8/3/2019 High Food Prices in South Asia

1/4

36 Trade Insight Vol.7, No.3-4, 2011

Chandan Sapkota

When food prices spiked in mid-2008, the level was cited asbeing the highest threshold reachedin recent memory. Unfortunately, thisyears prices have even surpassed thelimit reached in mid-2008. The Food

and Agriculture Organizations (FAO)Food Price Index (FPI) averaged 216

points in October 2011, much higherthan the threshold reached in 2008, buta moderation from the level reachedduring the middle of this year. A

recent report by the high-level panel ofexperts on food security and nutritionstates that agriculture price volatilityin the past five years has been higherthan in the previous two decades, butlower than it was in the 1970s.1

The rise in world food prices thisyear is attributed to extreme weatherevents in major food producing

countries and restrictions on grain

Causes and soluons

High foodprices in South Asia

South Asian countries need to adopt mul-

tiple optionsfrom emergency measures

to reforming the agriculture sectorto ad-

dress the impact of high food prices.

food security

8/3/2019 High Food Prices in South Asia

2/4

37Trade Insight Vol.7, No.3-4, 2011

trade, leading to higher food prices.For instance, Russia, the United States(US), China and Central Asia were

battered by drought. India and Russiaimposed embargo on grain exports,the US and the European Union (EU)

saw unfavourable weather conditionsand Pakistan and Australia had heavyrains and floodsall putting pressureon food supply and then food prices.The weakening of the US dollar, surge

in oil prices, unfavourable weatherevents, commodity market fluctua-tions, and restrictive trade policiesmight further exert upward pressureon global food supply and prices.

The FAO predicts that high andvolatile prices are likely to persistthis year and in the coming years too,primarily because of the uncertain-ties surrounding output in majorfood-producing countries and a sharprun-down on inventories.2 This comes

about even after forecast of an increasein food production this year and inthe future as well. For instance, cerealproduction this year is expected tobe 3 percent higher than in 2010 butprice is not expected to come down.3

Cereal price is expected to remain highparticularly in import-dependent de-veloping countries. However, the risein food prices is not homogenous in allcountries. Buoyed by high domesticproduction and market restrictions,

some countries might see lower localprices while others might experienceever-rising prices. But food prices willremain high in food-deficit low-in-come countries.

After the decline in food prices

following a spike in 2008, food prices

have been surging again in all SouthAsian countries since last year. Thisis not only impacting macroeconomicstability, particularly through increas-ing food import bill, widening trade

deficit, and increasing general prices,but also pushing millions of people be-low the poverty line. Food prices havebeen rapidly increasing in most of thecountries following a convergence offood-price inflation rates in 2003. In

the recent period, food price inflationin Pakistan, followed by Nepal, is the

highest in South Asia.

CausesFood prices in South Asia are not im-mune to the changes in prices at the

global level. The prices reflect bothglobal and domestic trends in output,supply-side constraints, and trade andexchange rate policies. The rapid risein food prices in South Asia is follow-ing the global rise in food prices. Someof the major factors that have been

pushing up food prices are discussedbelow.

Weather-related shocksIn South Asia, the flooding in Pakistanin 2010 submerged a large swath of

land (almost one fifth of total landarea) and destroyed crops. This yeartoo, Pakistan is seeing heavy floodingand has about 4.2 million acres of landsubmerged in water since late August.Similarly, Bangladesh was battered

by cyclone and heavy rains, whichaffected food production. Afghanistanis facing long precipitation deficit andlocalized floods. These events havetriggered negative supply shocks inSouth Asia. Globally, weather-related

events have affected output in Russia,Canada, the US, Australia, China,Argentina and Kazakhstan, amongother major food producers. All ofthese have amplified supply shocksand pushed up prices.

Demand shocksThough total production has increasedin most cases, it has not kept pacewith population growth, leading toexcess demand for food items. The

world population is expected to reachnine billion in 2050. The South Asianpopulation is projected to reach 1.9

billion in 2025 and 2.3 billion in 2050.This will further increase prices ifproduction does not match population

growth. Moreover, the added demandfor food from the emerging middle

class in developing countries will putmore pressure on food prices as theyconsume more meat and fish products,which require even more basic fooditems to produce.4 The World Bankestimates that the demand for food

will rise by 50 percent by 2030, thanksto rising population, rising affluence,and a shift in dietary consumption bythe middle class.

Increased demand for biofuelsBiofuel demand was widely seen asone of the factors behind the soaringfood prices in 20072008 and it contin-ues to be seen as a major factor behindthe current high food price spree. In2010, the production of corn-based

ethanol absorbed about 15 percent ofglobal corn production.5 The increasein biofuel demand in the US andthe EU created a demand shock andpushed up food prices, which werealso reflected in food prices in South

Asia.

Trade distortionsExport restrictions have heightenedanxiety among net food-importingcountries, leading to a situation where

everyone is pre-emptively purchasingfood from the international marketand stocking it up. This led to a sud-den increase in demand, created hyste-ria, and pushed up food prices. More-over, depletion of inventory added

fuel to fire and sent food prices up in

the interim period, i.e., until the inven-tories were replenished. Protectionisttrade policies were observed recentlywhen food prices skyrocketed. WorldBank economists have estimated that

restrictions on rice exports explainedalmost 40 percent of the increase inglobal rice price in 20072008.

SpeculationThough speculation of food commodi-

ties itself is not a direct cause of highfood prices, excessive speculation may

have magnified the impact of real food

Rising food prices

are not only im-

pacting macro-

economic stability

but also pushing

millions of people

below the poverty

line.

8/3/2019 High Food Prices in South Asia

3/4

38 Trade Insight Vol.7, No.3-4, 2011

demand and price shocks. It mighthave had a second-round effect, ag-gravating the volatility of food prices,

after the first round of production andprice shocks.

There is still no clear evidenceif speculation in the futures markettriggered higher food prices.6 How-ever, a study by World Development

Movement (WDM) squarely blamesthe financial markets for excessivespeculation and distorting and un-dermining the effective functioning ofagricultural markets.7

The WDM report argues that finan-

cial speculators now account for morethan 60 percent of some agriculturalfutures and options markets. It was12 percent a decade and a half ago.Farmers and those having direct com-mercial interests hold just 40 percent

of the market, leading to a situationwhere agricultural markets are notresponding to the underlying funda-mentals of demand for and supply offood commodities. The incentives forreal producers of food are waning.

The report also notes that total assetsof financial speculators have increased

to US$126 billion this year from US$65billion in 2006.

Fuel costsIncrease in fuel costs due to conflictin the Middle East and North Africaincreased transportation costs of foodgrains, leading to higher prices in theproduct market.

SolutionsGiven the structural change in de-mand for food items (such as dietaryshift to more meat-based productsand crop-based biofuels) in severalemerging and developed countries,

the existing high prices might remainsticky at high levels unless the increasein demand is matched by structural

increase in supply. Unfortunately, thisseems unlikely at least in the shortrun.8 Hence, South Asian countries

need to look for multiple optionsfrom emergency measures to reform-ing the agriculture sector to increasingagriculture production and produc-tivityto address the impact of highfood prices. Productivity growth (crop

produced per hectare) has to outstripdemand growth in the long run andsupply growth has to respond tohigher pricesboth of which will help

ease pressure on food markets. Sincethe worlds population is growing at

just over 1 percent a year, staple yieldswill have to rise by at least 1.5 percenta year (to also allow for an increase

in demand for animal feeds).9 Mean-while, the accessibility of food itemsin remote and food deficit places willalso have to be improved. At times,even when there is surplus at nationallevel, some areas within a country

might face short supply of food, lead-ing to higher prices. For instance, eventhough Nepal is expected to have foodsurplus in fiscal year 2011/12, theWorld Food Programme argues thatthere are still 1.3 million people facing

food deficit due to lack of accessibil-ity. Without accessibility, particularlygood distribution system, people willnot be able to purchase food evenif they are monetarily capable to doso, leading to widespread hunger in

remote areas. Nobel laureate Am-artya Sen argues that lack of adequatefood distribution system is one of thereasons why we see famine even whentotal food production is higher during

famine years when compared to non-famine years.10

To address the impact of higher

food prices, various country-specificshort-run and long-run measures

www.cepolina.com

food security

8/3/2019 High Food Prices in South Asia

4/4

39Trade Insight Vol.7, No.3-4, 2011

could be undertaken at both nationaland regional levels. The exact natureof intervention measures should

depend on the severity of food crisis,food accessibility and food avail-ability. During crises, recovery (price,

production and supply stabilization)should be the first priority. It shouldbe followed by reform of the entireagriculture sector and distributionsystems, keeping in mind the chang-

ing global, national and local food andmarket dynamics.

National levelAt the national level, the first priority

should always be recovery, which canbe attained by implementing a rangeof interventions such as emergencyfood aid, well-targeted safety nets,subsidized food, and effective marketsupervision to reduce speculation andartificial rise in prices. When countries

face a sudden rise in food prices, theyshould release supplies from nationalstock to address either a surge indemand or a shortfall in supply. Ifthis is not adequate, countries shouldimport food from abroad or seek im-

mediate food assistance in case of anemergency. The emergency release ofsupplies from small and strategicallylocated food reserves helps to tamelocal rise in food prices. Furthermore,reducing tariffs on food imports could

also help bring down domestic foodprices, especially in net food-import-ing countries. Duty-free import policyfor rice, wheat, pulses, edible oils, andraw sugar has already been imple-mented by a number of South Asian

countries. Meanwhile, stocking up re-

serves when the market is seeing highfood prices is not a smart move as itwill further fuel an increase in prices.The countries should also monitorprice fluctuations in local markets

because, in some cases, rise in foodprices has little to do with productionand market fundamentals and more todo with market imperfections arisingfrom the disconnect between farmsand markets.11

In the long term, agriculturereform aimed at increasing production

and productivity should be the prior-

ity. This will help address the structur-al issues plaguing the agriculture sec-

tor. While building up national foodbuffer stocks is counterproductive

when food prices are high, it is neces-sary to keep buffer stocks at normaltimes. Additionally, the agriculturesector should get adequate attentionand investment from both public andprivate sectors. While private invest-

ment in agriculture sector is under-standably low due to a high degreeof uncertainty, it is surprising thatpublic expenditure is also decreasing.The governments should invest more

in building infrastructures such asroad and irrigation to link farms withmarkets and to supply farms withadequate water, respectively.

Regional levelAt the regional level, the first prior-

ity should also be recovery and thenreform. An important step towardsrecovery from high food prices inthe region is to have easily accessibleregional food reserves. In this regard,

although the SAARC Food Banks

reserve of food grains has been raisedfrom 241,580 metric tonnes (MT) to486,000 MT, it is yet to become fullyfunctional. If properly designed andimplemented, it could help relieve

pressure on some countries facingurgent food shortages. The regionshould have enough food in stock toavert speculative price spikes. Hav-ing a minimum level of regional andworld stocks is a sufficient condition

to avert price spikes.12

Regarding trade policy, none of

the countries should impose embargo

on food exports or slap high exportstariff on trade within South Asia.SAARC members should also trim

their respective sensitive lists underthe Agreement on South Asian FreeTrade Area so that at least the major

agriculture goods that are consumedin high proportion in the region aretraded freely at low costs. Averageapplied tariff on agriculture goods isstill higher than that on other goods in

the region.Trade policy coordination aimed at

reducing food price volatility shouldbe enhanced. The region shouldpush for building new infrastructure

that would help increase agricultureproduction and productivity, and alsoreduce the cost of doing business bothwithin and across borders. Collabo-ration on agriculture research anddevelopment will also be immenselyhelpful.

Notes

1 HLPE. 2011. Price Volatility and FoodSecurity: A Report by the High LevelPanel of Experts on Food Security andNutrition of the Committee on World

Food Security. Rome: Food and Agri-culture Organization.

2 FAO. 2011a. Food Outlook GlobalMarket Analysis. June. Rome: Foodand Agriculture Organization.

3 FAO. 2011b. Crop Prospects and FoodSituation. June. Rome: Food and Agri-culture Organization.

4 Foresight. 2011. Executive Summary:The Future of Food and Farming.London: The Government Office for Sci-ence.

5 Helbling, T., and S. Roache. 2011.Rising Price on the Menu: Higher FoodPrices May be Here to Stay. Finance &

Development, March, pp. 2427.6 Note 1.7 Worthy, M. 2011. Broken Markets: How

Financial Market Regulation Can HelpPrevent Another Global Food Crisis.London: World Development Movement.

8 Note 5.9 The Economist. 2011. A Special Report

on Feeding the World. London: TheEconomist.

10 Sen, A. K. 1983. Poverty and Famines:An Essay on Entitlement and Depriva-tion. New York: Oxford University Press.

11 Sapkota, C. 2011. Food Security inNepal. Republica, 22 February, p. 7.

12 Note 1.

Food prices in

South Asia reflect

both global and

domestic trends

in output, supply-

side constraints,

and trade and

exchange rate

policies.