Grains Oilseeds

[Tackler]

Across Asia, food is the new oil as prices surge
Sun Jan 20, 2008 9:25pm EST

By Alan Wheatley, China Economics Editor

BEIJING (Reuters) - From India to Indonesia, governments across Asia are scrambling for solutions as it dawns on them that sky-high food prices might not fall any time soon.

With food accounting for a third of China's consumer price basket and even more in some other countries, the high prices are a ticking time bomb for the region, where fuel increases periodically touch off sometimes violent protests.

"If the inflation problem gets out of hand, it could have devastating implications for not only economic but also political stability," said Yiping Huang, an economist with Citigroup in Hong Kong.

In Pakistan, where the government has blamed a shortage of flour on smugglers and hoarders, paramilitary troops have begun escorting wheat trucks to deter thieves.

Malaysia briefly rationed cooking oil this month before the government boosted supplies of subsidized oil.

In China, where inflation is at an 11-year high, the government has taxed grain exports to boost local supplies and resorted to command economy-style price controls.

India has been considering cutting import duties on edible oil, while in Indonesia the government has subsidized cooking oil refiners and suspended a 10 percent duty on imported soybeans.

"Scrapping the tax is not sufficient. The government must ensure prices won't increase every day," said Sutaryo, who leads a group of tofu and soybean cake producers in Jakarta.

Some 2,500 of them protested in the capital on January 14 over a doubling in soybean prices since the start of the year.

The common thread in every country is unease over a sustained rally in global commodity prices that has carried wheat, palm oil and soybeans to all-time highs.

CYCLICAL OR STRUCTURAL?

Economists are split -- aren't they always? -- on how sustainable these price trends are.

In the same way that the forces of supply and demand, in the form of weaker global growth, are pegging oil back after its recent record run to $100 a barrel, some are confident that farm output will quickly respond to the signal of higher prices.

What's more, the law of averages says that last year's supply shocks, including a disease that decimated China's pig stocks, will not be repeated in 2008.

Others, though, see spiraling prices as more than a passing phase. Every year, millions of Asians move to better-paying factory jobs in cities and can afford more meat, milk and other high-protein food, boosting demand for animal feedgrains.

"We have the largest human migration in history happening right before our eyes in India and in China," said Paul Schulte, the Asian equity strategist for Lehman Brothers. "This is putting huge pressure on prices in a way that we've never seen before."

Swathes of cropland are being taken over to produce biofuels -- the U.S. Congress last month mandated a fivefold increase in corn-based ethanol by 2022 -- while China has lost 6 percent of its arable land since 1996 to industrial encroachment and desertification.

And don't forget the uncertain impact of global warming.

MUST DO BETTER

Against this background, governments must invest more to improve crop yields and modernize rural infrastructure.

More than 30 percent of the 60 million tonnes of fruit and vegetables that India produces each year is wasted for want of cold storage facilities, according to the Federation of Indian Chambers of Commerce and Industry. In value terms, that is more than Britain's annual output, the group says.

"It's imperative that land and labor productivity is ratcheted up in agriculture," said Ifzal Ali, chief economist of the Asian Development Bank in Manila.

While Ali is optimistic that farmers will ramp up production, he said there is a role in the short term for targeted cash handouts to help the very poor cope with higher food costs -- despite the strains they put on government budgets.

"Market forces by themselves will not do the trick," he said.

Economists are critical of other government policies.

Subsidies to food producers may increase supplies but at the cost of distorting the allocation of resources, while subsidizing retail prices is an invitation to smugglers. This is a problem for Malaysia, where cooking oil sells for much more in neighboring Singapore and Thailand.

Economists are particularly scathing about China's attempts to cap prices, which tackle the symptom of inflation, not the cause. Price curbs, they say, have been a failure down the ages.

"What they are doing will simply give rise to much more unrest and dissatisfaction when it turns out that these measures won't work to stop inflation," Gabriel Stein with Lombard Street Research in London said in a note to clients.

"And, after all, social unrest is one of the main reasons why the Chinese authorities are so worried about inflation."

So too, Stein could have added, are authorities across the region.