Sudden spikes in the prices of key food items, from chillies in Indonesia to onions in India, have raised fears of a repeat of the 2008 food price crisis. While that appears unlikely, at least in the near term, rising prices only press home the vulnerability of Asia’s food chain.
The panic that soaring prices triggered in 2008 and the actions taken showed the steps Asia’s governments will take to protect their citizens from sudden jumps in food costs. That is especially true for the price of rice, the staple ingredient for much of the region. The financial crisis may have dissipated fears of price increases three years ago, but a rebound in global commodity prices has put the issue back on the agenda.
“The repetition of these food-price hikes has everybody worried,” said Katsuji Matsunami, senior advisor to the agriculture, rural development and food security unit at the ADB. “In 2008, we said this was related to the way the supply system was built and, as we began discussing what to do and how to fix it, we saw this yet again. This enhanced our belief that we needed to work on the issue. But we also understand that the world is now coming into a new phase of high growth, high food prices and high volatility. So, it’s not just about fundamental vulnerability; we have to worry about food-price inflation and its impact on the poor, and the market volatility itself.”
Promoting transparency
Food and fuel make up nearly 40% of the average Asian consumer price basket, leaving economies especially vulnerable to inflation when commodity prices rise. Inflation in Asia, excluding Japan, is running at 5.5%, according to Credit Suisse, but the bank attributes around half of it to rising food prices.
Food inflation has already reared its head spectacularly in individual situations across Asia: the price of onions soared 70% in India in January and that of red chillies went up fivefold in 2010 in Indonesia.
Asian policymakers are struggling to determine how best to combat rising food prices. Part of the price hike stems from domestic inflation, but Asia is also vulnerable to global pressures.
“Governments need to have a better grip on macroeconomic issues - how to handle macro inflation. At the same time, they have to come up with a better safety net - how do we make sure the poor can access adequate food,” said Matsunami. “There is much scope for improvement.”
Rice prices have, so far, held relatively stable, but the ADB is pushing for better information sharing and greater transparency to guard against a repeat of the 2008 panic.
“There was no reason for the rice price to go up that high in 2008, but it was a lack of information, policy tools,” said Matsunami. “Countries have to learn how to share information. Many still hold food-price information as a matter of national security and don’t want to share it, but there is an increasing awareness that collaboration pays.”
Rice, which much of Asia’s poor relies on, is a particular concern. Trading is dominated by public sector, often bilateral, agreements, and the commodity is often subject to political manoeuvring as governments quail at the idea of passing on price rises to citizens.
Matsunami argues the idea of a public exchange is worth considering, with the goal of reducing the chances of panic buying and hoarding that drove prices to their 2008 records.
“The idea of a commodity exchange or rice exchange is very interesting. There are a lot of doubts whether or not that is possible because of political intervention, because of very thin trade, and because rice trading is dominated by government-to-government deals behind closed doors and by a small number of rice traders, who are not that interested in expanding their business into new markets,” he said. “It may not take out that volatility, but it could be a useful tool for price discovery.”
Private sector involvement may help ease the burden on governments, provided it is done in the right way. The ADB supports infrastructure projects designed to improve irrigation, and is increasingly interested in initiatives to enhance efficiency in the value chain past the farm gate - responsible for a large part of the price consumers pay for rice. Governments may be willing to attract private sector participation if it does not squeeze out smaller, poorer players.
Speculation fears exaggerated
Suspicion of private sector involvement, however, remains high. Policymakers have been quick to blame speculators for driving up food prices and increasing market volatility. However, Matsunami argues that tales of fund managers buying up tracts of land simply to speculate on rising food prices may be exaggerated. Countries, such as Cambodia, are encouraging private sector investment in farmland, with the proviso that the land must be used for agricultural purposes within a number of months to prevent speculators from keeping tracts idle.
“There are many fund managers interested in doing business right. Their investors want their money to be used properly for sustainable, inclusive development. So, why not capitalise on that and convert this into good opportunities from which small guys can benefit?” said Matsunami. “Rather than a threat, we would like to see this as an opportunity.”