Impact Mostly Expected on Emerging Europe and BRIS Countries
The authors are economists of Shinhan Investment Corp. They can be reached at heekim@shinhan.com. – Ed.
Rising grain prices leading to agflation fears
Rising prices of agricultural products are driving agflation concerns. Global farm production was hit hard by last winter's unfavorable weather conditions, and the Russia-Ukraine war is causing supply to tighten even further. Changes in agricultural product prices are typically reflected in food and beverage prices after a time lag of eight months on average. The time lag is relatively shorter in emerging markets and longer in developed countries. Food prices tend to immediately fluctuate on grain price changes in countries such as Brazil and Lithuania, but move after a time lag of four quarters in the UK and Switzerland.
Growing caution over countries vulnerable to agricultural price hikes
Agflation has a bigger impact on countries where local food prices sensitively react to changes in international prices of agricultural products, or where food and beverage account for a bigger share of total consumption. Major grain importers include Eastern European countries and certain Asian countries such as China and Indonesia. Food and beverage account for a bigger share of total consumption in emerging economies in Asia and Europe, as well as Central and South American countries. Food prices in Korea, due to its low grain self-sufficiency rate, are highly sensitive to changes in international grain prices. However, food and beverage account for a relatively small portion in the country's total consumption, similar to levels seen in major developed countries.
Impact mostly expected on emerging Europe and BRIS countries
Countries or regions reporting agricultural trade deficits are most vulnerable to rising prices of agricultural products. Africa as well as Central and East Asia are net importers of grain, while Eastern Europe, North America and parts of Southeast Asia are net exporters that are less affected by grain price hikes. In summary, we expect to see the largest impact of rising grain prices in emerging Europe including Hungary and Estonia, BRIS countries (Brazil, Russia, India and Africa) as well as Central Asia. In contrast, the US, Japan, and Northern European countries should see relatively limited impact from grain price hikes.