Heavy Rain and Drought, Global Weather Anomalies... "Fueling Agflation in the Second Half of the Year"

International Finance Center: "Grain prices surged in 2008, reflected in domestic prices after 4-7 months"

Prices of three major grains including corn surged up to 50%... exerting upward pressure on consumer prices

[Asia Economy Reporter Kim Eunbyeol] Concerns are rising that global weather anomalies such as droughts and heavy rains could further fuel agflation (agriculture + inflation). As the global economy rapidly recovers from the impact of COVID-19, grain and agricultural product prices have surged, and climate could become another variable that stimulates agricultural product prices again. Global agricultural prices began to rise sharply since August last year, and considering that international agricultural prices are usually reflected in domestic prices with a time lag, agflation is expected to intensify in the second half of the year.

On the 19th, the International Finance Center stated in 'International Finance Insight' that "grain prices that rose in the first half of this year are expected to act as a significant inflationary pressure from the second half." Oh Jeongseok, a senior researcher at the International Finance Center, citing analysis from the Korea Rural Economic Institute, said, "In Korea, if imported grain prices rise by 10%, the overall consumer price index increases by 0.39%," adding, "Considering that the prices of three major international grains?corn, wheat, and soybeans?rose by up to 50% in the first half of this year, consumer prices in the second half will face considerable upward pressure." In 2008, sharply rising grain prices were reflected in domestic prices after 4 to 7 months.

Corn futures traded on the Chicago Board of Trade (CBOT) were priced at 552.0 cents per bushel on the 16th (local time). Corn prices surged 151% from a low of 308 cents per bushel in early last year to over 700 cents per bushel in early May this year, reaching the highest level since 2012. During the same period, soybean and wheat prices rose by 91% and 63%, respectively. Although there has been some recent correction, prices remain at high levels.

The Food and Agriculture Organization (FAO) of the United Nations reported that the real food price index rose continuously for 12 months from 91.0 in May last year to 127.8 in May this year, reaching the highest level in 11 years. By category, the meat price index jumped from 91.5 in September last year to 109.6 last month, and sugar prices rose from 79.0 to 107.7. The food price index is indexed to an average price of 100 during 2014-2016 for comparison, indicating that inflation in the international agricultural market has progressed significantly compared to about five years ago.

Food prices are expected to rise further. Grain demand has surged mainly in China and other countries, but production has faced adverse conditions due to overlapping weather anomalies such as droughts and heavy rains. According to the U.S. Department of Agriculture (USDA), global grain supply and demand for 2020 and 2021 is expected to show a supply shortage of 31.4 million tons. To make matters worse, severe droughts are occurring in major grain-producing regions such as the western United States, Brazil, and South America, while Europe, which experienced drought last year, has been hit by record heavy rains this year.

Senior researcher Oh said, "Agricultural production is greatly influenced by uncontrollable weather conditions, making it difficult to find appropriate countermeasures, and even if prices surge, it is difficult to significantly increase supply in the short term," adding, "We need to prepare not only for inflation but also for food crises."

◇Terminology Explanation

◆Agflation = a compound word of agriculture and inflation. It refers to the phenomenon where general prices rise due to a sharp increase in agricultural product prices.