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Among the many ensuing economic troubles in Asia, the risk of food inflation has become critical, especially after the sky-high rice prices. The United Nations Food and Agriculture Organisation’s global (FAO) Rice Price Index rose by 27.8% year-over-year in September, primarily driven by India, Thailand and other Asian countries. Meanwhile, prices of the Indica variety of rice, one of the two main subspecies of Asian cultivated rice, remained at the 15-year high they reached in August.
Rice is critical to the diet of billions of Asians and it contributes around 50%-60% of the total calorie intake of the people in this region.
Though food prices remained modest in September, the risk of food inflation, globally and in Asia, remains paramount. Higher food prices can eat away the purchasing power of households in developing Asia and hamper consumption.
At the root of the risk of food inflation are the extreme weather conditions such as heat waves and floods, and the El Niño pattern. Besides, India has played a major role in fuelling food inflation risks across Asia, in a bid to tame food prices back home.
Weather conditions, El Niño, India rice export curbs fuel food inflation risk
Delving into the weather conditions, the onset of the El Niño pattern could potentially impact grain production across many Asian countries causing the prices to go up. According to MSCI, there are 95% chance of the occurrence of El Niño in the 2023-24 winter season in the Northern Hemisphere, causing hot, dry weather in Asia.
Thailand has already issued a caution on drought conditions in early 2024. Thailand’s Kasikorn Research Centre predicted that El Niño could result in reduced rice yields in the country by 5.6% to 6% from the previous year. Meanwhile, India’s major agricultural regions are left to deal with inadequate rainfall that has reduced crop yields and driven the year-on-year food inflation to 10.6% in July.
On the other hand, India, the world’s top rice exporter, imposed curbs on the exports of parboiled rice since mid-July. Later it extended the curbs to other varieties of rice including the premium Basmati rice. The government has levied a duty of 20% on parboiled rice until March 2024 and kept the floor price for basmati rice export at $1,200 per ton. This move is a part of India’s plan to keep food prices under control ahead of the key state polls by the end of 2023 and the general elections due next year. However, this has caused major problems for nations like the Philippines, Singapore, and Indonesia, the major rice importers of India. Notably, India earlier also banned the export of wheat and levied taxes on onion exports.
Singapore, the nation that imported around 40% of its rice from India in 2022, expressed that the export curbs would have a negative impact. Tze Ch’in Ong, deputy secretary at Singapore’s Ministry of Sustainability and the Environment told an Indian daily that they are considering other alternatives like Thailand and Vietnam as a cushion against such extreme restrictions that India imposed.
According to Nomura, due to government interventions across Asia, the global food inflation would take about six months to be completely visible in the region. As per its analysis, “…the current rise in global food prices, should it sustain, would be reflected in this region only towards the end of 2023 or early 2024.”
Experts suggest investors focus on the rebound in agribusiness
An event like El Niño pushing food inflation higher can impact the decisions of fixed-income investors as well as equity investors.
MSCI’s analysis highlights that the debt-to-GDP ratio for nations, especially in emerging markets usually worsens during the year after El Niño because of lower economic growth and increased government expenditure. Hence, it suggests that sovereign-debt investors factor in El Niño as they make decisions for country allocation.
As for equity investors, experts opine that companies offering farming goods such as seeds and equipment would be the top beneficiaries. At the same time, several analysts believe that food production and trading stocks would benefit as they are usually able to pass on the inflation to the customers.
“The severity of this El Niño event will determine how severely markets are affected. But investors should be aware of the risks in certain commodities markets and look out for opportunities in agribusiness-related companies,” says Morgan Stanley.
The investment bank further recommended that commodity investors should consider exposure to certain “soft” commodities such as sugar and coffee, instead of soybeans, corn, and wheat and keep an eye on a possible rebound in the agriculture sector to navigate the food inflation.
