Earlier this month, I reported on Brazil's tomato crisis, with prices of tomatoes and other vegetables rising. Soon after, the international press also began covering this issue (see Beyond Brics, FT, Bloomberg, AP, NPR, and Quartz). There were even reports in the Brazilian press of tomato smuggling across the Argentine border. One of Brazil's most popular TV personalities, Ana Maria Braga, wore a "tomato necklace" on TV and joked she was wearing gold. This weekend, two of Brazil's largest weekly magazines put tomatoes on the front cover. Much of the coverage, both domestic and international, focuses on the threat of inflation, and what rising inflation could mean for next year's presidential election. There's also the issue of consumption. Valor reported last week that due to rising food prices, supermarket sales fell 2.1 percent in February, though families spent 9.3 percent more than in February 2012. In the last week or so, tomato prices have started to go down, though prices of other vegetables--namely onions and potatoes--increased by 15 and 25 percent, respectively. Onions, too, are being smuggled across the Argentine and Paraguayan borders.To determine what is really going on with food inflation, I talked to São Paulo-based economist Luciano Sobral, also known as the Drunkeynesian, to get his views on whether this a long-term trend, a short-term problem, or a symptom of other economic forces at play.
Tomatoes, onions, and other vegetables and food products have risen over the last year. There are climatic reasons (drought, rains) and agricultural reasons (less area planted), but what are the bigger economic forces at play?
I don’t think there are other bigger economic forces acting here, since demand for those items is pretty much stable. As you mentioned, there was a supply shock caused mainly by climatic reasons (heavy rains in the Southeast, a severe drought in the Northeast), and since arbitrage is not possible for several products (there’s no international market, at least not a liquid one where players can hedge or speculate), prices skyrocketed. Curiously, the prices of exchange listed agricultural commodities have been falling consistently since last September, so if there’s any external factor in foodstuff items it should lead to lower domestic prices.
How is food inflation going to affect inflation overall? The economy overall?
Of course the first effect is a spike in headline inflation. The infamous tomato story caused a frenzy on local media (two of the largest weekly magazines in Brazil are currently running cover stories about inflation and food prices), and called attention to a deeper, more structural problem: headline inflation is so sensitive to food prices because ex-food inflation has been quite high. Service prices are rising more than 10 percent per year. There’s a huge adjustment in relative prices going on, and it’s not favourable to capital or investments. Thus the conundrum: the current situation is very desirable politically (low unemployment and real wages rising), but it doesn’t seem sustainable, since overall profit margins look already quite weak and don’t attract new private investments. Dilma has the political incentives to postpone an adjustment until after next year’s elections, but, as a long term growth strategy, Brazil cannot rely only on state-lead, profit-insensitive capital investment.
Do you think food-driven inflation will continue into next year? Or is this a short-term issue?I don’t see a major global uptrend in food prices, so I’d bet this is a short-term issue. Shocks related to climate are pretty much random, impossible to forecast. What’s been more or less established is that they tend to dissipate quite quickly, as soon as the climate turns favorable or higher prices attract new producers or importers to the market. An example: tomato prices hit R$12/kg a couple of weeks ago; this weekend I bought beautiful tomatoes at a supermarket for less than R$4/kg.
What does the price spike of certain foods reveal about the Brazilian economy?Despite all the progress of recent years, Brazil remains a (somewhat) poor and (very) unequal country. The substantial weight of food prices in the average consumption basket (and, consequently, in price indexes) is an evidence of that: everytime certain food prices rise, there’s a national concern. This is similar to what happens with tortilla prices in Mexico or rice prices in some poor Asian nations. Another interesting aspect is the dependence of Brazilian food markets on local producers, since importing is not a viable emergency solution (think of taxes, red tape, complicated logistics). This tends to make supply shocks more frequent and persistent. Finally, it shows the old obsession of the country with inflation, as if it were part of our collective conscience, and how there’s little space in current inflation to accommodate shocks within the established inflation target range (2.5 percent to 6.5 percent, with a center of 4.5 percent). Brazil indeed has an inflation problem, although I don’t think it’s as dramatic as the media and some economists are painting it; only it serves as an important alert to more complicated structural issues.
Image: Courtesy of Drunkeynesian