World scrambles to contain food inflation

Record high food prices are moving to the top of policymaker agendas, driven by fears it could stoke inflation, protectionism and unrest and dent consumer demand in key emerging economies.

The United Nations’ food agency (FAO) said on Wednesday that food prices hit a record high last month, moving beyond levels of 2008 when riots broke out in countries as far afield as Egypt, Cameroon and Haiti.

In Asia, official data and analyst estimates both pointed to inflationary pressures. Chilli prices have increased fivefold in Indonesia in the last year and Indonesia’s president called for households to plant food in their own gardens.

President Susilo Yudhoyono Bambang told a Cabinet meeting people should be “creative” in planting, with Trade Minister Mari Pangestu leading the way in planting at home.

“I have 200 chilli plants in flowerpots,” Pangestu told a briefing on Thursday. “The agriculture ministry is informing farmers how to take care of the plant and also encouraging consumers to plant chilli in their own yards.”

Surging food prices have often provoked unrest in urban areas of poor countries, where imported food often makes up a high proportion of household purchases.

Analysts say African and Caribbean economies dependent on food exports could be particularly hard hit, helping stoke unrest and potentially pushing governments towards imposing export bans and expropriating foreign-owned farmland.

If Asian and other emerging consumers have to spend more of their income on food, other purchases will fall — and that could be bad news for a global economy that has placed much of its hopes for recovery on consumption in developing economies.

World Bank President Robert Zoellick urged governments in a newspaper opinion column to avoid protectionist measures as food prices rose and called upon the Group of 20 leading economies to take steps to make sure the poor get adequate food supply.

French President Nicolas Sarkozy has asked the World Bank to conduct urgent research on the impact of food prices ahead of G20 meetings later this year, a source familiar with the matter said.

Indian rate pressure
Food price protests were seen a factor in the ousting of Indonesia’s long-term autocrat Suharto in 1998, and anger over a farmland purchased by South Korean firm Daewoo at a time of rising prices was in part blamed for a 2009 coup in Madagascar.

India’s food price inflation rose to a one-year high of more than 18% in the year to the end of December, data on Thursday showed. That, along with rising fuel prices, is the main reason analysts expect the central bank to raise rates this month.

The Indian government has used a range of measures for years to ensure stable food prices, but since last year has boosted the release of national stocks of grains and has pledged to continue with duty-free imports of crude vegetable oils.

In China, several cities have implemented direct controls to limit food price increases and the central government has vowed to eliminate speculation in the country’s commodities markets.

The cost of food rose 11,7% in the year to November, while non-food items were up just 1,9%. But, reflecting concerns that inflation is creeping beyond food to the wider economy, consumer goods prices and housing costs showed clear jumps.

Fu Bingtao, an economist with the Agricultural Bank of China in Beijing, said in a report the price of grains, the country’s most important food, would rise in 2011 by 10%, adding to an 11,7% rise in 2010.

“Speculative trading and hoarding of specific agricultural products may continue,” he said.

The FAO said sugar and meat were at their highest since its records began in 1990. Prices were at their highest since 2008 crisis levels for wheat, rice, corn and other cereals.

Benchmark prices solely in Asia for rice suggested a different picture.

The region’s staple food now stands at $535 per tonne — less than half its 2008 levels of more than $1 000 a tonne that prompted several governments at the time to impose curbs on exports to protect their domestic markets.

Asian policy dilemma
But most experts expect upwards price pressure to continue, particularly if countries slap on export bans and further squeeze supply and short-term investors again begin buying into agricultural commodities as they did in 2008.

Last year, wheat futures prices rose 47%, buoyed by a series of weather events including drought in Russia and its Black Sea neighbours. US corn rose more than 50% and US soybeans jumped 34%.

Alongside bad weather in Australia, Europe, North America and Argentina, rising Asian demand is at the heart of the spike. China, for example, is expected to buy 60% of globally traded soybeans in 2011/12, double its purchase of four years ago.

Terence Wong, an analyst at brokerage DMG in Singapore, said Asian food and related companies would therefore be some of the top tips for 2011, pointing to vegetable grower and processor China Minzhong and animal drug maker China Animal Healthcare.

Fan Cheuk Wan, head of Asia Pacific research at the private banking division of Credit Suisse, favours Indonesian palm oil firm Indofood Agri Resources and suggested investors avoid companies that could get hit by price controls.

Higher interest rates do little to ease pressure on food prices. Demand is inelastic because people have to eat, but current price pressures are largely supply-led, so tighter monetary policy would not directly help.

The danger, however, is that food inflation spreads to the wider economy.

“I think there’s an urgent need to be more pre-emptive in tightening monetary policy to prevent some of these inflation pressures from erupting,” said Neumann. Some central banks had taken some action but more needed to be done.

South Korea, like other Asian countries that run trade and current account surpluses, could give more room to its currency to rise to offset rising import costs on food.

But that presents another dilemma for policymakers trying to curb a flood of portfolio capital from investors turning away from the sluggish growth in developed economies.

Higher interest rates or the likelihood of a rising currency would just encourage further inflows, analysts say. Policymakers will also be worried that a rising currency will hurt exports, the major pillar of many economies. – Reuters

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