Finance

Look beyond your oliebol is round

From an economic point of view, energy prices were in the spotlight last year. This is understandable from a European perspective, because the increased oil and (especially) gas prices meant that the costs of energy consumption by European households were already 27 percent higher in November of this year.

Food prices in the eurozone, on the other hand, rose by 2.2 percent this year. That is more than 0.6 percent faster than the long-term average, but not nearly as noticeable as the energy costs. This is perhaps also the reason why the enormous rise in global prices of agricultural products has so far been somewhat underexposed.

The reasons behind those higher prices for agricultural products are varied. The weather conditions were unfavorable (La NiƱa, for example, caused more drought in South and North America) and stocks were already relatively low in many cases. As a result, increasing demand, such as from China, had a strong upward effect on prices. Higher energy prices and therefore higher costs for fertilization and logistics also contributed to this. ‘Rabobank raw materials market experts therefore expect the prices of many agricultural products to remain high for the time being.

The United Nations Food and Agriculture Organization price index was nearly 28 percent higher in November than a year ago and prices rose broadly. The stronger dollar this year amplifies the effect for non-dollar countries.

The index for oils and fats rose 51 percent, for sugar 38 percent, grains 23 percent and dairy products 19 percent. The observant reader may already notice that I have just listed the four most important ingredients for the oliebol.

Of course this does not mean that oliebollen will be 40 percent more expensive this year (the oliebol-weighted average price increase of the four ingredients) than last year, because according to bakery world only 15 percent of the price of such a bulb consists of raw material costs. But 15 of 40 percent is still 6 percent and thus significantly more than the 2.2 percent increase we have seen so far in European food prices.

Moreover, the transfer of costs is a gradual process that takes place in the chain. That is why our experts expect that food producers will increase their prices for retailers by an average of 9 to 10 percent. Part of this will be returned to the consumer, because the margins for retailers are relatively low.

For European consumers, this probably means that some will buy a little less oil or look for a cheaper alternative. After all, there are enough.

In the poorer part of the world it is a bit more difficult. Firstly, because a much larger part of income is spent on food. For example, about 17 percent of the average European consumption consists of food and non-alcoholic drinks. In Kenya this is 33 percent and in Bangladesh even 56 percent.

In addition, many developing countries are highly dependent on imports, which means that a weaker currency can also exacerbate the problem. In addition, the diet consists more of unprocessed foods. Because there are fewer links in the chain, the transmission of the price increase on the world markets is therefore often faster and greater.

This brings me to the point of concern. Although I do not rule out the possibility that higher food prices will also cause problems for some Europeans in the lower income groups in 2022, political instability here seems less likely. But in some parts of the world, we cannot rule out such a scenario. The Arab Spring of 2011-2012 is partly associated with the sharp rise in food prices in 2010-2011 and the current commodity price wave can be compared with that episode.

Food price increases in most countries have not yet moved beyond their historical range. But with low stocks, corona disrupting the balance in world markets and a strengthening dollar, a new price wave is looming. Moreover, the climate is becoming more erratic and unfortunately so is the international political environment. Consider Russia and Ukraine, both of which are in the top five global wheat producers. An escalation of the conflict there could have major consequences.

Food availability and prices and political stability, both nationally and internationally, have always been closely linked. Fortunately, the eurozone is not as dependent on food imports as it is on our energy supply. But the refugee crisis of 2015/2016 is still fresh on our minds and new political unrest in the world around us is also a serious risk. So let’s look further than our oliebol is round.

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