Brazil, one of the BRICS countries, seems to be rehearsing the global economic crisis, the script is that inflation is first out of control, and then the central bank bakes to speed up interest rate hikes, and then the economy collapses in a vicious circle. Brazil, a major global exporter of resources and agricultural products, is now plagued by an epidemic and a major drop in production, signaling that “hyperinflation” is looming on the horizon. Just after its announcement of interest rate hikes, iron ore prices of steel raw materials to record highs; soybean, wheat, corn prices continue to be at more than 8-year highs. The global economy is afraid to range speculation is not unfounded.
Brazil, the largest economy in South America, raised its benchmark interest rate by 0.75% to 3.5%; the last rate increase was on March 18 this year, when it was the first increase in six years, the same rate of 0.75%, that is, less than 50 days of a cumulative increase of 1.5%. The central bank also forecasts that it will raise interest rates by 0.75% next month, and reiterated its plan to partially withdraw the stimulus package in order to suppress inflation. Looking back at the local consumer price index (CPI) announced last month rose 6.1% year-on-year, economists estimate that the next will be as high as nearly 8%, meaning that inflation has the first signs of getting out of control. The economy has stagnated due to the epidemic and is caught in a stagflationary dilemma. Stagflation means that during the period of stagnant or even regressive economic growth, inflation continues to rise, meaning that people are facing the pain of a hundred things that are expensive and less income.
If it is the past, Brazil’s economy has not been hit by the global disaster, but this time coupled with the epidemic out of control to reduce the workforce, coupled with the weather is not ideal, so that the world’s largest net food exporter disrupted the global food supply chain, the recent sharp rise in global food prices and the country’s situation can not be unrelated. According to the United Nations, Brazil’s net food exports in 2018 were US$62.141 billion (about HK$484.6 billion), the highest in the world. Unlike Thailand, which relies on the export of grains, and the Netherlands, which mainly exports dairy products, Brazil’s food exports cover different types of grains, fruits and vegetables and even meat, which have a broader impact on the food supply chain.
Analysis points out that the wave of food prices will not end in the short term, more likely to signal the spread of “super inflation” around the world. Tracking the trend of nine crops of agricultural spot index, has risen to a new high since 2013, but food demand is still strong, the final cost is believed to be borne by consumers. Coinciding with the restart of global economic activity, coupled with demand stimulated by the U.S. summer barbecue, food prices will continue to surge for some time to come. Juan Luciano, CEO of Archer Daniels Midland (ADM), the world’s largest agricultural trader, admits that demand has not fallen back so far and everything has become more expensive. Dan Kowalski, head of strategy and research at CoBank, a U.S. bank specializing in agricultural credit, described the current situation as “quite rare” because food prices are rising across the board and almost everything is profitable. He said bluntly, “Fundamentally, at least in the U.S., there’s no reason for demand to fall.”
With the rise of everything, coupled with the Brazilian currency, the real since January last year against the U.S. dollar depreciated nearly 40%, the first quarter of this year alone also reached 9.8%, the people are in deep water, data show that in local currency, the 12 months to the end of March, local food prices soared 55%, of which, rice rose sharply 64%, fuel rose nearly 92%. The deterioration of the country’s situation makes the market worry that its food and resources will export inflation to the world, triggering a chain effect that will lead to a global stagflation crisis, with China as the leading net food importer, especially at risk.
However, given that Russia and Turkey have also raised interest rates in April, analysis worries that Brazil seems to be previewing the perfect storm in emerging markets, especially the U.S. Treasury Secretary Yellen recently suddenly mentioned the interest rate hike, the situation has become more complicated.
[Economic collapse brewing famine rather than food shortage]
Food prices are rising more and more, especially soybeans, wheat, corn repeatedly hit a new high of more than 8 years, in addition to triggering inflationary problems, but also fear that the evolution of a large global food crisis. By the United Nations Food and Agriculture Organization, the World Food Programme and the European Union jointly released the “Global Food Crisis Report 2021” shows that the number of people facing “severe food insecurity” in the world last year reached the highest level in the past five years. Behind the food crisis, economic issues derived from the epidemic have become a major driver of famine.
According to the report, at least 155 million people in 55 countries and territories worldwide are in crisis-level or more severe “severe food insecurity”, an increase of about 20 million people year-on-year. Severe food insecurity has been on the rise since the report was first published in 2017. Severe food insecurity is defined as the inability to consume enough food to put lives at immediate risk. The report notes that economic shocks, such as those caused by epidemics, have replaced extreme weather events as the second leading cause of food insecurity in the last year.
Ironically, Brazil, the world’s largest net food exporter, has also experienced a famine crisis. The country’s economy was ravaged by the epidemic, with gross domestic product (GDP) shrinking by 4.1 percent last year, and it has yet to emerge from its predicament. According to a survey conducted by the Brazilian Association for Food Safety and Nutrition, 19 million people were “hungry” last year, and half of the population could not guarantee sufficient food at home, with the weak economy, worsening unemployment and rising prices being the main causes.
Behind this phenomenon, in fact, confirms that in the more developed economies, the food crisis is more due to the economic downturn, inflationary problems. For example, the same food-exporting countries, second only to Brazil’s second largest economy in South America, Argentina, earlier this year also announced a ban on domestic corn exports to stabilize prices.
Argentina’s economy has been shrinking for three years in a row since 2018, and is in dire straits during the epidemic. As the world’s third largest corn exporter, Argentina’s domestic food supply is reasonably adequate, the ban on exports is only due to high food prices, resulting in unaffordable for the public, but also proves that the famine is not simply a reflection of the “lack of food”, but is closely related to changes in the global economic environment.
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