Increasing food prices create challenges and opportunities - Analysts

by Gamini Warushamana

Increasing food prices have created serious challenges as well as numerous opportunities in the agricultural sector, economic analysts said.

Prices of many staple food items in the international market have increased to the highest level in history and analysts said that the higher prices will persist for a long period.

The Economist food prices index has reached its highest since it was introduced in 1845. From 2005 food prices in real terms have increased by 75%. Last September wheat prices rose to $400 per tonne and in May it was around $200 per tonne. Last year corn prices reached a $175 peak and later dropped to $ 150 but it is still 50% higher than the to 2006 average and rice prices too hit record highs.

Analysts said the demand factors are strong for the price increase and therefore this is an ideal opportunity to boost the country's lagging agricultural sector. This price signal has already influenced farmers in other countries and now the resources are being channelled to increase grain production, they said.

There are three main factors for the current price increase. The main factor is higher demand coupled with a long running consumption pattern in emerging economies, mainly in China and India. Higher economic growth in these countries has pulled millions of people out of poverty. The increasing income has changed the consumption pattern of the people.

For instance the annual meat consumption per person in China has gone up to 50 Kgs in 2007 from 20 Kgs in 1985.

That in turn pushes up demand for grain because it takes 8 Kgs of grain to produce one Kg of meat. Similarly the demand for cheese and butter has gone up exerting pressure on dairy product prices and again on grain prices.

The second factor for the price increase is turning grain into bio fuel ethanol. In 2000, America used 15 million tonnes of maize to produce ethanol and in 2007 it increased to 85 million tonnes and worldwide turning grain to ethanol is increasing. Both these demand factors will not change immediately and therefore food prices will remain high for a long time.

Supply factors such as the drought in Australia, crop failure and low harvest have also pushed international food prices. However, The Economist magazine said that record prices are being achieved at a time not of scarcity but of abundance. According to the International Grain Council last year's total cereal crop was 1.66 billion tonnes, the highest record 89 million tonnes higher than 2006.

Political analysts said that the issue is not as simple as Trade Minister Bandula Gunawardena described it. Minister Gunawardena recently justified the food price increase in the local market quoting this international trend.

Though the era of cheap food is over, high prices of essential food items would create a political crisis, unless the issue is handled wisely. The magnitude of the price increase is a blow to the urban poor, landless poor in rural areas and the estate sector.

To boost the agro economy, the government should draw up a proper plan to address fundamental issues that experts have pointed out for a long time. Mere slogans would not help to solve the crisis in the agricultural sector.

Issues such as land, marketing, credit and infrastructure have to be addressed and there are many proposals prepared by professionals. Today, the main issue has been solved by the market and farmers will get higher prices and if we start production of ethanol the market condition could be sustained for many years, analysts said.

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