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LV Juris Lazdiņš: Food prices are skyrocketing and won't stop. How long?
Opinion
Juris Lazdins: Food prices are skyrocketing and won't stop. For how long?
Chairman of the Board of the Association "Farmers' Council"
The UN Food and Agriculture Organization (FAO) reports that food prices rose by an average of 281.3% last year.[1] Bakers warn that the price of bread could soon increase by at least 30%.[2] Food Union has increased the selling prices of dairy products in stores by 10%.[3] Moreover, all processors are now raising product prices, and they are no longer just 10%. This could go on, but it seems clear to everyone that a significant increase in food prices is expected. We have been talking for a long time about the fact that such a price increase will make the poor even poorer, but now we can safely say that the "new" food prices are causing a significant gap also in population groups with average or even high incomes. However, isn't it true that this increase is temporary, and it is not worth it for politicians? to sweat in solving this problem? What is the reason for the price increase? Are there any real possibilities to save the situation?
Inflation, global trends, commodity prices, energy resources.
No matter how much we want to find a single culprit for the rise in food prices, it is impossible. Our favorite products remain more expensive for several reasons. First, we do not buy wheat, rapeseed, oats, cans of raw milk or whole pigs in stores. We buy processed products – flour, oil, bread, butter, cottage cheese and sausages. In order to turn the raw materials produced by farmers into edible products, energy resources are very important – heat, fuel and electricity, the price of which has even quadrupled. Processing companies are in a desperate situation – they must either raise prices or go bankrupt. It is logical that prices are being raised, because processing companies are not charitable institutions, and it is impossible to work with "minuses" for a long time to keep food prices low.
The second factor that affects prices is the raw materials produced by farmers. (grains, milk, meat, etc.) price increase. Great powers, especially China, are building up huge food reserves. This drives demand forward, and demand, in turn, drives price. Grain prices on the stock exchange have reached an all-time high – wheat costs 270 EUR/t instead of the usual 180 EUR/t. Rapeseed costs 750 EUR/t instead of the usual 350 EUR/t. The price of raw milk in Latvia has also risen very rapidly, reaching an absolute record purchase price in many farms. Vegetable prices will also increase significantly, as they are very dependent on raw material prices. The price of mineral fertilizers has increased three times in a year, from 220 to 700 EUR/t. Consequently, the cost of fertilizers per kilogram of carrots or grains has also increased three times. Fuel used in transport and tractors – by 50%. Everything else is also experiencing a jump – prices of agricultural machinery, lubricants, seeds, and we cannot forget the increasing wages of agricultural workers, which in Zemgale already exceed the national average wage.
No less important factor is inflation. Inflation, unlike some of the factors mentioned above, is not something unique that would apply only to food prices. At the 8% inflation rate that we are experiencing, a loaf of bread that cost 1 euro last year costs 1.08 euros today. If we assume that a person spends 200 euros on food per month, then due to inflation alone, these costs would increase to 216 euros in a year.
Did it really catch the unprepared by surprise? What are the solutions?
Watching the political actions of the last few years, it seems like everything catches us off guard. The first wave of the virus, the second wave of the virus, the third wave, the logistics of vaccination, the rise in energy prices… And also food prices. It really angers me, because The rise in food prices is not a surprise, it is a natural phenomenon that experts warned about at least a year ago. It feels quite surreal. It seems that politicians' hands are working completely independently of their heads - in the public sphere they say that science and experts should be listened to as a priority, but when scientists and experts start sounding the alarm bells - there is no reaction. Noticeable excitement only appears when the head is almost under water and demands for ministers' resignations begin to be heard.
Already at the beginning of last year, observing global processes, we warned the public and politicians that prices would rise. In the middle of last year, industry experts began to speak louder, even warning of a “rapid and shocking price increase”, and offered several solutions to reduce the price increase. While Latvia was laughing about it, there was active activity in Europe – the Council of the European Union began discussions on the possibility of member states setting a 0% VAT rate for food products. An agreement was reached at the end of 2021.[4]
While we sleep, our neighbors are working - for example, Poland, from February 1st for half a year, completely abolishes VAT on food, fertilizers, and fuel, and also reduces VAT to 51% for heating and electricity.[5] For Poland, this is a strategic move, wisely defending its economic interests – along with lower fertilizer and fuel costs, the produced product – be it carrots or onions – will also be cheaper. In turn, we, due to our inaction, will be able to eat mouths full of products from neighboring countries, pay foreign entrepreneurs, and complain – ''How is it possible that products produced in Poland and brought to Latvia are cheaper than our own products?''
Reduced VAT – smart support or unnecessary costs?
Opinions on the reduced VAT are diverse – from fully supportive to completely negative. On the negative side, both constructive and well-founded arguments and false assumptions can be distinguished. Several economists have pointed out that the reduced VAT is not the best way to support the poorest strata of society, because it is not sufficiently targeted. True! Reducing the VAT on food will benefit both the poor and those who have arrived at the store with a new Bentley. From this point of view, it would be more logical to collect the full VAT rate in the budget, and then create targeted support from the state budget, which would only be received by residents with low incomes. However, when assessing the current, chaotically adopted Covid-19 support mechanisms, entrepreneurs are extremely skeptical that today's politicians would be able to create targeted, logical and meaningful support for anything. That is why the reduced VAT would be a relatively "safe option" to help society overcome the food crisis.
Another popular counterargument is that “the difference in the reduced VAT is already shared between the producer and the seller, society does not benefit from it”. This is not the case. A few years ago, a reduced VAT was introduced in Latvia for fruits and vegetables typical of Latvia, after which prices were supposed to decrease by 13.2%. If the statement about traders’ greed were true, prices would not change. But they did change! To be fair, prices did not fall by the full 13.2%, but the observed price drop – 11.7% indicates that the effectiveness of the reduced VAT was 88% of the potential, so – very good. [6]
In turn, the benefits of the reduced VAT are clear – lower food prices, and higher budget revenues from those food groups in which there is a large shadow economy. The explanation is simple – it is no secret that traders in various markets take risks and make payments without a receipt – in cash, thus not paying 21% VAT to the budget. However, at a VAT rate of 5%, this risk is no longer worth it. Traders write a receipt, pay 5% VAT to the state and sleep peacefully, while the state receives at least part of the money that would have previously gone to the treasury.
When will prices return to previous levels?
– It's hard to say. Certainly not in the next two years. Two different timeframes must be distinguished:
- In the medium term, which means 3 years, optimistically, it is possible that as the situation on the stock exchanges calms down, energy prices stabilize, and fuel and fertilizer prices "cool down", prices could gradually return to their usual level. However, this will not happen quickly - if at present local grain processors are still able to to hold within reason, because they are working with grain purchased last summer, next year they will have to work with the 2022 harvest, which will be significantly more expensive. In the medium term, the price increase caused by inflation will not disappear. However, at present, food prices are of greater concern in the long term.
- In the long term, we cannot forget the “elephant in the room” – the European Green Deal and agriculture within it. A beautiful strategy in the headlines, but a painful one in the details, which no Latvian politician has yet had the courage to openly analyze. We must thank the brave scientists, because the analysis has just been conducted by Europe’s most prestigious agricultural university – Wageningen University in the Netherlands. The results are not encouraging. Especially not encouraging for those who green wave are creating their own PR activities. Food prices will rise, the amount of food produced in the EU will fall, farm incomes will decrease. It should be emphasized that prices will not rise "a little". For certain food groups even by 50%!!! Moreover, it is not that the impact on the environment and climate will decrease. At best, it will shift to countries outside the EU. [7]
Consequently, politicians will soon have to make another decision. If we were weak and unable to solve medium-term problems, as a result of which the country is drowning in a conditional food price crisis – are we able to stand up for our wishes at the EU level and implement the green course in a way that the main victims are not our own citizens?
[1] https://www.reuters.com/markets/europe/world-food-prices-hit-10-year-peak-2021-2022-01-06/
[6] Nipers, A., Upite, I., Pilvere, I., Stalgiene, A., & Viira, AH (2019). Effect of VAT rate reduction for fruits and vegetables on prices in Latvia: ex-post analysis.