How to stop the rise in food prices: causes and solutions of the problem

Growth leaders: sugar — 42%, butter and eggs (28%)

Today I would like to consider the current situation in the Russian food market, which, in economic terms, is “unbalanced”. Judge for yourself, food in the country as a whole has risen in price for the year by 7,4%. Sugar (42%), sunflower oil (28%), chicken eggs (28%), all types of chicken (20%), beets (35,3%), cabbage (25,2%), carrots (18,8%), potatoes (15,4%), onions (11,3%) have become the leaders of growth. According to Rosstat, inflation in May was 6,02% year-on-year, and we have passed only half of the year. The figure of 6% was last seen in October 2016. Serious figures, actually. And the so-called food inflation plays a big role in the overall inflation rate in the country. According to economists, by the end of 2021, we will spend by 20% more on food than a year earlier. Remember the size of the cart in the store ten years ago and what you could buy for 2,000 rubles.

The main growth factor is global food prices, which play a big role in the development of the current situation in Russia, even more than purely domestic factors. The global price increase in 2021 has been the highest in 10 years. According to the UN figures, the average value of the food price index in May is 127,1 points. This is 5% more than in April, and 40% more than in May 2020. Tremendous growth! In general, the above figures for price growth in Russia are within the global trend, in the world the growth has been even higher by these positions.

The reason for such a rapid surge in prices in the world is very simple — producers, due to expectations of a decline in consumption during the pandemic, reduced the size of the acreage, reduced the purchase of fertilisers, and reduced livestock. A good example is oils (soybean, sunflower, palm) — yields have declined, and prices have started to rise. Because of the lockdown, there were not enough shipping containers, which added to the price. In addition to purely business reasons, there are also monetary ones — many countries, in an attempt to support their economies, injected hundreds of billions, trillions of printed money into the pandemic, which leaked to exchanges around the world and dispersed the exchange values of products.

What is happening in Russia itself? The government blames individual producers and retail chains, which, because of their “greed”, raised domestic prices following world prices. There is some truth in this statement, since any merchant, taking advantage of the moment, will gladly raise the price. But this does not cancel out a whole bunch of problems in the domestic food market — imported seeds, veterinary drugs, feed, food equipment, which have become significantly more expensive due to the falling ruble. Another problem is the dominance of large retail chains and a large network of intermediaries in the markets. It is sometimes difficult for the manufacturer to sell their goods at an adequate price (in the eyes of the end buyer), as there is a tremendous price-gouging.

Ways to solve the problem

As always it happens in such situations, the famous “ban and prohibit” is used — for example, from June 5 to August 31, a ban on the export of buckwheat was introduced, with a parallel ban on the growth of prices at home. It will not be surprising if we see an expansion of the list of restrictions on the export of other food products.

The so-called “price shock absorber” is widely used — the use of administrative resources to regulate the market. By guaranteeing minimum and maximum prices, the government both protects consumers and provides an incentive for producers to invest — creating new value chains. For these purposes, intervention funds are being created following the example of the experience of regulating the grain market since 2001. There is a mechanism of commodity (sale from the fund's reserves in times of high prices, knocking down the growth of prices in the market) and purchasing (purchase by the fund in times of low prices) interventions. The goal is to stabilise the prices of a particular product, raw materials, and food. In 2022, such funds for sugar and sunflower oil will be created. From the point of view of economists, this approach is more suitable for the economy than a common “freeze” of prices. Funds are a classic example of a subsidised tool, which is very common in all developed countries, especially large agricultural producers such as Russia.

Outlook for further developments

The government's actions to control the prices of socially important goods have stabilised the situation in the medium term. Taking into account that 58% of the Russian society considers the price increase to be the most important problem, we can say that the request of the society has been partially fulfilled. But the scale of inflation in general is alarming, no matter they control it or not, prices will still rise against this background. A good grain harvest is planned — up to 130 million tonnes, according to the forecast, grain prices will fall in the autumn. In general, good harvests are planned for all positions around the world, which will help to contain the price increase due to the greater supply on the market. The world market is playing against it, where all prices for food products are expressed in dollars and the flywheel of global inflation is fully spinned, with an increase in export prices, it will be difficult for our producers to resist the temptation to sell more abroad.

Something similar is happening now in the metal market — due to export supplies, prices for all rolled metal items have increased two and a half times since the fall of last year and continue to grow. There are already proposals at the government level to withdraw “super profits” from our producers. It is difficult not to agree with them, as the market has turned the construction of an ordinary fence from profiled flooring into a golden pleasure. Following the metal, the prices of sawn timber caught up, where producers, sensing an increase in demand, inflated their prices. As we can see, the Russian government has a lot of work to do to balance all the markets for goods, not just food. The pandemic is bringing unexpected results.