FAO urges to stay alert: will food inflation decline in Azerbaijan? Anaysis by Caliber.Az

According to the updated data published recently by the UN Food and Agriculture Organization (FAO), there was a steady downward trend in prices for vegetable oils, cereals, meat, and a number of other food products in November and December last year. Nevertheless, the level of food inflation is still quite high, and this change for the worse is most noticeable in the world's poorest countries.

High food prices remain a key problem in most post-Soviet countries, including Azerbaijan. Alas, in addition to the factor of global inflation, the local food market is under the pressure of monopolies, very selective policies of large retail chains, and inefficient logistics of supply of farm products to the cities.

As noted in a new review of FAO, a trend of some decline in global food prices since March last year, even more, pronounced in December 2022. Food prices in 2022 rose by 14.3% compared with 2021, down 1% from a year earlier. However, according to the UN profile, last month's food price index was 132.4 points, already 1.9% lower than in November. This trend was driven by a sharp fall in global vegetable oil prices as well as a slight decline in cereals (-1.9%) and beef and poultry (-1.2%). Vegetable oils accounted for the biggest fall in the price index, with a 6.7% decline in December against November, the lowest since February 2021. This, according to FAO, contributed to the fall in world prices of palm, soybean, rapeseed, and sunflower oils, as well as the decline in crude oil prices observed in November and December. The latter led to a drop in demand for oilseeds, the main raw material for the production of green fuels, biodiesel.

According to FAO chief economist Maximo Torero, the new trends in the food market are very positive, especially after two very volatile years. At the same time, the specialist believes that global risks for food security are rather high: since the end of last year world prices for rice, corn, pork, lamb, and dairy products have been rising, and in general prices for basic foodstuffs are still at a very high level. Due to geopolitical conflicts, there remains uncertainty about the logistics of food supplies in 2023.

According to numerous FAO forecasts published last year, high prices for nitrogen and phosphate fertilizers, last year's poor cereal harvest, and difficulties around exports of Ukrainian and Russian agricultural products increase the risks of continued high prices for cereals and other products in 2023. And along with bread and other flour products, the persistence of high prices for fodder for animals and poultry leads to higher prices for eggs, meat, and dairy products. All this increases the risks, especially for underdeveloped countries with underdeveloped food market diversification, insufficient agro-processing capacity, and low import substitution. The FAO and other relevant UN agencies estimate that, overall, the number of hungry people in the world has increased by 150 million since pre-pandemic 2019, surpassing 830 million.

In terms of food security, FAO experts consider Azerbaijan to be one of the relatively prosperous countries, ranking high in the post-Soviet region. For three decades of independence, the Republic of Azerbaijan established a well-developed agro-industrial complex, and about a decade ago, FAO included our country in the list of countries with the lowest rate of hunger - less than 5%. According to a UN assessment, the level of import substitution in livestock and poultry production has already reached 92% in Azerbaijan by 2013. In recent years, the average indicator of agricultural import substitution has steadily remained at the level of 70-80% due to the establishment of mass commercial production by local agro parks and large farms.

However, the global food crisis, which lasted about two years, exposed a number of significant gaps in Azerbaijan's food security: the country is still heavily dependent on imports of oilseeds and cereals, especially food wheat - about 60% of all needs are met by external imports. The lion's share of domestic demand for butter, hard cheese, some other dairy products, seafood, and tropical fruits is also met by imports.

Finally, local processing and food enterprises are highly dependent on external supplies of feed for poultry farms, feed additives, vitamin products, vaccines for animal husbandry, as well as imports of special packaging, containers, components, special equipment, fertilizers, and pesticides for crop production. Obviously, for all the above items the factor of imported inflation has had a very negative impact on price increases not only for imported food but also increased the costs of local producers who buy raw materials and components abroad.

As a result, the country's food market has been experiencing crisis processes for over a year: according to the Central Bank of Azerbaijan (CBA), by November 2022 food inflation in the country reached 20.1% (against November 2021), while the combined average annual growth of consumer prices for the first 11 months reached 13.8%, having slightly decreased relative to October indicators.

In its budget forecast for 2023, the government estimates average annual inflation at around 6.9%, which is half of what it was last year. Nevertheless, according to recent CBA monitoring, 81.9% of households in Azerbaijan expect further inflationary increases in the new year. Many trade and service providers are of the same opinion. "According to estimates of international experts, only in 2024, the inflation rate in many countries will return to the corridor predicted by regulators. The current geopolitical situation in the world is characterised by high uncertainty, which maintains the risk that the inflation rate will be higher than the projected corridors," the CBA said in a recent statement.

Whether the average annual inflation rate will be within the forecasted parameters of the state budget will become clear only in the second half of the year, but further price increases in the food segment of the country most likely cannot be avoided. In particular, last December and the first decade of this January beef rose in price, a kilo of which is sold for 14-16 manats, and prices of mutton rose to 19-20 manats per kg. Prices of some fruits and potatoes, cereals, yogurt, and butter rose slightly.

However, imported inflation is far from being the only negative factor affecting the local market, quite often some entrepreneurs and intermediaries, taking advantage of the global rise in prices, artificially inflate the market prices. The need to prevent such practices has been repeatedly voiced by the head of state, MPs, and experts.

It is clear that in a market economy, the use of administrative punitive mechanisms to reduce prices is useless and even harmful, and that the price factor should be influenced primarily by market methods, increasing supply. In this regard, a number of measures on strengthening food security is implemented in Azerbaijan: in the structure of state budget expenditures for 2023, investments in agriculture will amount to 1.202 billion manats, which is 20.5% more than last year's figures, implementation of a number of programs on raising productivity in grain sector has begun, including through the development of agriculture in Karabakh region. The State Reserve Agency is developing the structure of food reserves and a part of imported and produced food will be reserved in the Agency's warehouses, and in case of force majeure these reserves will help reduce the speculative rush and balance the market. "The country has stockpiles of essential foodstuffs for 90 days. In its turn, 180 million manats will be directed to measures for provision of food wheat," Prime Minister Ali Asadov said not long ago.

It is clear that the effect of the planned measures in the agricultural sector will be felt in Azerbaijan only after some time. However, it is important even today to overcome inertia in the sphere of legislative and administrative mechanisms, to struggle against the monopoly of wholesale suppliers, controlling import supplies (for example, tropical fruits, seafood, etc.), as well as large wholesale bases and logistics companies, operating in the uncompetitive environment, controlling segment of product storage on cold storages and in wholesale barns, and having possibilities to overprice considerably the trade margin. Alas, small producers of fruit and vegetable products from the regions often do not have access to large trading networks, and the prices for refrigerated storage are also unaffordable for them. The post-pandemic practice of small-scale trade "on the go" in Baku has for some reason almost been suppressed, and the fairs organised at the initiative of the Ministry of Agriculture under the "From village to city" programme are very few, besides, prices at such bazaars are often equal or even higher than in the capital's supermarkets or vegetable stalls.

In order to overcome the above negatives and to prevent monopolisation of the food market, the adoption of the new Competition Code (CC) is needed as soon as possible. Discussions on this document in the government and parliament have been ongoing for the last 15 years and in 2021 a new draft of the CC was sent to the relevant government bodies for feedback. The agreed document was expected to be sent to the government in the first half of 2022 and then submitted to the Milli Majlis. Alas, there is still no information as to whether the Code will be adopted soon. Since last year, at the initiative of the Ministry of Economy and the State Service for Antimonopoly Supervision and Control of the Consumer Market, a draft law "On Internal Trade", designed to regulate relations between suppliers and retail chains, has been under development. And today, in order to effectively regulate food prices, it is equally important to speed up the process of adopting this necessary law.