How likely is food price inflation?

Over the past decade, food price inflation hasn’t been an issue that troubled the financial markets; however, we believe that could change soon.

Food for thought

Food prices have trended significantly lower over the past decade for many reasons and have, to a large extent, underperformed other commodities and asset classes. While the last half of 2020 saw a rise in food prices, long-term forecasts from the Organisation for Economic Co-operation and Development suggest real food prices will likely remain at or below current levels for the next 10 years.¹ We have a slightly different view—we think consensus is underpricing the risk of a further sharp increase in food prices.  

Having underperformed for 10 years, food price inflation is making a comeback (%)

Table comparing the cumulated returns of different asset classes over two time periods: six months ending December 4, 2020, and 10 years ending December 4, 2020. The table shows that 10-year cumulative returns for food crops such as sorghum, soy beans, wheat, coffee and sugar are negative, although they were positive in the six months ending December 4, 2020.

Source: Bloomberg, Manulife Investment Management, as of December, 4, 2020. Green bars represent cumulative 10-year returns for various asset classes. Blue bars represent cumulative 6-month returns for soft commodities (food items).

Food price inflation typically affects the lower-income group most since food purchases account for a bigger portion of their household income. Therefore, a sharp, unexpected rise in food price inflation could widen the income gap between the haves and have-nots, exacerbating a situation that has already been made worse by the COVID-19 outbreak.

While policies put in place to contain the economic damage brought about by the pandemic have so far helped to prevent a financial crisis, it’s important to recognize that quantitative easing—a key component of the global response—has worsened income inequality through asset price inflation. In our view, a protracted period of food price inflation, when combined with other forms of bad inflation, will weigh on aggregate demand, denting global growth prospects.

Understanding food pricing—supply-and-demand dynamics

Commodity prices rising since April 2020
Table showing the Bloomberg Agriculture Spot Index from January 2010 to December 2020. The chart shows that the index, a measure of nine agricultural crops, has been rising steadily since April 2020, only moderating slightly at the end of the year.

Source: Macrobond, Manulife Investment Management, as of December 4, 2020.

The COVID-19 pandemic has triggered a surge in Consumer Price Index (CPI)-measured food price inflation, driven by an increase in demand for groceries and the shift from dining at restaurants and schools to eating at home. Governments have also built up strategic food stockpiles to insulate their economies from further supply disruptions. On the supply side, the pandemic has shuttered food processing plants and disrupted global trade. Extreme weather events—from droughts in the United States, Russia, and Brazil to flooding in China, Vietnam, Malaysia, and Indonesia—have also negatively affected harvests and supply chains around the world, sending crop prices higher. The Bloomberg Agriculture Spot Index, a gauge of nine crop prices, has risen by roughly 30% since late April to highs not seen in nearly four years, reversing a near decade-long downtrend in global food prices.²

Food price inflation has consistently outpaced headline inflation in the past year (%)

Chart showing the difference between food price inflation and headline CPI in various economies: India, Australia, the euro area, China, Japan, United States and Mexico. The chart shows that in the past year, food price inflation frequently outstripped headline inflation level.
Source: Macrobond, Manulife Investment Management, as of December 30, 2020.

That said, it’s important to note that food price inflation was already trending higher before the pandemic. A quick analysis of food price inflation (relative to the CPI) in a broad range of economies confirms this. For instance, CPI food inflation in Mexico has risen to 4.6 percentage points above headline CPI inflation. In Q3 2018, CPI food inflation was 2.4 percentage points below headline CPI inflation.² 

Structural demand and supply drivers

The rise in food price inflation isn’t only COVID-19 related—structural drivers also play a key role in determining price levels.

Key structural drivers of demand

Rising population and income growth in emerging markets have led to an increase in appetite for more protein in these economies. Unsurprisingly, the income elasticity of protein demand is much higher for poorer households than richer ones. Demand for protein among households in developed markets has also risen as a result of the growing popularity of plant-based diets on the back of rising concerns over environmental protection and obesity.

In our view, markets have underappreciated the risks associated with food price inflation and the widening income gap.

Key structural drivers on the supply side

Many factors have contributed to keeping a lid on food supply. The multi-year decline in food prices has disincentivized new agricultural investments to the extent that growth in agricultural supply hasn’t kept up with demand; water supply and arable land have decreased (the former due to global warming and the latter due to erosion, pollution, and over farming), limiting growth in global food production; urbanization and industrialization—particularly in emerging markets—have created a new source of competition for land needed for agriculture; and, finally, the frequency of extreme weather events such as plagues, floods, and bushfires have increased alongside climate change concerns, which is negative for harvesting.

Inequality and food distribution

Research from the United Nations World Food Programme shows that the number of people facing acute food insecurity could have doubled to nearly 265 million last year—an outcome of the COVID-19 outbreak.³ Meanwhile, Oxfam forecasts that 12,000 people die from hunger every day as a result of the pandemic.⁴

Indeed, food security was already an issue pre-COVID-19 and, as with many other issues, the pandemic has simply exposed that vulnerability. Food security isn’t just a problem for poor economies, it’s also a growing issue in rich countries. For instance, in the United States, nearly 28 million adults—13% of all adults in the country—reported that their household sometimes or often didn’t have enough to eat.⁵ Meanwhile, food bank lines have grown longer during the pandemic and school closures have also meant that some children who depended on schools for a daily meal have gone hungry.

The United Nations Food and Agricultural Organization highlights four key pillars of food security:

  1. Availability, which relates to production, distribution, and exchange; 
  2. Access, which relates to affordability, preferences, and allocation;
  3. Utilization, which is the quality and safety of food; and
  4. Stability, which is the ability to obtain food over time.

Income and class inequality directly affect access to food produced. Indian economist Amartya Sen, who won the Nobel Prize in 1998 for his work in welfare economics, argued that famine wasn’t caused by a lack of availability, but because people didn’t have the money and, importantly, the power to access food that had been produced.⁶ Africa is a good example: Since 2000, hunger in Africa—proxied by the prevalence of undernourishment—has increased by 25.8% despite the fact that food production has simultaneously increased by 8.6% per person.⁷

Inequality isn’t a new issue, but it has gotten worse in the last decade, amplified by a few developments:

  • Fiscal/development programs that lead to more debt and austerity in poorer nations. These programs often involve a combination of food subsidy elimination, an increase in the price of public services, wage reductions, trade and market liberalization, deregulation, and the privatization of state-owned assets. These policies invariably lead to more debt, economic stagnation, and unemployment, the latter of which makes it even harder for marginalized segments of society to access food. Crucially, such policies tend to enhance the power and/or control that corporations have over the production and distribution of food, for instance, free trade agreements often protect corporations and limit public intervention.
  • Food speculation: Multiple rounds of global quantitative easing and economic stagnation in the past 13 years have created a low return environment, forcing investors to source returns in nontraditional ways. This has accelerated the growth of financial speculation, which has also affected the commodity market, thereby contributing to increased volatility in world food prices.
  • Land grabs: Foreign direct investment such as the purchase of land/development rights often plays an important role in the growth of a developing economy; however, without adequate regulations, these agreements can leave the host economy with a larger foreign debt pile. These transactions can also be detrimental to the household sector through the outright reduction in control over food production processes. As farmers are moved off their plots, they not only lose access to their crops, which not only represent losses in their income and their livelihoods, but also an important source of food supply. Environmental degradation could also occur as a result of urban development.
  • Food security concerns, social unrest, and stronger trade protectionism: More than any other commodity, food is of strategic importance from a national security perspective given how food shortages could spark social unrest. The last protracted run-up in food prices dates back to 2011, which contributed to the Arab Spring. Understandably, governments are incentivized to play an active role to minimize food shortages. Intervention could take the form of price controls (domestic policy) and trade protectionism (foreign policy), or a combination of both. However, in a globalized world, attempts to protect an individual economy’s self-interest can create distortions in the global supply-and-demand balance. In our view, it may not take much of a rise in global food prices for trade protectionism in agriculture to escalate.
  • High debt loads: Economies with high debt burdens at both the private and public sector level—already vulnerable to rising food prices—will be weakened further by a sudden spike in food prices. In such a situation, households will have less income to spend on food, businesses will have less room for agricultural investment, and governments will have less fiscal space to absorb higher prices through food subsidies and other fiscal spending. This is particularly important in today’s context because COVID-19 has exacerbated debt burdens globally. 

Z-scores—which economies are most likely to be most affected by food price inflation?

To objectively gauge which economies could be most vulnerable to food inflation, we calculated z-scores⁸ for 31 economies/regions—which we follow regularly and believe to be a good representation of the global economy— based on multi-year averages of the following variables that, in our view, are good indicators of exposure to food price volatility:

  • Prevalence of undernourishment
  • Net food exports expressed as a percentage share of GDP
  • Renewable water resources
  • Availability of arable land
  • GDP per capita
  • Household food consumption expressed as a percentage share of household expenditure.

By calculating a composite Z-score from each of these variables, we find that of the 31 major economies/regions we tracked, the most vulnerable to higher food prices (highest Z-scores) are the Philippines, India, Indonesia, Vietnam, and China. The least vulnerable to higher food prices (lowest Z-scores) are Australia, Canada, New Zealand, Norway, and the United States.

Z-scores—which economies are most exposed to food price inflation? 

Table of z-scores calculations ranking economies that are likely to be most affected by a rise in food price inflation, from the most vulnerable to the least. According to Manulife Investment Management’s calculation based on publicly available data as of December 2019, the Philippines, India, Indonesia, Vietnam, and China are the most vulnerable to a jump in food price inflation. Conversely, the United States, Norway, New Zealand, Canada, and Australia are likely to be the least affected.
Source: World Bank, EIU's 2018 Global Food Security Index, Food and Agriculture Organization of the United Nations, Manulife Investment Management, as of December 2019. The results shown are based on Z-score calculations of 31 economies that provide a comprehensive view of the global economy. Z-scores are calculated based on multiple-year averages of prevalence of undernourishment; net food exports as a percentage share of GDP; agricultural water withdrawal as a percentage share of total renewable water resources; total internal renewable water resources per capital, arable land (hectares per person); GDP per capital; and food consumption as a percentage share of household expenditure.

Key takeaways from our calculations:

  • Asia remains more vulnerable to the rise in food price inflation relative to other regions.
  • It’s reasonable to expect that those most vulnerable to food shortages may step up efforts to secure global food and water supply chains.


While food prices may not appear as relevant to global markets as U.S. Federal Reserve decisions or the announcement of large fiscal packages, it’s important to remember that a food and/or water crisis represents a sizable investment risk with far-reaching economic, social, and geopolitical implications. 

In our view, markets have underappreciated the risks associated with food price inflation and the widening income gap—calls to address chronic hunger through a necessary structural reform of economy and institutions, including the redistribution of wealth and power, are likely to grow louder. As these issues come to the fore, we could see heightened political risk, particularly in key areas of the world where hunger, exacerbated by the COVID-19 shock, is evident.



1 Organisation for Economic Development and Co-operation, December 2020. 2 Macrobond, as of December 4, 2020. United Nations World Food Programme, April 21, 2020. 4 “12,000 people per day could die from Covid-19 linked hunger by end of year, potentially more than the disease, Oxfam warns,” Oxfam, July 9, 2020. 5 “Tracking the COVID-19 Recession’s Effects on Food, Housing, and Employment Hardships,” Center on Budget and Policy Priorities, January 15, 2021. 6 Poverty and Famines: An Essay on Entitlement and Deprivation, Amartya Sen, 1981. 7 Food and Agriculture Organization of the United Nations, November 30, 2020. 8 A Z-score describes the position of a value in terms of its distance from the mean (average). It is measured in terms of standard deviations from the mean.

A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future, could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other pre-existing political, social and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.

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Sue Trinh

Sue Trinh, 

Senior Macro Strategist

Manulife Investment Management

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