Food price inflation: Global issue

Food price inflation is a serious issue faced by many countries and is a reason for the uprising of people in some West African and Middle East countries. There is no escape against food price inflation for emerging economies such as China and India. According to reports in recent months, prices of essential food items in China has increased sharply. The price of eggs has increased from seven Yuan (US$1.07) to 10 yuan per kilogram. Tomatoes have almost doubled in price. Cabbage has tripled despite the government's pledge to rein in food prices.

In this file picture taken on January 13, 2011, an Indian woman sits near bags of onions at a wholesale market in Hyderabad. India’s embattled Congress-led government sought to defuse the anger of inflation-hit voters with a raft of subsidies in a populist budget that stops short of major reforms, analysts say. The spending plans, unveiled on February 28 by Finance Minister Pranab Mukherjee, comes as the left-leaning government reels from a slew of corruption scandals and spiralling food prices that have prompted street demonstrations. India’s hundreds of millions of poor have been hit hardest by the surge in the cost-of-living, especially of groceries with food inflation running at nearly 11.5 percent.

According to government figures in January, consumer prices in China climbed 4.9 percent from a year earlier, while food prices soared 10.3 percent from the month before. However, the consumer price figure was lower than expected, and critics claim the statistics bureau of China recalculated the index to give less weight to food costs, meaning inflation might have been higher than reported.

The Chinese government is struggling to combat inflation and recently the Central Bank of China raised the reserve requirement ratio for banks by 50 basic points and interest rates three times since October.

The government is concerned about the on growing unrest among the people and especially in the Middle East. Several measures have been taken to calm public concerns such as paying subsidies to poor families, keeping prices low at university cafeterias with local governments ordered to ensure vegetable markets are well stocked.

The World Bank's food price index shows that food price increase is a global phenomenon. The index has increased by 15 percent between October 2010 and January 2011 and is only 3 percent below its 2008 peak.

The last six months have seen sharp increases in global prices of wheat, maize, sugar and edible oils, with a relatively smaller increase in rice prices.

Higher global wheat prices have fed into significant increases in local wheat prices in many countries.

The transmission rate of global wheat price increase compared to the domestic price of wheat-related products, has been high in many countries. For instance, between June 2010 and December 2010, the price of wheat increased by large amounts in Kyrgyzstan (54 percent), Bangladesh (45 percent), Tajikistan (37 percent), Mongolia (33 percent), Sri Lanka (31 percent), Azerbaijan (24 percent), Afghanistan (19 percent), Sudan (16 percent), and Pakistan (16 percent). In many countries a large share of calories consumed are from wheat-based products, particularly the poor.

Higher maize, sugar, and oil prices have contributed to increase the costs of various types of food, though local maize prices have largely been stable in Sub- Saharan Africa. Local rice prices have increased in line with global prices in some large rice-consuming Asian countries.

These food price rises create macro vulnerabilities, particularly for countries with a high share of food imports and limited fiscal space, as well as increases in poverty.

Estimates of those who fall into, and move out of, poverty as a result of price rises since June 2010 show there is a net increase in extreme poverty of about 44 million people in low- and middle-income countries.

In the immediate term, it is important to ensure that further increases in poverty are curtailed by taking measures that calm jittery markets and by scaling up safety net and nutritional programs.

Investments in raising environmentally sustainable agricultural productivity, better risk-management tools, less food intensive biofuel technologies, and climate change adaptation measures are all necessary over the medium term to mitigate the impact of expected food price volatility on the most vulnerable.

Global rice prices have increased at a slower rate than other grains and the outlook remains stable. However, domestic rice prices have risen sharply in some countries and remained steady in others.

The domestic price of rice was significantly higher in Vietnam (46 percent) and Burundi (41 percent) between June-December 2010. Indonesia (19 percent), Bangladesh (19 percent), and Pakistan (19 percent) have increased in line with global prices.

These Asian countries are large rice consumers, especially among the poor. Rice prices have increased in Vietnam despite good domestic harvests. This is primarily due to the depreciation of the currency, which has fuelled overall inflation and expectations of higher demand from large importers and led to the minimum rice export price being raised by the Vietnamese government.

Rice price increases in Sri Lanka (12 percent) and China (9 percent) have been relatively moderate in the second half of 2010, while in Cambodia and the Philippines the retail price of rice remained largely unchanged during this period.

Rice prices outside Asia remained stable in many countries, such as Cameroon, Guatemala, Mexico, Panama, and Somalia, during this period.

Sugar and edible oil prices have increased sharply in recent months. Sugar prices have risen by 73 percent since June due to supply shortfalls from Brazil, the largest exporter, and weather shocks in Australia.

Similarly, edible oil prices were up on account of a number of weather-related shocks. Prolonged dry weather related to La Nina lowered expectations of yields in Brazil and Argentina, which together account for roughly 45 percent of soybean exports.

On the other hand, floods in southern Malaysia and Indonesia have hindered palm oil harvests. These higher prices feed through to domestic prices quickly in many countries, for instance, sugar prices doubled in Cambodia between June and December 2010 and edible oil prices increased by 15 percent between September and December in Afghanistan.

Several countries have intervened to temper this pass through. In Algeria, taxes and import duties on sugar and edible oil were sharply reduced in January 2011 due to double digit prices rises. In Indonesia, the government has reduced taxes on sugar and increased subsidies to local cooking oil producers.

Prices of other food items essential for dietary diversity have risen in many countries. In India, food inflation stood at 18.3 percent in December partly due to the higher prices of fruits and vegetables, milk, meat, and fish.

Source: World Bank