Rising Production Costs and Supply Chain Disruptions
Recent research by UBS shows a 9.2% food price increase in the last quarter of 2022, a trend that has been going on for a few years since the start of COVID-19 and ending with the Russian invasion of Ukraine (Margulis, 2023). The three factors affecting food prices worldwide are natural gas, fertilizer, and coal (Margulis, 2023). As the diagram below shows, all three of these components are necessary for the healthy existence of the agricultural sector. Fertilizer determines crop yields, coal is necessary for the production of herbicides, preservatives, and food dyes, and natural gas prices affect the entirety of the economy, while also being a necessary component for the production of agriculture-related supplies.
Impact of Global Economic and Political Factors
Events surrounding the war in Ukraine have greatly affected the prices of all three components. Gas and oil prices have been highly unstable as a result of the West’s economic sanctions against Russia and other countries (Margulis, 2023). Ukraine itself used to be a large producer of all three commodities; its productive facilities are now devastated. Russia’s capacity to export food and fertilizers is also diminished (Margulis, 2023). As a result, prices have grown considerably, affecting the world’s agriculture and pushing it towards crisis.
The Role of Price Elasticity of Demand in Setting the New Equilibrium Price
Price elasticity regarding foodstuffs is a subject of research and debate. On the one hand, the food industry is known for low brand loyalty and the ease of product replacement. Shops have a multitude of companies offering everything, from chicken to cereal, with very little deviation between products (Margulis, 2023).
At the same time, if price increases hit everything across the board, the way they do now, people do not have the option of not buying food at all. Food is, by definition, a necessary product for survival (Margulis, 2023). As a result, price elasticity does not work, and customers are forced to buy products at whatever price they are being sold.
References
Margulis, M. E. (2023). Shadow Negotiators: How UN organizations shape the rules of world trade for food security. Stanford University Press.