‘Heatflation’ is burning a hole in consumer’s pockets

What’s happening? Drought conditions in Spain are causing “irreversible losses” to over 3.5 million hectares of crops, according to analysis by the country’s leading agricultural organisation. The report by the Coordinator of Farmers and Ranchers Organisations (COAG) warned some crops could be lost entirely. In 2021, Spain produced approximately 25% of fresh vegetables in the EU. The dry conditions are leading to “heatflation” whereby food prices rise as high temperatures and drought negatively affect livestock and cause harvests to shrink. In 2021, the European Central Bank warned that hot summers had the major and longest-standing effect on inflation, particularly food inflation.

Why does this matter? Spain is experiencing an intensification of extreme weather conditions. On 27 April, the southern region of Andalucia recorded temperatures of 38.7C – making this provisionally the area’s hottest-ever day in that month. Between 1991 and 2020, the average April temperature in the region was 14.2C.

Long-term trend, long-term drought – The high temperatures are part of a three-year period of weather-related stress in Spain. The country has warmed 1.3C since the 1960s, with summer temperatures now 1.6C higher. Spain officially entered long-term drought at the end of 2022.

The COAG report argues that drought now affects 60% of Spain’s countryside, with crops including wheat and barley set to fail entirely in key growing regions. Farmers in Andalucia have decided not to plant vegetables, including industrial tomatoes, and winter crops of garlic and onions are also at risk. Lack of water is likely to cause reduced sowing of corn, cotton, rice and sunflowers. The conditions have led the country to request emergency EU funding to support its farming sector.

Burning a hole in consumer’s pockets – Heatflation is already driving price increases. Spain produces 63% of the olives used in cooking oil in the EU. Over the last year, consumer prices have risen by 27%. In May 2022, financial services multinational Allianz found that food and drink prices in the Eurozone had risen by an average of 14% since the start of 2021. However, retail prices had risen by just 6%, meaning that the worst increases from producers had not yet been passed on to consumers. Allianz forecast that European consumers would be spending, on average, an extra €243 ($268) YoY for a basket of food items. Such calculations will be even higher when heatflation is factored in.

A global problem – The problem is not confined to Europe. In 2022, summer rains undermined fruit, rice and vegetable production in China. In the same year, drought reduced winter wheat yields in the US and affected corn and soy bean crops in Argentina.

Climate change – The situation is set to worsen as climate change intensifies. The 2021 European Central Bank report argued that there exists a “non-linear impact of global warming on prices, with the impact more significant for larger shocks and for higher absolute temperatures.” According to Carbon Brief, around 50% of the global population is now living in regions that experienced their hottest daily temperatures since 1950 during the last decade.

Solutions – To counter the problem, the world needs to improve the resilience of crops to climate change, while also protecting water resources. Some farmers are already switching to growing crops that are more resistant to heat and drought conditions. A more wide-ranging option is to entirely reconfigure global food systems, away from their current emphasis on cheapness and just-in-time processes. Resilient systems emphasise storage, diversity and decentralisation, but are more expensive, according to Professor Tim Benton, Director of the Environment and Society Programme at think tank Chatham House. Benton warns that as such systems will only increase food supply stability rather than lowering costs, it might be time to accept that “the era of cheap food is coming to an end.”

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