But in many ways, the issue of food price inflation is more critical given households in Asia spend far more of their incomes on food than energy (on average, 4.5x more). Food-related shocks have a disproportionately larger impact on the poor, with important socio-political implications. This heightened political sensitivity to food inflation raises greater odds of various types of fiscal or quasi-fiscal intervention to mitigate the shock among the more vulnerable in Asia, which may further add to country-specific peculiarities in both inflation and fiscal dynamics.
Select Food-Related Commodity Prices
Source: Bloomberg, Citi Research, BCOM-Agri- Bloomberg Agriculture Spot Index
The nature of the soft commodity supply shock from Ukraine and Russia comes in various channels. There is the physical disruption risk from Ukraine, sanction risk on Russia, and export control risks from both. On the back of these issues, soaring regional freight and insurance costs along the Black Sea and rising fertilizer prices impacting food production costs, alongside overall geopolitical risk premiums, further feed into higher agri-related prices. The supply-side shock is worsened if this precipitates food protectionist measures by other countries to safeguard food security. For example Moldova, Hungary and Serbia have banned some grain exports, while Indonesia tightened controls over palm oil shipments.
Citi’s commodity analysts now expect average staple crop prices to be higher and more volatile in 2022-23, with assessed physical disruption risk being particularly palpable in 2Q22. These shocks could abate by 2023 but this depends on how the geopolitical conflict evolves, though there could be some rerouting/ substitution benefits from the likes of Australia, Brazil, US – even India on wheat.
A broad assessment of the most vulnerable households to a food inflation shock is to look at the share of food in household consumer baskets, especially “food-at-home” CPI that is less impacted by other margin absorption mechanisms in the distribution and retail services channel. Households in South Asia (India, Pakistan Sri Lanka) alongside Philippines appear to spend the most on food, while this is less the case for richer economies, with the city-states of Singapore and Hong Kong (to a certain extent Korea) having a disproportionately large role played by meals away from home.
Household CPI Baskets - Food & Non-alcoholic Beverage Weights (% of Total)
Source: CEIC, Citi Research, Note: We don't have a breakdown for China
However, even this food-related CPI breakdown may also be too broad as the geopolitical shock directly impacts wheat & corn (& barley) versus other types of grains. It also indirectly affects other food items like meat (via animal feed) more so than locally sourced food (e.g. vegetables).
The two rounds of global food inflation shocks in 2007-08 and 2010-11 saw significant synchronization with Asia’s food inflation cycle, but in more recent years, this correlation has broken down. China’s food inflation has been particularly off-synch, influenced by the outsized swings of pork prices (~2.2-2.5% of China’s CPI weight in this period). Varied weather anomalies also created some de-synchronization.
Monetary and Fiscal Policy
Most central banks in Asia are unlikely to respond to largely supply-driven inflation pressures unless they pose significant risk to inflation expectations, sustained by demand-drivers, to levels beyond the comfort thresholds of the central banks. Economies most vulnerable to more hawkish moves by central banks following the mostly exogenous price shocks are those with already very vulnerable external positions with heightened FX sensitivity (Sri Lanka, Pakistan) and those where FX is the major monetary policy tool to address imported inflation seeping into core and which is already above the comfort threshold (Singapore).
As monetary policy is unlikely be an effective tool in addressing what is largely a supply-driven shock to food prices, Citi analysts say fiscal and quasi-fiscal (i.e. non-monetary) policies will be the policy of choice to protect the most vulnerable households from the regressive food inflation shocks. Even here, there are variations depending on political imperatives, growth vulnerability and fiscal capacity.
Industrialized economies like Australia and Singapore do not intervene directly on food prices, while others like Korea and Taiwan implement temporary targeted imported tax cuts at negligible cost. Direct food-related subsidies are only apparent in South Asia and parts of Southeast Asia – Malaysia and Philippines – where poverty, food insecurity and import reliance is high. More food self-sufficient middle-income economies like China, Indonesia, Thailand and Vietnam pursue very limited food-related subsidies, and the focus of non-monetary measures seems to relate more to energy, especially for Indonesia that can better self-finance it through its energy exports.
Inflation has always been a politically sensitive issue, especially in economies that already have very high levels of food insecurity and limited social safety nets to withstand significant economic shocks. Citi finds a somewhat weak positive correlation between news mentions related to “social unrest” and the global agriculture price index.
The full report contains country-by-country discussions on inflation dynamics across the Asia-Pacific region (see Asia Economics - A Deep Dive into Food Inflation).
Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.