Singapore: Record high food prices are moving to the top of the agenda for many Asian policymakers as the prospect of higher inflation in 2011 poses a major threat to the region’s strong revival from the global financial crisis.
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.
Food inflation in many Asian countries, including China and India, is already in double digits, raising fears that the price pressures could spread more broadly to other sectors and pose a threat to both economic and social stability as millions of Asians live in poverty.
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.
However, the fact that rice is far from the lofty levels of the 2007/2008 food crisis should offer no comfort for policymakers.
“I wouldn’t be terribly surprised if 2011 resembles in many ways 2008,” said Frederic Neumann, regional economist at HSBC in Hong Kong.
“Food price inflation could really go into double digits across the region and rise to such an extent that it undermines the purchasing power of households and as a result then slows consumer demand and overall economic growth,” he said.
“And that’s a problem for Asian economic growth. But really it’s also a problem for the rest of the world because as the Asian consumer increasingly is helping to stabilise world demand, it’s actually a challenge of wider global significance.”
Surging food prices have proved a trigger for social protests in the past, forcing governments to cave in to demands for action. They were a factor in the fall from power of Indonesia’s long-term autocrat Suharto in 1998.
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 percent and US soybeans jumped 34 percent.
PRICES TO KEEP RISING
Luke Matthews, a commodity strategist at Commonwealth Bank of Australia, said there was little reason to expect any let up in the global rally in food prices.
“We do believe that the structural drivers behind high food prices are likely to persist for some time,” he said. “We have tight stocks in the corn and sugar markets, we have world wheat stocks susceptible to turn lower with forecasts of La Nina to persist for the next 3 months or so.”
La Nina is a weather pattern that brings cooling temperatures, resulting in higher rainfall in Australia, a major wheat and sugar exporter, and parts of Southeast Asia.
The structural drivers make food commodities and the stocks of food companies hot investment sectors this year, said Terence Wong, an analyst at brokerage DMG in Singapore.
He cited vegetable grower and processor China Minzhong and animal drug maker China Animal Healthcare as his top tips in the local market.
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.
World Bank President Robert Zoellick urged governments in a newspaper opinion column to avoid protectionist measures as food prices rise and called upon the Group of 20 leading economies to take steps to make sure the poor get adequate food supply.
Still, Asia’s rapidly rising consumption as developing economies such as India, China and Indonesia emerge on the world stage is a major factor behind the rise in food prices.
China, for example, is expected to buy 60 percent of internationally traded soybeans in 2010/11, double its purchases of four years earlier.
Several countries have implemented measures to try to keep food prices under control, worried about a repeat of the 2007/2008 crisis, when surging commodity prices prompted a jump in inflation and left many countries with a deep trade deficit.
India’s food prices 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 operated 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 that grains, the country’s most important food, would rise in price in 2011 by 10 %, adding to an 11.7% rise in 2010.
“Speculative trading and hoarding of specific agricultural products may continue,” he said.
Indonesia’s president called on Thursday for households to plant food to help combat inflation. Chillis, used widely in Indonesian cooking, have risen fivefold in the past year.
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.
Neumann said some central banks had taken some action in terms of monetary tightening, but more needed to be done.
“On average, interest rates in Asia are about 150 basis points below the neutral level, that is, even if we see marginal rate hikes coming through, this wouldn’t necessarily amount to a tightening of monetary policy, rather an easing of the stimulus.
“Therefore much more aggressive action would be warranted at this stage.”
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.