Cocoa and Food's Inflation

One recent point that caught my attention is the rise in food prices. It's evident in inflation (CPIs) over the past few months, especially in early 2024 (despite inflation indices gradually showing some relief). I asked if this is a local phenomenon here in Brazil or a global one. Initially, it seemed to be a global event. However, there is less impact in some places in the Southeast Asian region (a significant % world pop), where there appears to be less of this effect. In some countries, such as China, there's even deflation.

Why? The reasons.

Investigating further, I discovered numerous factors - not all - that explain this phenomenon. Some attribute this inflation to El Ni?o mainly, but upon closer examination, El Ni?o only explain part of it, and not for all food commodities. the reality is a combination of factors, including the Ukraine war, rising fertilizer prices, oil costs (affecting transportation from farms to industries and to consumers), stricter regulations for producers (especially in Europe), water costs and scarcity in many regions. Add to it, the population growth that naturally grows the demand, especially for basic foods (e.g. rice and beans in Brazil). On the other hand, some commodities like corn and soybeans have seen deflation in many areas.

Despite numerous factors at play, the El Ni?o and weather patterns are just one aspect, not the sole driver. While I haven't taken a regression analysis, the impact of the Ukraine war is noticeable, particularly from late 2022 to early 2023. Some argue that El Ni?o effects might be stronger in the upcoming 2024 harvests, while others suggest the climate will stabilize, helping the situation forecasts. But there are indications that the War affected more (elevating costs and behavior changes non related with the weather). But both War and El Ni?o are outliers events. The point is there are a trend of long-term, a component that became the food inflation resilient against the Monetary Policy. In part, the Fiscal Policy where Governments put more money in the game and others that help the people buying food. In other words: How you control the food inflation without diminish the demand? But, is it already at its point of inflection? We know that the expectation to increase high level of productivity in short-term it is unlikely.?Is hunger the bitter medicine?

Cocoa and Substitution effect

One notable example is the cocoa price, possibly the foremost symbol of global food inflation nowadays. A substitution effect is also observed, likely a post-pandemic response and due to high inflation, as people shift from non-essential items to essential foods, intensifying the sense of real poverty. Even so, cocoa prices are rising and rising, with notable implications for cocoa-consuming populations. Interestingly, it seems the consumers have an inelastic demand for cocoa likes to a drug - where even with rising prices, demand remains resilient (in portuguese, we have a expression for it 'chocólatras'). We can see it in the rising stock prices of companies that sell cocoa derivatives what remember the oil crude market.

However, in Brazil, the question is deeper. While there's a connection to global trends, internal factors also contribute to Brazilian food inflation. The substitution effect is evident, particularly with basic food items like rice and beans, reflecting an unfavorable economic environment. Families may be adjusting their spending habits, with capital formation notably declining, redirecting expenditure towards essentials - like food. Specially in a context where animal mean prices are intangible, they look for another protein sources (rice, beans, eggs, cheese). And here is the point. How closer a household's income is to zero, the more expenditure is focused on food. And the people need food, otherwise they die. Probably, the inflation rise of these basic foods while other inflation components is falling (or in low level) is a indication of a shadow of risks implicit in this substitution effect.

The Breadbasket of the World

Brazil's nickname is "the Breadbasket of the World". But, with a open economy, Brazilians have to competing with foreign market (all world wants food), despite being a producer. With you don't offer a best bid order (high price), the foreigner will take the food to China, UE. And the soy case? Brazil is a biggest producer. Soybean prices have dropped, but they aren't a significant part of the Brazilian diet (we don't see it). If there was the substitution effect, it could help a little to count the food inflation. And, yes, large productive areas of Brazil were punished by the climate affecting some productions. Thus, there are domestic factors that somewhat diverge from global trends.

Brazil's role as an exporter favors the trade balance and aids GDP somewhat. Yet, the question remains whether this offsets the deleterious effects of overall inflation, especially on food, which affects everyone. After all, school inflation, health plans and medicines, gasoline not affect all (many people do not have children, or do not need to go to the doctor, or do not have to drive many KMs by car). But, in the case of food, all pop needs. The poor is more affected because they haven't more options to substitution while the rich people have. Probably, this problem is a BOLD factor what is contributing to declining approval ratings for the government Lula. And there aren't a good and fast solution to increase the offer side (others governments, as well). We need the help of the Nature in one side, and, in another side, the productivity and brave of the producers who need to invest in a environment with many scenarios of risk (legal uncertainties, wars, regulations, increase in costs, a government that attacks agribusiness for ideological and political reasons). It's big challenge.

Remember. Is there a worse pain than the pocket? Exists! It is the stomach. Especially that of the children's stomach.?