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Agflation

Updated on February 28, 2024
Article byJyotsna Suthar
Edited byRaisa Ali
Reviewed byDheeraj Vaidya, CFA, FRM

Agflation Meaning

Agflation refers to an economic situation where the price of agricultural produce, like crops and grains, rises, resulting in inflation in food prices. The sole purpose of agflation is to determine the impact of agricultural produce prices on the overall economy.

Agflation

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The term was popular in the early 21st century, majorly post-2005 period. This type of inflation was caused due to various climatic and environmental factors. Likewise, the impact of agflation was also severe on other sectors. However, possible ways are mentioned to curb its effect on the economy.

Key Takeaways

  • Agflation is an economic concept that describes how the rising prices of agricultural inputs, such as food grains, seeds, and biofuels, can impact the overall inflation of a nation.
  • The term gained significant popularity during the 2007-08 world food price crisis, affecting consumption patterns and the prices of related food items.
  • The word “agflation” is a combination of “agriculture” and “inflation.” Major causes of rising prices include weather conditions, the rise of biofuels, trade policies, and similar factors.
  • For example, adverse weather conditions can damage soybean crops, reducing supply and higher prices for soybeans, soy sauce, and tofu.

Agflation Explained

Agflation is a popular economic term that uproots the branches of inflation. It measures the impact of rising agricultural goods prices on the inflation level of the country. In short, it understands how the prices of grains can affect the prices of other goods and services. For example, a jump in soybean prices can inflate the prices of soy sauces, tofu, and related items. It is a type of cost-push inflation where a shortage in supply can pump the inflation price index.

The word “agflation” splits into two terms: “agriculture” and “inflation.” The former impacts or leads to the latter. In other words, current agflation can be an initial point for future inflation. To measure it, economists and experts use Anderson’s agflation index. This index acts more like a variable than a general inflation index. There are two components of it, namely, agricultural input and output prices. It includes labor, technologies, energy, seeds, and similar items. According to the Andersons agflation index, the agricultural input prices were 3% lower in May 2023 than last year.

Agflation in an economy has been prevailing for decades. However, the major usage was visible during the 2007-08 world food price crisis. A similar phenomenon was prominent during the Second World War. At this time, the prices of food grains were extremely high due to varied factors. Although the causes were complex and multifaceted, some stipulated drought and weather conditions. Various investment banks also made a notable mention of rising agflation in an economy in the same period. In addition, the World Food Programme has also defined the term equal to a “silent tsunami.”

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Reasons

Various reasons can lead to agflation in an economy. The increased demand puts pressure on the prices. So, let us look at the potential reasons or factors for its occurrence:

  • Increase In Population Rate: Due to the growing population, there is an extreme load on agricultural producers. They are compelled to fulfill the market demand. But, if the produce (supply) is incompatible, the prices of food grains increase. As a result, the associated food products also experience agflation.
  • Environmental And Climatic Conditions: Among the major causes, climate and weather can strongly influence agricultural input prices. For instance, bad weather can destroy the yield opposite to favorable conditions. Thus creating a shortage in agricultural produce, leading to agflation.
  • Emergence Of Biofuels: The spread of biofuels has surpassed other fuels in the past few decades. However, the method of its creation creates an unknown pressure on crops. The crop residues act as feedstock for its production. But, if the demand for biofuel rises, a similar effect will follow agricultural produce. Thus, the prices of agricultural inputs like food grains also rise.
  • Conversion Of Agricultural Land To Residential Areas: As a result of the rising population, the demand for residential houses and apartments also surges. Therefore, the pre-existing agricultural land gets converted into buildings for various purposes. Thus, the supply percentage reduces, creating a shortage of the current demand.
  • Monetary And Trade Policies: The government-drafted trade policies also impact agricultural input prices. An increase in export duty or taxes can influence or surge the prices of agricultural products and services.

Examples

Let us look at the examples of agflation to comprehend the concept in a better way:

Example #1

Imagine two farmers, Yalen and Levin, who live on the outskirts of a town. Yalen typically grows nine units of organic wheat, and Levin grows 22 units of rice yearly. However, this year, there were unpredictable weather conditions with uncertain rainfall. As a result, Yalen’s wheat crop was badly affected, with 50% of it being destroyed. On the other hand, Levin faced a different problem in the latter half of the year when many insects damaged his rice crops. This led to a shortage of food grains, causing their prices to rise in the market affecting prices in other sectors. This situation is what we call agflation.

Example #2

The global commodities market recently grappled with agflation, driven by rising freight and fertilizer prices, worsened by conflicts, disease outbreaks, and weather concerns. However, it is predicted that 2024 will bring optimism as input costs recover, with a modest 0.9% increase in grocery prices forecasted. The significant price spikes observed in 2022 are expected to stabilize, with eggs, pork, and dairy prices projected to fall in 2024.

This is driven by softening freight and fertilizer prices, potentially relieving the commodities market. The deceleration is expected to increase consumer spending, boost profit margins for producers, and impact trade dynamics in countries with significant agricultural trade, ultimately creating a more stable and prosperous environment.

Impact

As the price of agricultural produce rises, it also affects the price of biofuel, subsequently influencing the cost of producing food and related products. However, consumers can switch to alternatives, creating a substitution effect. Nevertheless, not everyone will make these switches; some will continue to choose the original product. For instance, a chip manufacturer may use expensive biofuel to maintain product quality. In such cases, the impact may not immediately manifest in sales, and to shield consumers from this effect, businesses may reduce costs.

Customers may purchase them out of necessity and habit, even with rising food grain prices. A direct correlation and positive correlation exists between agricultural produce prices and consumption patterns. Consequently, rising prices will result in an upward, ascending graphical curve for the consumption index.

How To Control?

Let us look at different ways to control the rising agflation in the economy:

  • Introduction of fiscal measures in the economy. The regulatory and agricultural bodies must implement policies on the efficient use of natural resources and cultivation patterns. Plus, a boost can be provided to agricultural research fields.
  • Introduction of innovative technologies and medicines in agricultural production.
  • Preparation for any weather shocks. It would prevent the crops from being damaged.
  • Make arrangements for properly storing food grains to prevent fungus.
  • Liberalization and removal of excess duties on agricultural products to reduce the load on domestic prices.

Frequently Asked Questions (FAQs)

1. What is the effect of agflation on exports?

The effect of agflation on exports is that when the agflation rate rises, it signifies a relative shortage of agricultural produce in the country compared to the past. Consequently, the country may impose restrictions on exports, leading to a significant reduction in income from exports and a negative impact on overseas demand.

2. What are the disadvantages of agflation?

Agflation has several disadvantages, including its indirect association with poverty levels in the nation. When food prices increase due to agflation, the lower-income groups may struggle to afford essential food items, potentially leading to increased hunger levels and a higher likelihood of engaging in illegal activities.

3. What is agflation vs. inflation?

Agflation and inflation refer to the increase in overall price levels within an economy, but they focus on different sectors. Inflation is a broader term encompassing price increases across all goods and services, while agflation specifically relates to inflation within the agricultural sector. Agflation occurs when rising prices of agricultural products, such as crops and livestock, contribute significantly to overall inflation. It can have distinct economic and social implications, particularly in regions heavily dependent on agriculture for food and livelihoods.

This article has been a guide to Agflation and its meaning. Here, we explain it in detail, including its reasons, examples, impact, and how to control it. You may also find some useful articles here –

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