The drought has broken into the inflationary spiral that has been pushing the consumption 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 of these products began to exceed the data of general inflation, moving further and further away. Until reaching the historic distance of last month: an interannual CPI of 3.3% compared to 16.5% inflation in food, more than thirteen points of difference despite the reduction of VAT on basic products applied since this January.
The food sector, in the eye of the political and social hurricane, and the central government were starting to breathe a little more calmly because production costs - energy, fuels, fertilizers... - are already decreasing and global food prices and quotations such as cereals, dairy, meat or vegetable oils have been falling for months, as compiled by the FAO - see graph -. As the leader of the distribution in Spain, Mercadona, anticipated a few days ago, the prices at the base of the food chain are relaxing and this should have a translation to the consumer after having made the products "a lot" more expensive , in the words of its president, Juan Roig. But the extreme lack of rain is now adding uncertainty again, distribution sources acknowledge, and could delay price moderation in part of the food, essentially unprocessed food in which Spain is a prominent producer.
This is the case of olive oil, with an important weight in the CPI of the consumption basket. Spain supplies 40% of all the world's olive oil. However, the 2022-2023 campaign has suffered an unprecedented decline due to drought and high temperatures, another of the effects of climate change that is raging 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. There is nothing more to do than go to the prices at origin – what is paid to the producer – and to the supermarket shelves to check the consequences. With less supply, the price of extra virgin oil has reached 5.225 euros per kilo 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 it was 3.44 euros. In March, the CPI for olive oil reached 32.1%.
The drought can also take away 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 has plagued the country 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. In origin, the price of white rice of the Japanese variety in Spain – third 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'Ebro or Andalusia compromise the next harvest and world production will not compensate this time for the internal fall.
The lack of rain that is punishing large regions of China or Pakistan - among the world's first suppliers and consumers of rice - predicts the biggest reduction in global production in twenty years, with another price escalation in sight, points out an analysis by the consulting firm specializing in raw materials Fitch Solutions.
Regarding summer stone fruits, such as peaches and nectarines, producing areas such as Catalonia estimate a 50% reduction in the harvest if the current restrictions continue, emphasizes Miquel Piñol, head of the union's agricultural sectors Union of Farmers "We are trying to get the central government to prioritize the watering of the trees and the stone fruit to have a normal route", adds Góngora, from the COAG. Despite the fact that production decreases, he considers that the price to the consumer should not vary excessively, since it accumulates "very remarkable increases". "Vegetables have been among the foods with the greatest inflation in March - he continues - when the prices at the origin of many of these products have fallen, such as cucumber, which has gone from 1.40 euros per kilo paid to 'farmer at the beginning of the year at 0.20 cents now; so the food industry and distribution should have room to contain eventual price increases in the countryside”.
The effect of the drought on the price of current food comes from behind, it started strongly 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, increased its cost and reduced the fattening of cows. And it wasn't just the water. Last summer's heat wave "also damaged the yields of milk production", which has once again reduced supply and shot up 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 of this year it has risen to 0.585 euros. In stores, the price of whole milk rose 33.2% year-on-year in February and 30.8% in March. Abnormally high temperatures for longer periods of time have contributed, along with other factors, to the fact that pork reaches a record market price of more than two euros per kilo and becomes more expensive in shops, with an IPC of 19 .6% in the last month. With more heat, the animals grow less and the litters are reduced, with this, once again, the supply drops, says Miguel Ángel Higuera, general director of Anprogapor, the National Association of Pig Producers.
Javier Ibáñez de Aldecoa, CaixaBank Research economist, points out that the drought "seems to be the main source of the increase in food consumption prices". According to data from the Ministry of Agriculture, production drops in 2022 have been very sharp. “We see double-digit drops in most of the products for which the ministry provides statistics. In this sense, it is a dynamic that can turn around quickly, but on which it is very complex to make predictions", this economist points out. Olive production, for example, decreased in 2022 by 46.9% and this year it is suffering further setbacks; that of cereals, 24.8%; and fruit, 23.5%. The current drought adds more pressure to the food chain. CaixaBank Research highlights that since 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 sufficient to cover significant drops in consumer prices ".
The manufacturing industry points in the same direction. "To one extent or another, there has been and continues to be an increase in the price of everything necessary to produce a food product and make it available to consumers", says Mauricio García de Quevedo, director general of the Federation of Industries of Food and Beverages (FIAB). "Although some costs have been softening, this drop does not have an immediate reflection on production costs, since many tickets were acquired months ago, at a much higher price and now we are also facing the threat of the drought", he insists.
Meanwhile, consumers have adapted by activating a crisis buying mode in the last year, as in the eighties, with smaller and more frequent baskets to control spending, highlights Ignacio Biedma, of 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 is falling and that of frozen food is increasing, with more stable prices", explains Biedma. Eating fresh food has become a small luxury for more people.
