Sydney, Apr 4, 2008 (ABN Newswire) - Across the developing and emerging economies of the world, and in some developed economies for that matter, governments are opting to shoulder some of the burden of higher food prices or try and control their immediate direction.

The efforts are likely to be fruitless and very expensive for the countries involved, consumers and taxpayers.

From India to Egypt governments are slashing import tariffs on foodstuffs and curbing exports, as well as boosting subsidies: all to try and ease the impact of what will be the big story of 2008 and 2009 - the soaring cost of food.

As we reported this week, an exploding price for rice is the latest cause of much government action.

Egypt, India, the Philippines, Vietnam, Indonesia, Cambodia, parts of Africa, Mexico, Italy, China, Russia, Argentina: the list is growing by the day of governments who now see the rising cost of food and all the social and political problems that brings, as far more important that good governance, low debt, the US recession, subprime debt or American foreign and economic policy.

Even in the developed world the impact is startling. Biofuels in Asia, Europe and the US are withering because of rising costs for corn, canola and palm oil. Food riots have happened in Mexico over the cost of tortilla flour. Italians have protested about the sharp rise in the cost of flour for pasta and bread.

Farmers are being blamed in some countries, such as Argentina and parts of Europe; in the US it's causing an explosion in land values and incomes in parts of the country that have been slowly withering away.

The irony won't be lost on Americans that in the midst of a recession farmers and some of the biggest companies in the US (think Cargill and Archer Midland) will be booming, some with record incomes, and much of it (like Europe) subsidised.

Longer term, however, the side-effects of this largesse will be ugly. Forgoing revenues and paying subsidies hurts national budgets.

India, for example, spent $US600 million on rice and wheat subsidies in 2004-05. Given the surge in rice, maize and wheat prices since then, the cost could be up by a third to a half: something approaching $US1 billion, which a country like India can ill afford, even in the midst of its boom (which is slowing anyway).

In the Philippines, the rice subsidy could top the half a billion dollar mark this year, according to the Asian Development Bank, and the country is scouring Asia and the US for around 1.5 million tonnes of rice at subsidised prices because its stocks have run down.

Indonesia which is thinking of banning some rice exports, like China, India, Vietnam and Egypt, may have to pay $US2.2 billion in food subsidies this year, or around 3% of spending by the national government.

That's three times earlier estimates.

Nearby Malaysia is looking to boost rice imports and hitting a wall because the Philippines has been mopping up as much grain as it can get.

Indonesia and many other countries in Asia also subsidise energy costs and they have skyrocketed with the rise in oil prices over the past three years.

Indonesia is thinking of cutting rice exports, even though it will have a surplus this year of around two million tonnes (it imported just over 1 million tonnes in 2007).

Soaring food and fuel prices are driving global inflation. Consumer prices in China hit an annual rate of 8.7% in February, an 11-year high, and reached a 13-month peak in India of 6.8%.

World prices for rice, wheat, soybeans and corn have all increased sharply: rice and wheat prices have doubled in the year - rice is up 30% or more in a week.

Oil prices are up more than 50% in the past year, and more for some derivatives. High petrol prices in the US, now at record levels, are pointing to further upward pressures in the American summer and the so-called driving season when they usually spike in July-August.

The United Nations warned in February that 36 countries, including China, face food emergencies this year, as stockpiles of grains such as rice, wheat, corn and soybeans drop to multi-decade lows around the world and in key supplier nations like the US and Australia.

The World Bank said this week it considered soaring food and fuel prices as greater challenges to East Asian governments than the financial turmoil in the United States and slowing global growth.

Since 2003, oil and non-oil commodity prices have respectively more than tripled and doubled. However, of greater immediate concern for policy makers is the surge in commodity prices over the last 6–9 months––especially for food––that has pushed headline inflation higher and sparked concerns about the adverse effect on the poor.

"In the medium-term the answer clearly lies in greater fuel efficiency, stronger and more productive global agriculture and an open international trading system. But in the short-term the bigger concern is to alleviate the harsh burden this imposes on the poor," the bank said this week.

As we said yesterday, it's a similar outlook from the Asian Development Bank.

"The major risk lies not so much in softer growth but in rising commodity prices and accelerating inflation,'' the Bank said yesterday. "Appropriate macroeconomic responses to accelerating inflation are likely to include tighter monetary policy and some exchange-rate appreciation.''

"Indeed, published inflation rates disguise the true extent of underlying inflation pressures due to the presence of subsidies, administrative price controls and cuts in excise taxes," it said.

The subsidies used by many governments in the region to cushion the impact of soaring fuel and food prices are posing a threat to budgets and the bank said that cash handouts to the poor may be a better and cheaper option.

"If governments do not rethink these expensive and inefficient subsidy programs, fiscal costs could escalate sharply and require painful adjustments (or accelerating inflation, or both) later," the ADB said.

"Carefully targetted direct income support for the poor, within strict budgetary limits, might better alleviate stresses, and at much lower cost."

Saudi Arabia has cut import taxes across a range of food products this week, slashing its wheat tariff from 25% to zero and reducing tariffs on poultry, dairy produce and vegetable oils.

On Monday, India scrapped tariffs on edible oil and maize and banned exports of all rice except the high-value basmati variety, while Vietnam, the world's third biggest rice exporter, said it would cut rice exports by 11%.

In Argentina, farmers called off a protest against attempts by the government of President Cristina Fernández to redistribute the benefits of rising commodity prices by increasing export taxes on soybeans and other crops.

The World Bank said this week in its half year report:

Non-oil commodity prices increased 15 percent in dollar terms over 2007, a fifth year of solid dollar price gains.

That was only a precursor to even more rapid 20 percent gains in just the first 2 months of 2008. Grains, edible oils, and metals prices have been especially buoyant in recent months, supported by strong investment and physical demand (the latter especially from developing countries) as well as by a variety of more specific factors on both the demand and supply sides of the markets.

Low initial stocks; rising input costs (especially energy); competition for limited arable land; weather-related production shortfalls; and strong demand for food, animal feeds, and biofuels have produced a surge in prices for corn, wheat, rice, and soybeans. 

Grain and edible oil prices rose 21 percent and 15 percent, respectively, in just the first 2 months of 2008.
Metals prices gained 27 percent in the same period, led by iron ore, copper, lead, aluminum, and precious metals.

China's consumption of the 6 main metals traded on the London Metal Exchange (LME) grew by nearly one-third, or 5.8 million tons, in 2007, up from an average 16 percent growth rate in the previous 7 years.

Growth in Chinese demand alone more than offset lower 2007 consumption in the OECD. A 21 percent increase in China's steel production––the largest in the world––helped set the scene for a 65 percent increase in iron ore prices in early 2008.

The pattern of terms of trade losses and gains in 2008 should be qualitatively similar to that of the last four years, but with higher food prices adding a new twist.

Higher food prices are expected to have relatively small effects at the level of national income––as distinct from possible distributional effects––in economies such as Cambodia, Indonesia, and Lao PDR.

Economies such as China, Philippines, and Papua New Guinea could see somewhat larger net losses of approximately 0.5 percent of GDP.

On the other hand, rice exporters such as Thailand and Vietnam likely will see substantial income gains because of high rice prices.

Combining the effect of higher food prices with those of additional increases in oil and metals prices, the region could experience an aggregate income loss of approximately 1 percent of GDP in 2008.

Income losses of this size perhaps could have been overlooked when the region's economy was growing very rapidly in 2006-07.

However, they could have a more negative effect if the global credit market crisis results in significantly lower growth in East Asia.

The sharp rise in international food prices is likely to have a significant impact on the living standards of the poor throughout the developing world, posing one of the more urgent and difficult problems facing governments today.

Food comprises a larger share of the consumption basket of the population in most developing East Asian economies than it does in developed countries. In the U.S. the share of food in the consumption basket of the average household is 15 percent, while in East Asia it ranges between 31 and 50 percent (31 percent in Malaysia, 34 percent in China, 36 percent in Thailand, 40 percent in Indonesia, 43 percent in Vietnam, and 50 percent in the Philippines).

In Cambodia the share of food in total consumption is 59 percent in rural areas and 40 percent in urban. Internationally traded food products are also a large proportion of the food consumption of the poor – 56 percent in Cambodia for example, and 64 percent in Vietnam.

The impact of food price increases on the poor also depends on whether they are net food consumers whose real income will be reduced by higher food prices, or net producers of food, who will tend to benefit.

The urban poor and landless rural workers are generally net food consumers as, typically, are a significant fraction of poor small landholders.

In Cambodia these three types of poor households comprise 46 percent of the poor, with another 18 percent being small land holders who are self-sufficient but not net sellers of food.

In Vietnam the proportion of net consumers among the poor is 47 percent, with another 19 percent being net self-sufficient. In Indonesia 76 percent of the poor are net rice buyers, including some 72 percent of the rural poor.

Here it is estimated that every 10 percent increase in rice prices reduces the real value of the expenditure of poorest tenth of the population by 2 percent.

Other things being equal, the surge in food prices is therefore likely to increase poverty in the low and lower middle income countries of the region, although against that must be set the poverty reducing impact of continued robust economic growth.

We estimate that every 1 percent increase in per capita consumption reduces the poverty rate for East Asia as a whole by around 1 percent (at the $1 a day level). In the slightly longer term there will also be a supply response as net food consumers move towards becoming net food producers in response to higher prices.

What the net effect of these complex interactions on poverty rates in the region in 2008 will be is not yet clear.

But it seems probable that, depending on how much food prices increase during the year, the pace of poverty reduction in the region will not be as rapid as in the recent past and may even reverse. (Poverty rates at the $1 a day level fell by 11-12 percent a year in 2002-2007, while those at the $2 day level fell by 8-9 percent a year.).

Rising food prices are quickly taking on a high profile around the region, eliciting a range of policy responses.

Broadly speaking these have been designed to protect the poor through new or existing safety net programs or to moderate the rise in food prices by one means or another. The instruments applied are generally fiscal measures such as taxes and subsidies or administrative measures.

In other countries, such as Vietnam, government strategy is to design and adopt safety net programs that are universal but where participation by the poor is fully subsidized and participation by the near poor is partially subsidized.


 

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