Gold Silver Reports (GSR) – In India, the government’s decision to hike minimum support prices (MSPs) has raised the prospect of higher food inflation. But global food inflation may head the other way thanks to fears of an escalating trade war, if data from June is any indication.
The Food and Agriculture Organization’s (FAO’s) monthly Food Price Index fell by 1.33% in June, over May. This reversed an increase seen for four straight months. It had dipped by 0.4% in January.
FAO said that rising tensions in international trade relations have affected most food markets. In cereals, for example, wheat and maize prices fell despite a worsening production outlook. But rice prices increased due to a tight supply situation. The cereal index was down by 3.7% in June.
Vegetable oil prices have been trending lower and continued to fall, down 3% with declines seen in palm oil, soya bean and sunflower oils. Apart from trade tensions, weak demand and strong supply conditions also affected prices.
Surprisingly, sugar prices were up in spite of trade tensions, which FAO attributed to worries over Brazil’s crop suffering due to dry weather conditions.
Fears of a trade war have, for now, disrupted a rising trend in prices of cereals, a commodity set of particular importance to India’s farmers. FAO also says that its forecast points to a reduction in cereal output in 2018 and a negative outlook for the 2018-19 crop year. If the rumblings on the trade war front get louder, it may continue to weigh on prices.
Back home, this could pose a difficult situation. Higher MSPs were meant to be a signalling mechanism for prices to go higher. If farmers are satisfied with market prices, their dependence on the government’s capacity to procure reduces. That plan could go awry if prices trend lower.
A falling trend in international prices may not directly affect domestic markets, since imports are not freely allowed, but it could send a bearish signal. If exporters fear a declining trend in realizations, they too will be unwilling to pay a higher price. Keep a watch on international food price trends to see if this continues, and what implications that may have for the agriculture sector and rural demand. – Neal Bhai Reports (NBR)
