy response, hit demand.

In short, it is questionable how far the price of pork can continue to fall and offset the rapidly rising prices of other foods in China – the price of fresh vegetables is up 30.6 per cent in November year on year.

But perhaps the fact that this is a global issue – as the FAO Food Price Index shows – should be even more worrying for China, given that policymakers have long been preoccupied by food security.

The pandemic has had a part to play in rising food prices. An International Monetary Fund blog post in June noted how concerns about supply chain disruption had encouraged stockpiling.

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The blog also referenced soaring shipping costs as contributing to rising food prices, along with, for example, the impact on harvests in some parts of the world as a result of the La Niña weather phenomenon.

Additionally, given that most food is priced internationally in US dollars, when the currency is strengthening appreciably, as has been broadly the case throughout 2021, then food unavoidably becomes more expensive in local currency terms.

In this sense, the Chinese yuan’s own strong 2021 performance versus the dollar has helped shield China from imported food price inflation but if the Chinese currency now weakens against its US counterpart, that protective shield will be eroded.

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But there’s another issue that also has to be considered: the knock-on effect of higher energy prices on processes that are key to maximising global food production.

No one in China needs reminding about recent instances of energy price rises and the associated power disruptions, but what may be less understood is the impact this has had, and not just in China, on the manufacture of fertiliser required to enhance agricultural production worldwide.

Farmers apply fertiliser during the winter planting season in Darong village, Wuxuan county, in southern China’s Guangxi Zhuang autonomous region, on November 23. Photo: Xinhua

Fertiliser production is energy-intensive and energy price rises this year have resulted in dramatic increases in the cost of key fertiliser constituents such as urea and diammonium phosphate (DAP).

As for the effect of power supply interruptions, as a World Bank blog noted last month, “escalating thermal coal prices in China led to a rationing of electricity use in some provinces and forced fertiliser factories to cut production”. That supports upward pressure on global fertiliser prices because, as the blog noted, “China’s exports of DAP and urea account for around one-third and one-tenth of global trade respectively.”

That price pressure is only likely to intensify now that Beijing has put curbs on fertiliser exports, citing domestic food security.

Falling pork prices are currently helping keep food inflation in China under control even as food prices soar globally but the situation may not last. The real risk is that food price inflation in China starts increasing.

Neal Kimberley is a commentator on macroeconomics and financial markets

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