The drought has interrupted the inflationary spiral that has pushed the shopping basket for just over a year and threatens to give it new speed. The price of food began an unprecedented escalation in April 2022, when the CPI for these products began to exceed the data for general inflation, getting further and further away. Until reaching the historical distance of last month: a year-on-year CPI of 3.3% compared to 16.5% inflation in food, more than thirteen points of difference despite the reduction in VAT on basic products applied since January .
The food sector, in the eye of the political and social hurricane, and the Government began to breathe a little easier because production costs –energy, fuel, fertilizers…– are already decreasing and world prices and quotations of foods such as cereals, dairy products, meat or vegetable oils have been falling for months, as reported by the FAO –see graph–. As the leader of the distribution in Spain, Mercadona, anticipated a few days ago, prices at the base of the food chain are relaxing and this should have a translation to the consumer after having made products more expensive “a nonsense”, in their own words of its president, Juan Roig.
But the extreme lack of rain now adds uncertainty again, admit distribution sources, and could delay the moderation of prices in a part of the food, essentially the unprocessed ones in which Spain is a leading producer.
This is the case of olive oil, with a significant weight in the CPI of the shopping basket. Spain supplies 40% of all world olive oil. However, the 2022-2023 campaign has suffered a drop never seen before due to drought and high temperatures, another of the effects of climate change that is rampant in the Mediterranean. The campaign has concluded with 780,000 tons of oil, almost 48% less than the 1,412,000 tons of the previous campaign. One only has to go to the prices at source – what is paid to the producer – and to the supermarket shelves to see the consequences. With less supply, the price of extra virgin olive oil has reached 5,225 euros per kilo at origin in the week of April 10 to April 16, according to data from the Ministry of Agriculture, when in the same period of 2022 the price was 3 44 euro. In March, the CPI for olive oil reached 32.1%.
The drought could also wipe out part of the rice production in Spain, says Andrés Góngora, head of agricultural production at the agricultural and livestock organization COAG. The lack of rainfall that the country has suffered since last year has reduced production and raised prices, with 22.2% inflation in March, the largest year-on-year increase in the last fourteen years. Originally, the price of white rice of the japonica variety in Spain – the third largest producer in Europe – has gone from 722.14 euros per ton in mid-April 2022 to 1,109.34 today, according to Agriculture. And the future doesn’t look much better. The recent restrictions on agricultural irrigation in the Delta de l’Ebre or Andalusia jeopardize the next harvest and world production will not compensate this time for the internal drop.
The lack of rains that is punishing large regions of China or Pakistan – among the world’s leading suppliers and consumers of rice – suggests the largest reduction in global production in twenty years, with another rise in prices in sight, says an analysis of the consulting firm specializing in raw materials Fitch Solutions.
As for summer stone fruit, such as peach or nectarine, producing areas such as Catalonia estimate a 50% reduction in the harvest if the current restrictions continue, stresses Miquel Piñol, head of agricultural sectors for the Unió de Pagesos union. “We are pushing so that the Government prioritizes the irrigation of the trees and the stone fruit has a normal course,” adds Góngora, from COAG. Despite the fact that production decreases, he considers that the consumer price should not have to vary excessively, since it accumulates “very notable increases”. “Vegetables have been among the foods with higher inflation in March -he continues- when the prices at origin of many of these products have fallen, such as cucumber, which has gone from 1.40 euros per kilo paid to the farmer at the beginning of year at 0.20 cents now; so the food industry and distribution should have room to contain eventual price rises in the fieldâ€.
The effect of the drought on current food prices comes from behind, it started with force last year and has also influenced the increase in the price of milk in recent months. A recent analysis by the Bank of Spain highlights how the lack of rain in 2022 spoiled the quality of pastures for animal feed, increasing its cost and reducing the fattening of cows. And it wasn’t just the water. Last summer’s heat wave “also hurt milk production yields”, which has once again reduced supply and skyrocketed prices. Thus, the kilo of raw cow’s milk in origin was in February 2022 at 0.367 euros per kilo, while in the same month this year it has risen to 0.585 euros. In stores, the price of whole milk has increased 33.2% annually this February and 30.8% in March.
Abnormally high temperatures for longer periods of time have contributed, along with other factors, to pork reaching a record market price of more than two euros per kilo and becoming more expensive in shops, with a CPI of 19.6% the last month. With more heat, the animals grow less and the litters are reduced, which, once again, lowers the supply, says Miguel Ãngel Higuera, general director of Anprogapor, the National Association of Pig Producers.
Javier Ibáñez de Aldecoa, an economist at CaixaBank Research, points out that the drought “seems to be the main cause of the increase in consumer food prices.” According to data from the Ministry of Agriculture, the production drops in 2022 have been very pronounced. “We observe double-digit falls in a good part of the products for which the Ministry offers statistics. In this sense, it is a dynamic that can turn around quickly, but about which it is very complex to make predictionsâ€, points out this economist. Olive production, for example, decreased by 46.9% in 2022 and this year it suffers new setbacks; that of cereals; 24.8%; and fruit 23.5%. The current drought adds more pressure to the food chain. CaixaBank Research points out that since last September there has been a moderation in production costs thanks to the lower prices of energy and fertilizers (they depend on the price of natural gas), “although it does not seem enough to cover significant falls in the prices of consumption”.
The manufacturing industry is pointing in the same direction. “To a greater or lesser extent, there has been and continues to be an increase in the cost of everything necessary to make a food product and make it available to consumers,” considers Mauricio GarcÃa de Quevedo, general director of the Federation of Food Industries and Beverages (FIAB). “Although some costs have been softening, this drop is not immediately reflected in production costs, since many inputs were purchased months ago, at a much higher price and now we are also facing the threat of drought,” he insists. .
Meanwhile, consumers have adapted by activating a crisis purchase mode in the last year, as in the 1980s, with smaller and more frequent baskets to control spending, highlights Ignacio Biedma, from NielsenIQ. The consumption of fresh products has fallen by 2.3% between March 2022 and February 2023 and cheaper alternatives are being sought. “The purchase of fresh fish and fruit decreases and that of frozen increases, with more stable prices,” explains Biedma. Eating fresh food has become a small luxury for more people.
