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DateLine Sunday, 7 October 2007

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Sharp drop in bread consumption following price hike

International food prices to remain high:

Bread consumption has dropped sharply following the increase in wheat flour prices, market sources said. The drop in demand is clearly seen in rural areas and traders and bakery owners said that the sale of bread has declined by nearly 50%.

However, in Colombo the decrease is marginal and the demand in the city will be back to normal within a short period of time, said market analysts in the Price Division of the Department of Census and statistics.

The price of wheat flour has a significant impact on inflation because wheat flour is the second major staple food in Sri Lanka. Analysts said that inflation for October would remain at around 17% high while earlier it was expected to come down to 14%. Point to point inflation for September was 17.3% while the annual inflation (12 months moving average) stood at 17.5% last month.

However, prices of other bakery products have not seen an immediate increase after the wheat flour price increase. Market sources said that these prices too will increase gradually, and the actual price increase is more than the real cost increase of the food items.

"There is a general expectation of price increase and traders use this and every time the price increases it is more than the actual cost increase, an analyst said.

The wheat flour price increase could help boost the agricultural sector of the country if rice and other locally produced substitute food items are supplied.

As the Yala season paddy production has been affected by the drought, there is a short supply of rice.

As a result rice prices are also on the increase. Market sources said that even though the scheduled imported rice will come to the market by December the price of rice would reach Rs. 60 per Kg.

As a result of the anticipated price increases there is a shortage of milk powder and rice. Traders have held stocks and even some leading supermarkets issued only a limited number of milk food packets to consumers. A sharp milk food price increase is also expected soon.

The high food price is a global phenomena but it has become a big political issue in the country. The cause for international food price increases is complex and therefore any price decline cannot be expected in the short term.

The demand and supply factors have contributed to the price increase of many food items in the international market. The OECD-FAO Agricultural Outlook 2007-2016 says temporary factors such as droughts in wheat-growing regions and low stocks are the main contributory factors for hikes in farm commodity prices.

But when the focus turns to the longer term, structural changes are under way which could well maintain relatively high nominal prices for many agricultural products over the coming decade.

Reduced crop surpluses and a decline in export subsidies are also contributing to these long-term changes in markets. But more important is the growing use of cereals, sugar, oil seed and vegetable oils to produce fossil fuel substitutes, ethanol and bio-diesel.

This is underpinning crop prices and indirectly through higher animal feed costs and also increases the prices for livestock products, the report said.

According to the report, in the United States, the annual maize-based ethanol output is expected to double between 2006 and 2016. In the European Union the amount of oilseeds (mainly rapeseed) used for bio-fuels is set to grow from just over 10 million tonnes to 21 million tonnes over the same period.

In Brazil, the annual ethanol production is projected to reach some 44 billion litres by 2016 from around 21 billion today. Chinese ethanol output is expected to rise to an annual 3.8 billion litres, a two-billion litre increase from the current levels.

The report points out that higher commodity prices are a particular concern for net food importing countries as well as the urban poor. While higher feedstock prices caused by increased bio-fuel production benefit feedstock producers, it means extra costs and lower incomes for farmers who need the feedstock to provide animal feed.

The Outlook also says trade patterns are changing. Production and consumption of agricultural products in general will grow faster in the developing countries than in the developed economies, especially for beef, pork, butter, skimmed milk powder and sugar.

OECD countries are expected to lose export shares for nearly all the main farm commodities. Nevertheless, they continue to dominate exports for wheat, coarse grains and dairy products.

International market prices of dairy products have skyrocketed since last December. The extent of the price surge has been remarkable: FAO's index of international dairy product prices increased by 46 percent between November 2006 and April 2007, when it reached a record value of 213 (basis 100 in 1998-2000) Prices of milk powder have soared even higher: skimmed milk powder and whole milk powder prices have increased by 56 and 61 percent since November.

Cheese and butter prices have increased by a modest 18 and 34 percent. Record prices for all products are due to both short term and underlying structural causes. However, the price hike for milk powder is primarily attributable to the exhaustion of public stocks in the European Union.

Robust income growth in the Russian Federation and in many developing countries, especially in Asia, oil exporting countries of Africa and Latin America and the Caribbean continues to drive the demand side for dairy products.

The US dollar devaluation has also moved prices of dairy products higher since these are denominated in that currency even though they are traded largely among non-US currency areas.

However, the essence of the price hike lies on the supply side where global milk production has not kept pace with strong demand. Successive droughts in Australia have limited its milk product exports, while export taxes by Argentina have hindered its supply response.

A six-month suspension of skimmed milk powder exports in India has eliminated its presence in world markets. High feed grain prices have also curtailed profitability in many feed intensive dairy sectors.

The most significant factor in recent times is current policy reforms in the European Union, which have resulted in a drastic reduction in public stocks of dairy products, especially milk powder, and a steep cut in EU's export subsidies, in value and quantity terms, the report said.

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