Echoes of inflation: unpacking the drivers of food prices in Central America

In 2022, Central America experienced significant surge in food prices, a trend that was evident in Honduras. The country saw  year-on-year monthly food inflation exceeding 12% from May 2022 to May 2023, with rates surpassing 17% in eight of those months. 

In the following lines, we address the underlying causes of the food and fertilizer price surges, and the actions that can be taken to mitigate this situation in Central America.

The story of Higinio Gonzalez, a potato farmer from Intibucá, Honduras, embodies the difficulties many regional farmers encountered due to escalating prices for essential agriculture inputs. For Higinio, the cost of certified seeds surged by roughly 28% and fertilizers by 18%, undermining his productivity and sustainability. Despite rising potato prices, food inflation rendered his additional income inadequate to offset increased costs for inputs and personal food expenditures. 

Drivers of Food and Fertilizer Price Surges

Rising food and fertilizer prices impact food security by lowering farmers’ production and consumers' ability to purchase food. The COVID-19 pandemic caused disruptions in agricultural value chains, leading to an increase in international food prices. Russia’s invasion of Ukraine further escalated food, energy, and fertilizer prices globally. By 2022, real global food prices had reached their highest levels in over 60 years.

Simultaneously, key global fertilizer prices more than doubled within a year. In the same period, Central America witnessed a spectacular growth in domestic food and fertilizer prices (Figure 1), which led to dire conditions for large segments of the Central American population: in Honduras, 56% of the population faced food insecurity in 2020-2022. Although prices have decreased, they remain historically high and of continued concern.

Figure 1: Food price inflation vs. general inflation in Central America, January-June 2022

Source: Own elaboration, using IMF data

To what extent are the dynamics on international markets responsible for domestic food and fertilizer inflation in Central America? In a recent report, we show that the link between world prices and the prices of key foods and fertilizers in local markets is surprisingly weak for most countries in the region. This means that the recent record inflation and food security crisis observed in Central America are only in part driven by international price surges, and that their real determinants are more likely domestic.

From an economic point of view, the fact that domestic and international prices are only loosely related is an indicator of inefficiencies in domestic markets, which in turn may affect the region’s resilience to current and future shocks – generating unfair prices for consumers and affecting the competitiveness of producers like Higinio.

Addressing Market Inefficiencies and Enhancing Resilience

Why are international and domestic prices so disconnected? Likely factors include the domestic agribusiness market structure, which in many Central American countries is very concentrated, and more broadly the overall ecosystem of public policies for agriculture. Analyzing the measures enacted by Central American countries in the face of recent periods of strong inflation, we found that the region has been able to provide immediate relief to food crises (e.g. strengthening safety nets, reducing trade barriers, providing food assistance).

However, it has fallen short of strengthening agri-food systems´ resilience in the future. Over time, most countries have relied on extensive producer support measures (e.g. trade barriers, input subsidies), usually at the expense of consumers; investment in public goods and services for agriculture, which has been long recognized as the most efficient use of public money, has also been limited and stagnating over the years (Figure 2).

Figure 2: Support Estimates for Agriculture in Countries in Central America (US$ Million)

Note: PSE: Private Support Estimate; CSE: Consumer Support Estimate; GSSE: General Support Services Estimate. Source: Own elaboration, based on Agrimonitor data.

Looking ahead, there are three actions that Central American countries can undertake:

1. Support vulnerable food consumers by reducing border protection measures to import food and agriculture inputs and strengthen social safety nets for long-term food security and poverty reduction.
2. Revise farmer support measures to eliminate agriculture input and food price distortions, transitioning from common measures such as direct input distribution to market-friendlier alternatives like agriculture input voucher schemes, and facilitating family farmers’ access to markets and financing.
3. Enhance the returns to public sector investment in the sector by improving the provision of agriculture public goods and services such as agri-food information systems, boosting agricultural R&D, rural infrastructure, land administration, and water management.

Reflecting on Higinio’s story, there is an urgent need for strategic, forward-looking measures to support both farmers and food consumers. Implementing such measures will enable farmers to cultivate a more sustainable and profitable future, ensuring that the agriculture sector can withstand and adapt to future economic shocks. This approach will also help keep food accessible and affordable for all consumers, contributing to the overall resilience and prosperity of Central America.

Download the full report: "International prices and food security: An analysis of food and fertilizer price transmission in Central America".