food inflation

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By JEAN MARC VON DER WEID*

The government will have toçair a políimport policy for essential foods até that national production responds to thisíexpansion muleswill

I've been reading various articles and listening to debates and lives on the burning issue of the Selic interest rate and the need to reduce it. Attached to this storm of opinions is the quid pro quo of the Central Bank's autonomy. Maybe I haven't done enough research, but I haven't been able to find a clear focus on where our current inflation is coming from. After all, the remedies depend on the diagnosis, don't they?

If inflation is caused by excess demand, the classic solution is to cool down the economy in order to squeeze demand and seek an equilibrium that holds prices down. This is done by increasing interest rates, driven in Brazil by the Selic rate. This solution is always cruel, as it normally implies lowering the income and employment of the great masses. Classical economists always explain that it is a temporary evil and that inflation is the worst evil for the poorest. I don't want to discuss this formula now, because I don't believe that the main force driving our price hikes is caused by excess demand, although this exists in relative terms.

Why can't we say that we have demand inflation? From the outset, the loss of income for the great masses has been continuous, from 2015 until now, with classes C, D, E, returning to pre-Lula levels and B stagnating, while only class A had an increase in income in the period. We are not talking about the heated demand for imported cars, giant speedboats or jets (nowadays it is no longer possible to talk about jets, as in the past, the animals grew a lot), which is causing queues at suppliers.

The weight of consumption in this sector, however sumptuous it may be, involves so few that it is not capable of defining the general direction of inflation. What weighs on inflation is the consumption of the less favored and much more numerous classes. Well, not only have these classes lost purchasing power, but they are heavily indebted, with 70% of bills compromising up to 40% of family income. There are no leftovers after payments and essential purchases. In fact, there is not enough money for most to cover these expenses. So where does the demand pressure come from?

Since the beginning of the pandemic and the vote by Congress on the so-called Emergency Aid, later transformed into Auxílio Brasil by the energetic person who presided over us, up to 20 million families have received amounts intended to theoretically allow them to eat properly. This is not the place to discuss whether these aids were sufficient for the proposed purpose (and they were not), but to note that a significant portion of the popular masses received aid resources. Even considering that not all of it was spent on food, and some research points to “purpose deviations” of up to 50%, this aid caused a significant increase in demand for food.

My hypothesis, not verified by conclusive research, is that the beneficiaries bought the cheapest food as a rule, and not the most necessary for a correct diet. This means that the demand for ultra-processed foods was relatively stronger than that for natural or processed foods. All of this leads to minimizing the impact of demand on basic food consumption, until today defined by the food basket that DIEESE monitors and which was enshrined in the minimum wage law. Minimize yes, but there was certainly an impact.

In these three years of the pandemic, food prices rose well above the inflation measured by the IPCA, especially in 2020 and 2022, with a more moderate year in 2021. These are impressive numbers: in the three years mentioned, food, on average, rose 12,14 .11,71%, 11,64% and 4,52%, against an IPCA (the general inflation index for all economic activity) of 10,06%, 5,79% and XNUMX%. These figures indicate that food inflation has been at a constant high level, with the first and last years slightly above or below twice the general rise in prices. The following year, there was a general explosion in prices that practically equaled the two indices.

In the last 20 years (recalling that there was no government aid with the weight of the pandemic times), food inflation has been below general inflation in six years. Between 2003 and 2006, the years of President Lula's first government, the rise in food prices entered a consistent decline, from 7,48% to 1,23% per year, accompanied by an equally continuous and consistent fall in the IPCA, from 9,30% to 3,4%. In Lula's second government, food inflation jumped to the level we have been reaching in the last 3 years, 10,79%, 11,11% and 10,39% in the years 2007, 2008 and 2010. explains the 2008 crisis, preceded by the rise in oil prices in 2007. In these years, the IPCA also rose, but less, 4,46%, 5,9% and 5,91%. In 2009, the rise in food prices slowed down, remaining at 3,18%, below the IPCA of 4,31.

After this period, food inflation was always above the IPCA, in several years with values ​​up to three times higher. There was an exceptional year, 2017, in which food inflation was negative, 1,87%, for an overall inflation of 2,95%. This was the year of the great depression of the Brazilian economy caused by the economic measures taken by the government of Michel Temer and this heavily brought down demand in general and food in particular. It didn't leave good memories, despite these apparently favorable numbers.

The trajectory of food inflation almost always precedes that of general inflation. This is explained by the fact that the first is the most important component of the second, followed by the cost of transport. But the difference that occurs in terms of the size of the two inflations is remarkable and has to be understood.

Before the market responds to food supply/demand, defining the prices that will be charged, there is a starting point which are the production, processing and marketing costs of food products, with primary production costs being the most significance of this operation. It is also necessary to take into account the profit margins of economic agents.

I am not going to discuss in detail the set of production factors in our agriculture and livestock. The most important thing to note is that fertilization costs currently represent 30% of all primary production costs in conventional production systems. It is by far the heaviest item on the bill. These costs are not only very high, but tend to increase systematically in the coming years. The FAO assesses that agricultural prices entered an upward spiral with no prospect of significant change and that fertilizer prices play a role in this trend.

The high price of fertilizers can be explained by two reasons. The first is the fact that they depend on the availability of phosphorus and potassium minerals and the cost of identifying new deposits, exploring and processing them, as well as the levels of reserves and the cost of extracting, processing and distributing oil and gas. In all these products, we are witnessing an increasingly accelerated process of depleting reserves and increasing costs in identifying new deposits and the greater difficulties and costs in exploring them. The “peak” of phosphorus production, for example, would have already occurred in 1989, according to some analysts. According to others, it will occur in less than a decade. Potassium has broader reserves, but peak production should occur by mid-century. Oil and gas reserves, on the other hand, have either reached their limit or this is approaching quickly, depending on conflicting studies.

On the other hand, the fertilizer market is highly oligopolistic and this allows four or five companies to set prices according to the interests of their shareholders. This set of factors (availability of raw materials, operating costs and market control) indicate that fertilizer prices will continuously pressure the prices of food and agricultural products in the present and in the future.

Brazil depends on 80% of fertilizer imports to maintain its conventional agricultural production. This is the reason why the prices of this raw material have risen so much since the beginning of the war in Ukraine. We import a large part of the potash used from Russia and Belarus, which together represent 33% of world production. 53% of this production comes from Canada, which gives an idea of ​​the level of concentration of global supply.

In addition to the problems of access to these products due to the sanctions imposed on the Russians and their allies and the higher prices that the market has set since the beginning of the war, we also add to our difficulties the high exchange rate, 30 to 40% above one theoretical “normal”.

We could repeat this demonstration for other inputs such as seeds, whose prices, also oligopolistic, rose well above inflation.

With the costs of agricultural production rising without limits, our national production has a high level that should remain, on average, well above inflation, helping to put pressure on it continuously.

To summarize, we have inflation in Brazil with multiple factors pushing for expansion, the most important of which are costs, although part of it is related to the increase in demand caused by programs to help the poorest.

Many analysts tend to disregard cost pressure, indicating that the bulk of our grain and meat production continues to find markets with prices capable of remunerating producers. This has to do with our integration in the international markets of commodities, fueled by increased demand from countries such as China. This solves the problem of agribusiness profits, but it represents an extra problem for our domestic market. With our agricultural economy heavily indexed in commodity prices, the upward spiral in food prices at a national level is difficult to control.

A good part of the difficulties in food supply in Brazil have to do with the fact that it is more profitable for producers to enter this export circuit than to produce for an internal market that is dependent on the payment capacity of an impoverished population or on the values ​​of government aid. Beans are not quoted in Chicago, but the national producer does not stop comparing the prices achieved by soybean and corn producers and this has influenced many of them, over the last 30 years, to opt for export chains.

In the scenario described above, raising interest rates to cool down demand does not solve anything, but neither does lowering them. Or, at least, it is not enough to solve the food problem in Brazil.

To face the problem of rising food prices in the country, which affect the constant rise of inflation in general, we have to adopt a series of policies aimed at increasing domestic production, seeking to reduce production costs. Classical agroeconomists point to increased efficiency in the use of productive factors as a solution. One of these factors is the price of land and this leads agribusiness to seek deregulation of access to land, with an increase in cultivated areas through deforestation.

Land is a cheap productive factor in Brazil, compared to countries such as the US, the European Union, Argentina and Australia. But facilitating access to indigenous lands or nature reserves has other serious social and environmental implications. Furthermore, it is a short-term solution, as these new arable lands are found in ecosystems with fragile soils and low productive potential. The second factor is the increase in agricultural productivity. The more rational use of industrial inputs in agricultural production comes up against the need for strong technological investments, such as those involved in so-called precision agriculture. In any case, even this greater efficiency in the use of inputs does not free us from the pressures of the continuous increase in their cost.

What we have to do implies radical changes in our agricultural production system. From the outset, we have to reduce the use of chemical fertilizers, pesticides and company seeds, in addition to reducing the use of fossil fuels in production. Rationalizing this use is a first step, but certainly not enough. Removing subsidies for the use of inputs is a necessary measure to encourage the rationalization of their use, although it has an immediate effect of increasing costs. Another important step would be the replacement of imported fertilizers by others produced domestically. As we do not have significant deposits of phosphorus and potassium, the solution would be to recycle sewage sludge and organic waste.

We are in a position to achieve self-sufficiency in fertilizers, but this will require national investment in setting up composting plants. Technically this is not a problem as the solutions are well known and have already been applied locally. It is a public policy choice, allocating adequate investment resources for rapid expansion, in collaboration with state and local governments and encouraging private ventures. The positive side effect would be to reduce the environmental impact of landfills and the discharge of raw sewage into rivers, lakes and the sea.

This solution may improve the performance of our agribusiness, but it does not solve the fundamental problem. It is the whole logic of agribusiness that is in question. Defining policies that encourage agroecological systems is a requirement for our future. But as these policies do not have a short-term effect on a sufficient scale to stop the pressure of rising food prices, it will be necessary to face the heated demand for these products stimulated by government aid.

To be consistent with the proposal to help the poorest, the Lula government will have to outline a policy for importing essential foodstuffs until national production responds to expansion stimuli. And these foods will most likely have to be subsidized, as international prices are as high as national ones. In order not to erode the value of the aid caused by the increase in food prices, the government will have to study a policy that makes the values ​​of imported basic foods adequate to the values ​​of the aid.

There are many radical changes and I don't see the government or society discussing this problem from the angle presented in this article. But it doesn't hurt to give a vote of confidence in the new government and wait and see.

*Jean Marc von der Weid is a former president of the UNE (1969-71). Founder of the non-governmental organization Family Agriculture and Agroecology (ASTA).

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