Hot food

Hot food
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First Published: Thu, Sep 06 2007. 12 14 AM IST

Updated: Thu, Sep 06 2007. 12 14 AM IST
It is one thing to be unable to pay top dollar for sushi at some fine dining place and quite another thing to see your monthly budget in tatters because of rapidly rising food prices in the markets. One is an inconvenience. The other is a political dynamite.
There are signs that dynamite sticks could be hissing in many parts of the world. Food prices are rising at a rate not seen in a decade. Economists have already coined a smart term for the renewed burst of agricultural inflation—agflation. It is our guess that agflation—unless unexpectedly contained—is likely to emerge as one of the most pressing public policy challenges in the next few years, testing political regimes, social security systems and central banks.
The news that India will once again try to import large quantities of wheat has helped push up the international price of this cereal. Runaway pork prices have taken China’s rate of consumer price inflation to almost 6%, and a new Goldman Sachs report says “the inflation impulse has quickly passed on from pork prices to prices of other primary agricultural products, processed food and catering services”.
The spurt in food prices is because of both demand and supply pressures. The growing prosperity in China and India and the shift to more meat-intensive diets have raised the demand for food. The biofuel rush means that biomass and land have to satisfy food and fuel needs.
Of course, higher prices should ideally lead to a response from farmers who will have an incentive to produce more. In the language of economics, the supply curve will shift till prices come back to more natural levels. But supply responses are usually slow in agriculture, since they often depend on new farming technology as we saw during the green revolution of the late 1960s.
To complicate matters, climate change has perhaps led to crippling droughts in countries such as Australia, thus squeezing supplies even more. The worst-case scenarios painted by climate change scientists suggest that farming will be severely affected if the world warms even more. It thus seems quite likely that high food prices are not going to go away with the next burst of the monsoon.
Three sets of institutions will have to manage the consequences of high agflation —political regimes, social security systems and central banks. The response of each of these has perhaps been dulled by almost a decade of low inflation. It is worth remembering that the International Monetary Fund (IMF) was worried about global deflation as recently as 2003. We’ve come a long way since then, but there are as yet few signs that a credible public policy response is in place.
Central banks have the more technical job. Their current tendency is to focus on what they call core inflation, or inflation that does not include the prices of food and fuel. The assumption is the latter two may jump around, but eventually revert back to where they started off. The secular rise in food and fuel prices in recent years should force central banks to look beyond core inflation, and move actively to cool overall demand.
High food prices will also impact the poor directly, especially since food accounts for about 70% of the household budget for an average Indian rural labourer. While food imports are temporary solutions to keep domestic prices in check, the longer-term challenge is to ensure that nutrition levels do not fall because the poor cannot afford to buy expensive food. More ominously, sustained increases in food prices have usually led to either electoral upsets or street protests.
While most of us have been entranced with the bounce in the stock market and the loud politics of the nuclear deal, it would be good to keep an eye on food prices as well. There’s a lot on the table there.
Is agflation a serious threat? Write to us at views@livemint.com
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First Published: Thu, Sep 06 2007. 12 14 AM IST
More Topics: Food prices | Agflation | Biofuel | Views | OurView |