Vladimir Putin’s war on Ukraine is one of the reasons for soaring food prices that now threaten some of the world’s most vulnerable populations. But that’s far from the only reason. In Argentina, that’s not even the main reason for soaring food prices.
Central bankers and politicians around the world want to blame high food prices on the situation in Ukraine. However, there are two components to compression. The first is the change in relative prices, i.e. wheat becomes more expensive relative to gadgets due to a reduction in global supply. The second cause of rising food prices is generalized inflation throughout an economy.
The market is the remedy for a change in relative prices; the more flexible the economies, the faster the adjustments will be. The remedy for economy-wide inflation is to correct monetary, fiscal and regulatory errors. Argentinian politicians are failing on both fronts.
Russia and Ukraine are major global suppliers of food products. From 2018 to 2020, depending on According to the International Food Policy Research Institute, Russia’s share of world barley trade was more than 14% and that of wheat 24%. In 2018-2020, Ukraine’s share in barley trade was 12.6%, corn 15.3% and wheat 10%. Almost 50% of the world trade in sunflower oil during the same period came from Ukraine.
Mr. Putin’s decision to attack his neighbor has disrupted these supplies. Russian production has not been eliminated, but the sanctions mean that much of what was destined for the West and its allies has been re-routed to Kremlin allies or neutral parties, sold on the domestic market or stored. This puts pressure on prices. Meanwhile, Ukrainian production is disappearing.
With less global production and the same demand, the prices of the goods concerned increase. Higher wheat prices mean that flour has become “expensive” relative to other items in consumers’ food baskets in many countries.
Wherever food imports are heavily dependent on foreign aid and subsidies, the same amount of money buys less. Shortages in places like North Africa are inevitable unless financial aid increases or supply becomes unavailable.
Changes in the relative prices of wheat, cooking oil and corn have also hurt low-income consumers in the Western Hemisphere. Yet among South American commodity exporters, with this change comes opportunity. Peru pays more for flour, sugar and fertilizers, but as an exporter of minerals and coffee, it can benefit from increased production and sales abroad at favorable prices. Unfortunately, this potential has been dampened by President Pedro Castillo’s anti-market agenda, which has scared off investors.
When it comes to economic malpractice, it’s hard to beat Argentina, the region’s breadbasket. It recorded monthly inflation of 6.7% in March. Some analysts now expect inflation in 2022 to be close to 60%, after 2021 inflation more than 50%.
As always, this inflation is a monetary phenomenon, to paraphrase Milton Friedman. The government of President Alberto Fernández, in the long Argentine tradition, deepened the country’s debt to finance its deficit spending. According to Pablo Guidotti, professor of economics at Torcuato Di Tella University in Buenos Aires, since 2000 public spending as a percentage of gross domestic product has doubled from 20% to 40%. Public debt as a percentage of GDP is now around 100%. To pay the bills, the central bank prints pesos with abandon, sending prices skyrocketing.
The recent evolution of the relative prices of wheat and other agricultural products should be a blessing for Argentina. In a free market, higher prices would act as a motivator to grow, sell and export more. As the value of crops, measured in hard currency, increased, the nation would also become wealthier as the inflows of dollars would strengthen its purchasing power. In other words, improving the terms of trade would boost GDP.
Yet, rather than ride the wave of rising commodity prices with policies that encourage production and export, the government is trying to drive down local prices by forcing producers to sell within the country. . The political mix of this strategy consists of high export taxes and export quotas which limit the amount that can be shipped overseas. Both drive down exports and make it better not to plant at all or to keep excess stocks in silos.
In March, the government announcement that it will attempt to “decouple prices to protect the domestic market in a global context of war and high and sustained wheat prices” by subsidizing 800,000 tonnes of wheat to domestic millers. It may succeed, in the short term, in making bread and pasta cheaper for the public. But it’s a costly “solution” that reduces the incentive for consumers to find substitutes for wheat, which is a way to bring down high prices.
These policies harm the Argentine people and the world’s poor because they diminish the world’s food supply. Let’s put the blame in its place.
Write to O’Grady@wsj.com.
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