Global Trends by Martin Khor

Monday 7 February 2011

Concern over soaring food prices

Food prices have shot up to record highs, even above the levels in 2008, and countries should act to counter the effects before there is more social unrest.

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Food prices across the world have soared to their highest ever level, even exceeding the previous peak levels in mid-2008 before the recession caused by the global financial crisis dampened the prices.

The food price inflation is causing concern in many countries, as access to food is important for social stability. The last time prices shot up to such high levels, in 2008, there were riots in many countries.

High food prices also contributed to the discontent that led to the current protests in Egypt and elsewhere in the Middle East, according to the World Food Programme.  “In many of the protests, demonstrators have brandished loaves of bread or displayed banners expressing anger about the rising cost of food staples such as lentils,” said its executive director Josette Sheeran.

In January, the average price of food items globally rose to its highest ever recorded level, according to the Food and Agriculture Organisation.  The FAO's food price index increased for the seventh month running, up by 3.4% from December 2010.

Prices of almost all the commodity groups jumped in January compared to December.  The cereal price index was 3% above December and the highest since July 2008, though still 11 percent below its peak in April 2008.   The oils and fats index rose by 5.6%, nearing the June 2008 record level.

The dairy price index shot up 6.2%, and the sugar price index by 5.4%.  The meat price index however remained stable.

The soaring prices of various food items are caused by several factors, as pointed out by speakers at the Global Commodities Forum at UNCTAD (the UN Conference on Trade and Development) in Geneva last week.   

First is the growing demand for food. This is due to population growth but also the revival of economic growth following the 2008-2009 recession.  

Second is the weather and other factors that affected supplies of some crops.  Wheat production was severely affected by the drought in Russia. The benchmark US wheat price averaged USD 340 per tonne in January, 59% higher than a year earlier.

Maize production is forecast to fall this year in Argentina.  The benchmark US maize price averaged USD 263 per tonne, 58% higher than a year earlier.

The steep price increases in coffee in the past three years are due mainly to reduction in crop production in Colombia, according to a senior official of the International Coffee Organisation.

Third is the competition for land to produce certain crops that are used both for food and for bio-fuels.  In the United States, maize and soyabeans are produced to make ethanol, and this contributed to rising prices of the two products used as food, according to the executive director of the International Grains Council.

Fourth is the growing investments placed in commodity markets by investors in the current situation of low interest rates and excess liquidity.   The extent to which speculation is a cause of rising commodity prices has been a matter of quite intense debate, and the situation may vary from commodity to commodity.

According to a senior official of the International Sugar Organisation, the recent soaring of sugar prices (now at a 30-year high) is due to fundamentals.  “But the financialisation of commodity markets magnified the price surges.”

Other commodities besides food items have also been increasing rapidly, including oil and cotton.

According to the commodity-price index (in dollar) of The Economist magazine, the index for all commodities on 1 February was 6.2% higher than a month earlier and 49.7% above a year ago.

The index for food items was 6.4% above a month ago and 44.8% above a year ago.  And the price of oil at USD90.68 was 17% above a year ago.

Inflation has become a significant problem in many developing countries, being around 5% in China, nearly 6% in Brazil and nearly 10% in India.

In several Asian countries, the prices of some important food items have been soaring, according to the FAO.

In China, prices of the main staples rice and wheat have been rising in the last months. Prices of rice have increased markedly in the second half of 2010, in particular those of the Indica variety, the most consumed by the low income population.

In the main producer area of Hubei, wholesale prices of Indica rice were quoted at 3260 yuan per tonne in January, or 20% higher than a year ago. Prices of wheat flour, have also risen significantly in the past two months and by January 2011 the national average price was 16% above the level one year ago.

In Bangladesh, prices of rice reached a new record high in January of 36 taka per kg, 33% higher than a year ago. To stabilize prices, the Government announced plans to import nearly 900,000 tonnes of rice. Prices of imported wheat surged in August and September and increased further in January to 34% above a year ago.

In Indonesia, rice prices also reached new record levels. In December 2010 the national average rice price was quoted at 9082 rupiah (about USD 1) per kg, 31% above a year earlier. In late December, the Government suspended import duties on rice until the end of February in an attempt to counteract the increase in prices.

In India, prices of the main cereals rice and wheat remained high in January, after increasing during 2010.  Prices of onions skyrocketed in the second half of last year, and by January were double the level of June 2010. Onion exports have been banned and import duties on onions have been removed.

The surge in onion price followed unseasonal rains during the October-November harvesting season in the key growing states, which resulted in severe damage to the summer crop and supply shortages. Potato and tomato crops have also been affected and their prices have shown marked increases.

Malaysia has had only moderate inflation overall (1.7% in 2010), but there are significant price increases in some food items, according to Statistics Department data

In December 2010, food prices were on average 2.8% above the December 2009 level.  The increases on some items were:  sugar, jam, chocolate (20.6%), fruits (4.6%), vegetables (3.6%), milk and eggs (3.4%), meat (3.1%), fish and seafood (1.8%) and rice and bread (1.1%).

There were hefty price jumps in December 2010 compared to a month ago for onions (17%), sugar (10%), spinach (7.4%) and eggs (3.6%) and choy sum (2.4%)   But prices also fell for tomato, cucumber and chillies.

In the weeks ahead, governments would be wise to pay close attention to inflation and especially food prices, and work towards solutions which in the medium term should include a boost to local food production.