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).
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).
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.
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.
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.