Wednesday 27 September 2023

Why did Costa Rica have one of the highest food price hikes?

Costa Rica's heavy dependence on imported agricultural inputs such as fertilizers and agrochemicals, as well as the highly concentrated chain of agricultural products, are explanations.

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QCOSTARICA – The data is striking. Costa Rica is the fifth country with the highest year-on-year growth in food inflation among the members of the Organization for Economic Cooperation and Development (OECD) with a growth of 22.5%.

The point is how can it be explained that the newcomer to the club of the 34 rich countries of the world stands out for its increases in food?

Read more: Costa Rica is the fifth OECD country with the highest population aging

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Let’s see what the data from the international organization says. General year-on-year inflation for the same period was 12.1%, the ninth highest, and energy was 32.9%, a percentage that places us in 19th place in the ranking.

“In agricultural products we find more volatility in prices, for example, the tomato has been one of the products that has varied the most in recent months. This tends to have a greater impact on the population with less income and I am concerned that in the coming months and years we will see an increase in poverty levels,” said Alberth Campos, researcher and professor at the School of Agricultural Economics and Agribusiness at the University of Costa Rich (UCR).

Economists and experts in agro economics agree that there are factors that have a general impact on the country’s economy, such as the rise in fuel prices.

Others, such as the cost of human resources and taxes, are less determining factors than is commonly believed, they say, if the high percentage of informal employment in the agricultural sector and the high salaries and taxes in less expensive European countries are taken into account.

Among the factors mentioned that experts claim has the greatest impact on feed costs are the High dependency on imported food and supplies

Alberth Campos; Leiner Vargas, researcher at the International Center for Economic Policy for Sustainable Development (CINPE); and the former minister of the Ministry of Agriculture and Livestock (MAG), Luis Felipe Arauz, agree that the factor that most affects inflation that the country has experienced in the last year in food is the high dependence on imports.

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“What makes (food) so volatile? In the case of Costa Rica, we are a country highly dependent on the inputs needed for the production of these products such as fertilizers, agrochemicals, tools, concentrates for animals, technologies, and sometimes even the seed itself,” said Campos.

For example, Costa Rica imports 99% of the corn widely used to feed animals, so in the face of the rise in the price of concentrates of this grain, high-consumption products in the country such as meat and eggs rise in price.

Costa Rica currently imports 99% of the corn.  In the 1980s it produced around 85,000 hectares and, in 2021, the planted area was 3,500 hectares.

In other countries, Vargas indicated, there are subsidized agricultural or energy productions that minimize the impact of inflation and, therefore, the price that reaches consumers.

Arauz believes that public policies have to aim at making better use of and improving national supplies to counteract dependency and, in situations of crisis in the international market, perceive a lower increase in food prices.

Intensive use of agrochemicals

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Although agrochemicals are also a highly imported input, the experts consulted consider that they should not only promote their national production but also reduce their intensive use.

Costa Rica uses between four and eight times more pesticides per hectare than the other American countries that make up the OECD and 93% of the pesticides used can be considered highly dangerous, according to a study published this year by the United Nations Program for Development (UNDP).

Leiner Vargas explained that agrochemicals are a by-product of energy, so their cost goes up with fuel: “We have become overly accustomed to using agrochemicals.”

In addition to the contamination of food and water bodies, the State stops receiving up to ¢24 billion colones annually in exemptions from these pesticides and invests approximately US$9 million dollars (¢6 billion colones) a year in treatment, disabilities and losses due to productivity as a result of health effects due to its use.

Oligopolistic markets

Economists Leiner Vargas and Welmer Ramos consider that the power of the entire chain of agricultural products is highly concentrated and that this allows profit margins to get out of control.

According to Vargas, our market structure is so small and segmented that few players are under control in all phases: “Production, distribution, import… it is more or less common for four or five companies to dominate more than 60% and even 70% of the market. That concentration is even higher in remote areas.”

Economist Welmer Ramos considers that the case of supermarkets is one of the most important and has the greatest impact on the final price: “Walmart has the capacity to go to Cenada and pay for avocados at ¢800 per kilo and sell them at ¢4,500”.

The three main supermarket chains in Costa Rica concentrate 80% of the establishments in the country (Walmart with 56%, Megasuper with 14% and Gessa with 10%), according to a report published last year by the Organization for the United Nations Food and Agriculture Organization (FAO).

And further market clarification by Walmart stopped in 2018, when its purchase of the Perimercados, Super Compro and Saretto chains was disapproved, Ramos said.

Another example is that of importing rice, an activity that in 2021 was dominated by 82% by two importing companies, according to data from the National Rice Corporation (Conarroz).

High indebtedness in the agricultural sector

High interest rates, a product of the policies that the Banco Central de Costa Rica (BCCR) – Central Bank of Costa Rica, promotes in the face of inflation, is another factor that affects the indebted agricultural sector, mentioned Welmer Ramos and Alberth Campos.

These measures raise two rates that banks use to calculate loan installments, Campos explained: the monetary policy rate rose about 8% in the last year and the basic passive rate, which “was very low in the pandemic” currently it is at 6% “and it will continue to rise”.

Campos lamented that in the country there are no financing tools for farmers, who often give up the activity because they cannot compete against subsidized competition in other countries.

“In the loans there is no differentiation in the agricultural part, it is practically a commercial loan. In this new government of several months I have not seen an approach or strategy from the MAG to provide tools to the producer who has been greatly impacted by a particularly strong winter,” said Campos.

Luis Felipe Arauz pointed out that, unlike Costa Rica, first world countries, such as the United States, heavily subsidize farmers to guarantee the availability of food (a “cushion” of national production) in crisis situations at least cost.

Article translated and adapted from Semanario Universidad. Read the original (in Spanish) here.

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