Clearly,
we are back in another phase of sharply rising global
food prices, which is wreaking further devastation
on populations in developing countries that have already
been ravaged by several years of rising prices and
falling employment chances. The food
price index of the FAO in December
2010 surpassed its previous peak of June 2008, the
month that is still thought of as the extreme peak
of the world food crisis.
Some of the biggest increases have come in the prices
of sugar and edible oils. But even staple prices have
shown sharp increases, with the biggest increase in
wheat prices, which doubled in the second half of
2010 and have been increasing since then. Rice prices
have been relatively stable in global trade over the
past year in comparison, but are still much higher
(by around 48 per cent) than they were at the start
of 2008.
Of course this need not (and should not) translate
directly into prices faced by consumers in poor developing
countries. Certainly, given the much lower per capita
incomes in such countries and therefore lower purchasing
power of the people, it should be expected that there
would be some public mediation of the relationship
between global prices and domestic food prices. This
is all the more desirable, if not essential, in periods
of high price volatility in global trade, such as
has been observed in the past four years. Otherwise,
poor consumers in the developing world for whom basic
food grains still accounts for around 40-50 per cent
of the consumption basket, would be sharply affected
by such price movements.
As it happens, the period of dramatic increases in
price volatility in global markets has also been one
in which there has been very high transmission of
international price changes to domestic prices in
many developing countries. This is evident from a
quick perusal of retail price changes in wheat and
rice markets in some developing countries.
Consider India, a country which currently has the
largest number of hungry people in the world and very
poor nutrition indicators in general, despite nearly
two decades of rapid income growth. Chart 1 shows
the behaviour of retail wheat prices in two major
cities – Delhi and Mumbai – in relation to the global
trade price of wheat (relating to US wheat in the
Chicago Board of Trade).
Chart
1 >> Click
to Enlarge
Two
important features are immediately evident from this
chart. First, the substantial variation in retail
prices across the two Indian cities (which would be
reinforced by other data showing the variation in
retail prices across other towns and cities), which
suggests that there is still absence of a national
market for essential food items, even those that can
be transported and stored easily. Second, the degree
to which price changes, have tracked international
prices.
Many analysts have argued that the Indian food grain
market is insulated from the international market
because of the system of domestic public food procurement
and distribution. Indeed, until the early part of
the last decade, this has been generally true. However,
the opening of agricultural items to international
trade without quantitative restrictions has clearly
allowed for greater impact of global prices on domestic
prices.
Further, the public distribution system itself has
been increasingly run down in the past two decades.
Recently, this has been further complicated by the
insistence of the central government on raising procurement
prices and procuring more, but not distributing the
increased procurement to states to allow them to provide
wheat to the defined “non-poor” population in a manner
that would restrain prices. Instead, the focus has
been on building central stocks, which has even turned
out to be somewhat counterproductive because of the
lack of adequate storage facilities. As a result,
Indian retail wheat prices have been higher than global
prices in both these urban centres. They rose by about
30 per cent in the year to October 2010 as global
prices also increased.
Chart 2 describes the behaviour of wheat retail prices
in two other South Asian countries – one a domestic
producer and occasional exporter of wheat (Pakistan)
and the other an importer in which wheat is still
important in fulfilling dietary needs (Bangladesh).
Chart
2 >> Click
to Enlarge
Bangaldeshi retail prices have closely tracked global
trade prices, always remaining higher. This in itself
is significant given the low purchasing power of most
Bangaldeshi consumers. It indicates that there is
little to no mediation between import prices and prices
faced by consumers in Bangaldesh, and that the latter
are subject to the fierce fluctuations and rising
tendencies that have characterised the global market.
What is surprising is that the same is broadly true
of Pakistan (the retail price here relates to Lahore
city). What is of interest in this case is that while
periods of rising prices appear to be marked by rapid
transmission to Lahore retail prices, the period of
global price reduction shows no such tendency. In
fact, Lahore retail prices kept rising even as global
prices came down, such that even after the latest
global price surge, global prices are still at around
the same level as the Pakistan retail price.
The food grain commodity that is the most important
for most Asian consumers is rice, which remains the
grain that is dominantly consumed by large parts of
the population in most of the region. Chart 3 indicates
the behaviour of rice prices in Sri Lanka and the
Philippines, in relation to the global price.
Chart
3 >> Click
to Enlarge
Note that the two are rather diffferent countries:
while Sri Lanka exports cash crops, it is close to
self-sufficient in rice in recent times, thanks to
major efforts to promote domestic rice cultivation.
Rice is of course by far the dominant food crop, accounting
for around 60 per cent of dietary requirements. The
Philippines, on the other hand, is a rice producer
but also depends on imports for between 15 and 20
per cent of domestic consumption, so it is likely
to be far more affected by international prices. Rice
accounts for around 46 per cent of dietary requirements.
Retail rice prices in Sri Lanka (referring to Colombo
in this chart) very closely track international prices.
Other than the extreme peak of June 2008, retail prices
have been close to global trade prices, despite the
lack of reliance on imports. So the global price volatility
has been reflected even in a country that is largely
self-sufficient in rice. In the Philippines, the story
is even more worrying. Rice prices (referring here
to retail prices in Metro Manila) rose dramatically
in response to global price movements, almost to the
same level as the peak in June 2008; came down as
global prices fell in the second half of 2008, but
since then have actually been higher in the Philippines
than in international trade. Further they have continued
to rise even as rice prices have stabilised in the
global market.
Chart 4 describes retail price movements in India
(Delhi) and Bangladesh (national average). It is worth
remembering the retail prices vary quite significantly
across towns and cities in India; even so this provides
an important indication of recent patterns.
Chart
4 >> Click
to Enlarge
According to FAO data, India is completely self-sufficient
in rice whereas Bangladesh currently is only 97 per
cent sufficient, importing around 3 per cent of its
requirement (possibly more if the cross-border smuggling
is taken into account). While retail rice prices did
not peak in June 2008, they have risen steadily in
India and increased by around 26 per cent in the second
half of 2010 alone. In Bangladesh there has been much
greater volatility, with prices rising sharply following
the global surge in 2007-08, then falling and then
rising again. In the past two years retail rice prices
in Bangladesh have increased by more than 35 per cent.
These trends in different Asian countries point to
a broader trend whereby prices in domestic food markets
are more and more strongly affected by and related
to international price changes. This is a matter of
some concern, especially in the context of the ongoing
extreme volatility in global prices.
The recent price increases, just as those in 2007-08
(which were followed by declines) do not represent
significant changes in global demand and supply balances.
Rather, once again, it is likely that a combination
of panic buying and speculative financial activity
is playing a role in driving world food prices up
well beyond anything that is warranted by real quantity
movements. The most recent data on financial activity
in commodity futures markets from the US Commodity
Future Trading Commission suggest that until the end
of January the net long positions of index investors
had increased dramatically in commodities like wheat
and corn. This is likely to have increased even more
in the past few weeks, given the announcements about
lower levels of public stocks.
Once again we are also seeing contango in these commodity
markets, with futures prices higher than spot prices.
This is all a repeat of 2007 and the first half of
2008, when prices of these commodities nearly tripled.
And it is not surprising, because the regulations
that could prevent or at least limit such speculative
financial activity are not yet in place, and there
are even concerns about whether they will be effective
or toothless in the implementation.
We now have direct recent experience of how financial
speculation in commodity markets can create not only
unprecedented volatility, but also affect prices in
developing countries with extreme effects on hunger
and nutrition for at least half of humanity. The case
for moving swiftly to ensure effective regulation
in this area – and for dealing with supply issues
in a serious and sustainable way - has never been
more compelling.
