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Record high food prices stoke economic fears

The high price of food is moving up the policymaker agenda, driven by fears of spreading inflation that could dent consumer demand in emerging economies

Reuters, Thursday 6 Jan 2011
Food Prices
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The United Nations Food and Agriculture Organisation (FAO) said Wednesday that food prices hit record highs last month, moving beyond 2008 levels when riots broke out in countries as far afield as Egypt, Cameroon and Haiti.

In Asia, official data and analyst estimates both pointed to inflationary pressures. Chilli prices have increased fivefold in Thailand in the last year and Indonesia's president called for households to plant food in their own gardens.

President Susilo Yudhoyono Bambang told a cabinet meeting that people should be "creative" in planting, with Trade Minister Mari Pangestu leading the way in planting at home.

"I have 200 chilli plants in flowerpots," Pangestu told a briefing Thursday. "The Agriculture Ministry is informing farmers how to take care of the plant and also encouraging consumers to plant chilli in their own yards."

Surging food prices have often provoked unrest in urban areas of poor countries where imported food often makes up a high proportion of household purchases.

Hundreds of youths clashed with police in several cities in Algeria, including the capital, on Wednesday over food price rises and chronic unemployment, residents said.

World Bank President Robert Zoellick urged governments in a newspaper opinion column to avoid protectionist measures as food prices rose, calling upon G20 leading economies to take steps to make sure the poor get adequate supplies of food.

French President Nicolas Sarkozy has asked the World Bank to conduct urgent research on the impact of food prices ahead of G20 meetings later this year, a source familiar with the matter said.

INDIAN INTEREST RATE PRESSURE

Food price protests were seen a factor in the ousting of Indonesia's long-term autocrat Suharto in 1998, and anger over a farmland purchased by South Korean firm Daewoo at a time of rising prices was in part blamed for a 2009 coup in Madagascar.

India's food price inflation rose to a one-year high of more than 18 per cent in the year to the end of December, data on Thursday showed. That, along with rising fuel prices, is the main reason analysts expect the central bank to raise rates this month.

The Indian government has used a range of measures for years to ensure stable food prices, but since last year has boosted the release of national stocks of grains and has pledged to continue with duty-free imports of crude vegetable oils.

In China, several cities have implemented direct controls to limit food price increases and the central government has vowed to eliminate speculation in the country's commodities markets.

The cost of food rose 11.7 per cent in the year to November, while non-food items were up just 1.9 per cent. But, reflecting concerns that inflation is creeping beyond food to the wider economy, consumer goods prices and housing costs showed a clear jump.

Fu Bingtao, an economist with the Agricultural Bank of China in Beijing, said in a report that the price of grains, the country's most important food, would rise in 2011 by 10 per cent, adding to an 11.7 per cent rise in 2010. "Speculative trading and hoarding of specific agricultural products may continue," he said.

The FAO said sugar and meat prices were at their highest since its records began in 1990. Prices were also at their highest since 2008 crisis levels for wheat, rice, corn and other cereals.

Benchmark prices solely in Asia for rice suggested a different picture.

The region's staple food now stands at $535 per ton — less than half its 2008 levels of more than $1,000 a ton that prompted several governments at the time to impose curbs on exports to protect their domestic markets.

ASIAN POLICY DILEMMA

But most experts expect upwards price pressure to continue, particularly if countries slap on export bans and further squeeze supply, and if short-term investors again begin buying into agricultural commodities as they did in 2008.

Last year, wheat futures prices rose 47 per cent, buoyed by a series of weather events including drought in Russia and its Black Sea neighbours. US corn rose more than 50 per cent and US soybeans jumped 34 per cent.

Alongside bad weather in Australia, Europe, North America and Argentina, rising Asian demand is at the heart of the spike. China, for example, is expected to buy 60 per cent of globally traded soybeans in 2011/12, double its purchase of four years ago.

Higher interest rates do little to ease pressure on food prices. Demand is inelastic (because people have to eat), but current price pressures are largely supply-led, so tighter monetary policy would not directly help.

The danger, however, is that food inflation spreads to the wider economy.

"I think there's an urgent need to be more pre-emptive in tightening monetary policy to prevent some of these inflationary pressures from erupting," said Frederic Neumann, regional economist at HSBC in Hong Kong. Some central banks have taken action but more needs to be done, he added.

South Korea, like other Asian countries that run trade and current account surpluses, could give more room to its currency to rise, to offset rising import costs on food.

But higher interest rates or the likelihood of a rising currency would just encourage a flood of portfolio capital from investors spurning sluggish growth in developed economies. And rising currency could hurt exports, the major pillar of many economies.

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