In 2023, world food prices dropped significantly from their 2022 highs. However, India’s food inflation remained high at 9.5% in December 2023, contrasting with global deflation of -10.1%.The UN Food and Agriculture Organization’s (FAO) food price index averaged 143.7 points in 2022, but fell to 124 points in 2023, a decline of 13.7%.
What Factors are Contributing to the Drop in Global Food Prices
- Abundant Supply of Key Crops: Bumper harvests of major crops like wheat in 2023 led to a surplus in the global market.
- This abundance contrasts with concerns in 2022, when worries about supply disruptions due to the war in Ukraine, a major grain exporter, caused prices to spike.
- Improved Supply from Russia and Ukraine: Despite the disruption of the Black Sea Grain Initiative in July 2023, both Russia and Ukraine have managed to maintain wheat exports.
- This continued flow of grain from the region has helped to alleviate some of the supply anxieties.
- Lower Demand for Vegetable Oils: The UN’s Food and Agriculture Organization Vegetable Price Index saw the biggest drop in 2023, falling by 32.7%.
- This decline is due to a combination of factors, including improved vegetable oil supplies and a decrease in its use for biofuel production.
- As more oil becomes available for food purposes, and less is diverted for biofuels, the overall demand for vegetable oil goes down, leading to lower prices.
- Slowing Demand: High inflation and fears of an economic recession have dampened consumer demand in many parts of the world, including in major food-importing regions, leading to a decline in import demand for certain food commodities and putting downward pressure on global prices.
Why is India Experiencing High Food Inflation Despite Falling Global Food Prices
- Limited Transmission of Global Prices: While global food prices fell, India’s food prices stayed elevated due to limited transmission of international prices to domestic markets.
- India’s import dependence is significant only for edible oils (60% of consumption) and pulses.
- For most other agri-commodities, including cereals, sugar, dairy, and fruits and vegetables, India is self-sufficient or an exporter.
- Export Bans and Import Duties: The Indian government imposed bans on exports of certain food items like wheat, non-basmati white rice, sugar, and onions and provided import duty waivers on others, effectively reducing global market influences on domestic prices.
- Domestic Production Challenges: Issues like weather conditions affecting crop yields, particularly for cereals, pulses, and sugar, contributed to supply shortages and higher prices domestically.
- Cereal and pulse inflation stood at 9.9% and 20.7% year-on-year, respectively, in December 2023.
- Low Stock Levels: Low stock levels for commodities like wheat and sugar further exacerbated price pressures.