Global agflation in 2020, will the vaccine be a savior?

Rice

Published Feb 26, 2021

Agflation has swept through the world. As the unprecedented pandemic disrupted supply chains and caused export bans, global agricultural prices have spiked up. People started panic-buying essential food products such as bread, rice, and beans and stepped away from luxury and perishable foods. As a result, world food prices have been fluctuating since early 2020. In this article, Tridge aims to look back at the Agflation in 2020 and analyze the Covid vaccine’s role in the world agriculture prices in 2021.

Look back on the price trend in 2020

2020 was a challenging year for agriculture prices. According to the Food and Agricultural Organization of the United Nations (FAO), the price has increased dramatically since early 2020, regardless of sub-categories, and is currently still on the rise. As the unprecedented pandemic hit the global agriculture market, countries started imposing lockdowns and stopped exporting agricultural products, or set import quotas to other countries in order to secure food in the domestic market. People have started panic-buying, hoarding essential food products such as wheat, corn, and rice. The combination of the worldwide export ban, labor mobility restriction, and high freight cost due to the pandemic has made the price soar in 2020, eventually causing Agflation. Will the vaccine be a savior for the high agriculture price? And will it bring international food trade to normal?

[FAO Food Price Index, including Meat, Dairy, Cereals, Oils, and Sugar, 2019-2020]

Source: Food and Agricultural Organization of the United Nations(FAO)

There were not enough farmers to pick up the apples, no transportation to deliver the harvested product to intermediaries, and could not move above all. Due to Covid-19, the supply chain got disrupted with the lockdown measurements, labor shortage, and logistics issues.

Some specific products were hit harder than others by the pandemic, as well as from climate change and trade war, which are: staple products (rice, wheat, corn), and beef. As people were panic-buying essential food products, supply chain disruptions meant that countries could not meet the high demand, leading to high prices in aforementioned products. The following section briefly explains how food production was affected in the top exporting regions.

Staple products

Grain prices in 2020 reached their record-high point since 2013 because of supply chain distributions caused by Covid-19. As national lockdown measures entered into force in the main grain-producing regions, such as the United States, Russia, and India, production levels fell abruptly compared to the previous year, by around 10% for each country. Russia, the largest exporter of wheat, charged export taxes on wheat and grain from April to June in 2020 and eventually banned the grain exports in the second half of 2020 to protect the domestic market from wheat supply shortage.

[Global Wheat Prices, 2019-2020]

Source: FRED Economic data

Beef

Since April 2020, the beef demand in grocery stores and retails has doubled in the US as people started to stockpile food at home. On top of that, meatpacking facilities slowed down processing and operated only 40% of their full capacity due to labor shortage. Some livestock herds and packing facilities had to shut down as the number of workers tested positive in Covid-19 increased dramatically in spring 2020.

[Beef production volume in the US, 2019-2020]

Source: USDA, Tridge.

As illustrated from the graph above, the production volume started to fall from the end of March 2020 when the first Covid wave hit the US and pushed down to the lowest level in April during the last decade, with 1.8 billion pounds. According to USDA, wholesale beef prices soared more than 100%, and the retail price also reached its record-high point with an increase of 25%, from March to May. Although the production volume returned to pre-pandemic levels in July 2020, there are still fluctuations in the production volume and domestic market price. Since the US is the largest producer of bovine meat globally, these fluctuations can cause a supply disruption in the global market.

Will Vaccines be a Savior?

Since vaccination started on December 14, 2020, the countries technically started a competitive race to supply sufficient vaccines. Israel and the United Arab Emirates (UAE) have already covered vaccinations for a significant chunk of its population, 36.4%, and 22.1%, respectively. It is forecasted that consumer demand is likely to increase along with vaccinations as labor shortages, logistics, supply chain disruptions are less likely to happen. Dubai, for example, is projected to experience a 4% increase in consumer consumption as the food industry, hospitality, and logistics services will be reactivated soon. Also, the World Bank expects Malaysia to experience economic recovery by 6.7% in 2021 as well as for other neighboring countries, including Indonesia and Singapore.

However, it is questionable whether the vaccine can mitigate high prices and supply shortages. The supply chain disruption cannot be resolved immediately since the Covid situation across countries is very different. Wheat production in Russia is projected to increase by 6.4% in the 2020/2021 season. Still, shutdowns in packing facilities and food services could still disrupt the supply chain. Although Russia has successfully developed the vaccine, Sputnik V, Russia will still be charging stricter export tax on wheat from March to prepare for uncertainty. The situation is different in the US. With the successful development of the Pfizer vaccine, the US has now covered nearly 6 percent of the population. As packing facilities have recovered from the direct labor shock, the supply started to increase from the second half, but the meat demand is decreasing as the economic recession continues. Therefore, the US’s beef price is now even lower than in the pre-pandemic era, and expected to continue this price trend since there are less demand and higher supply, compared to April and May 2020.

It is hard to answer clearly whether the vaccine will recover supply disruptions and high food prices immediately. The situation in each country varies vastly to tell. For example, European countries are experiencing the lowest domestic supply and consumption due to the spread of coronavirus mutations and Brexit. Also, at the moment, the national policy of global leaders in agriculture, Russia, China, and the US, differ on whether each country decides to secure food supply in the domestic market or boost production to export more to the global market. Therefore, until there is an apparent signal of decreasing the number of cases and the majority of the world is fully vaccinated, the market price is projected to fluctuate.

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