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Food inflation: Treat the causes, not the symptoms

n January, the UN'sFood and Agriculture Organisa­tion (FAO)wamed thatfood prices had hit a recordhigh, moving beyond200slevels.The headline'~scrambles to contain food inflation" was a top newsitem in most newspapers in the region.

Here in Malaysia, we hear constant complaintsabout how much less RMI00 buys these days com­pared with a year ago. In the first three months of thisyear alone, sugar went up by 27%,vegetables by 16%,eggs, dairy and meat by 10%and fruits by 9%.Worldcom prices have gained nearly 52%,while soybeanshave risen 34% since early 2010 on strong demandfor animal feed.

Food affordability is, of course, a major concernfor the poor and low-income groups. But the middle­income group is also feeling the effects of spirallingprices. Households earning below RMl,OOOspend anaverage of 33%of their income on food, while thosewith an income ofRM3,000 or less fork out 22%.Foodaway from home, however, adds another 11%to theexpenditure of both groups.

So, how do we handle this vicious spiral of ris­ing food prices? In 200S, spikes in rice prices causedwidespread panic. There were riots in the philippineswhile Vietnam, a large rice exporter, imposed anexport ban to allay fears of insufficient supply in thedomestic market.

The effective handling of rising food prices is allthe more urgent in view of the number of generalelections that will be called in the region, includingMalaysia. In 200S, higher prices, especially for pet-

BY MAHAN I ZAINAL

ABIDIN

rol, were one of the reasons for public unhappinessand are thought by many to have contributed to theoutcome of the uth general election.

Malaysians have long been familiar with price con­trols and the immediate reaction would therefore beto call for their continuation. In fact, the governmentis expected to continue to subsidise basic food items.At the same time, there are more calls for the intro­duction of a minimum wage policy and increases inwages in general.

There are, of course, counter arguments that com­plicate the formulation of policy responses. Price con­trols and subsidies distort the markets and lead toinefficient allocation of resources. Quite often, foodimporters and middlemen benefit more than theproducers. subsidies are also a fiscal burden and wageincreases contribute to cost-push inflation.

If we are to deal with the problem of rising foodprices realistically, it is important to understand thenature and causes of the increases. when one talksof inflation, the solution that most often comes tomind is raising interest rates. But if food inflation isnot driven by high demand, interest rate hikes will, atbest, be ineffective and, at worst, further reduce publicwelfare by pushing up costs and lowering householdincomes further.

Rising food prices are a global phenomenon and notlimited to Malaysia. The government has tried to ex­plain to the public that its options are limited becausemany food products are internationally traded. Many,however, seem unconvinced and hold the view that it

is the government's responsibility to ensure food pricestability no matter what the cause or cost.

Four factors are driving food prices higher. First,food commodities are experiencing structurally higherdemand due to the rising world population, growingaffluence and alternative uses. Food prices will rise ifworld food production does not keep pace with grow­ing demand, especially from large countries like China,India and Brazil.

In recent times, the food-for-fuel phenomenonhas also contributed markedly to prices. For example,the price of sugar and com (maize) has risen stead­ily mainly as a result of their conversion to ethanolfor biofuel.

Second, adverse weather conditions have seriouslydisrupted food supply. Floods in India, for example,severely curbed onion production and prices haveshot up by IS% this year in peninsular Malaysia anda whopping 59%and U2% in sabah and sarawak re­spectively. Similarly, domestic production of coconut,ladies' fingers, long beans, French beans and tomatoeshas been affected.

The third factor is the value of the USdollar. Manyinternationally traded food commodities, such aswheat, com and rice, are denominated in this currencyand the dollar's weakening means that commodityprices have to rise to retain their original value. TheUS Federal Reserve is said to be exporting inflationthrough its loose interest rate and quantitative eas­ing policies.

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·Liberalisation of import duties will lower food costs

FROM PAGE 64

The fourth factor is speculation.Financial investors have moved intothe commodity markets (includingfood),resulting in volatile prices. Thisis cle~dy seen in the price of rice. Ithit a peak of US$962 a tonne in May2008 but had dropped to US$474byJune 2010.The 50%fall from peak totrough cannot be blamed on fallingdemand because the consumption ofrice has actually increased.

These four factors expose us to twotypes of food price changes. Struc­tural price increases are unlikely toreverse and likely to be sustained. Incontrast, food price rises due eitherto bad weather or speculation can besteep but they could also drop back tonormal levels in a very short time.

Malaysia, like many other coun­tries, faces a mammoth task ofresponding to this global phenom­enon. with food imports amountingto RM42 billion in 2010, the govern­ment has to ensure that the people'swelfare is taken care of,that the strat­egies to mitigate price increases donot interfere with the workings ofthe market and that its measuresare affordable.

So,how do we achieve all of this?where weather-related and cycli­

cal price shocks are concerned, weshould let things take their course

and wait for production to returnto normal levels again, provided theproduction cycle is short. It is also im­portant to keep the public informedso that the situation can be moni­tored closely.

We should think about subsidiescarefully because of their distortiveeffects and because they are not aprudent measure. Not only will thepoor and low-income groups becomedependent on subsidies but importersand distributors will also profit fromthem. Some subsidies are necessaryto cushion the effects of high foodprices but they will only be effectiveand beneficial if they can be targetedat the right groups and the free-rideproblem is eliminated.

The response to structural pricetrends requires careful planning,ef­fective implementation and trans­formation. This means countrieswould want food security as a keyagenda,wherethere areways to ensuresufficient supply and affordable pric­ing. We have to be serious about foodproduction, either domestically oroverseas.

There should be attractive incen­tives for investment and innovationin food production and the manage­ment of the supply chain. It is diffi­cult for any country to be fully self­sufficient in food, so it should work

out a scheme, regionally or inter­nationally, to develop a secure foodsupply chain. Besides looking atincreasing food production,stockpilesare also an effective measure. Perhapswe should consider this scheme forkey food items in view of the sharpvariation in global prices.

Since we import a lot of our food,import tariffs on these items shouldbe eliminated. Liberalisation of im­port duties will lower food costs andencourage our food industries to bemore competitive. In fact, we shouldgo further by revamping our food im­port system, which includes importlicences, transport and distribu­tion.

For the long term, the issue ofaffordability is very much linkedto wage levels. The New EconomicModel has set high income as one ofits three goals. Indeed, Malaysia hasto earnestly look into how to increasewages and consequently purchasingpower if it is to effectively cope withfood inflation. At the same time, ithas to allow domestic food produc­ers and farmers to sell their produceat high prices. I]

Datuk Mahani Zainal Abidin is thechief executive of the Institute ofStrategic and International Studies(ISIS),Malaysia