Aginflation rises again

Aginflation rises again

2007-08 was a year when food price inflation first caught global attention. Diversion of cereals for biofuel production, dwindling stocks and a rising tide of consumption led to a new word for the phenomenon: aginflation.

If the Asian Development Bank (ADB) is to be believed, developing Asia is at risk from aginflation again, if it was ever secure from it. India, in particular, is not quite prepared to deal with the problem. The bank in a new report, Global Food Price Inflation and Developing Asia, has estimated the effects of different levels of food inflation on growth and poverty in various countries.

A 10% increase in food price will swell the ranks of the poor by 64.4 million across developing countries in the continent. A 20% increase will double this number. While such an increase looks improbable at the moment, it is not in the realm of speculation. A look at key food (cereal) production and consumption ratios shows this clearly. In 2007-08, the ratio of world’s stock to utilization for wheat fell to a low of 22.4, for rice to 24.9 and for coarse grains to 14.8. The ratio of major exporters’ to their total disappearance too fell dramatically. Similarly, the ratio of major grain exporters’ supplies to the normal market requirements also fell.

This year, these ratios have not dropped to the 2007-08 levels, but they certainly are lower for the most part from what prevailed in the past two years. Volatility in output due to adverse weather—observed most clearly in China, Russia, Pakistan and Australia—has now been coupled with export bans in many countries. These conditions render many net consuming countries susceptible to a food price shock.

It’s not hard to guess which country is least prepared to deal with the problem.

India, which is a large producer of these cereals, is the least prepared to face these shocks. A 10% increase in prices is likely to push 22.82 million Indians living in rural areas below the poverty line (BPL). This will also make 6.68 million living in the country’s urban areas meet the same fate. The poverty line being considered here is the $1.25 per day. These numbers are the highest in developing Asia, way higher than China and all other South Asian countries.

One reason for India’s woes is the huge demand side pressures that have been unleashed in recent years. While supply issues should not be underplayed in the emergence of food inflation, unleashing of pent-up demand has clearly fuelled it. How the country manages this issue, will largely determine the severity of the problem.

Has the food price problem been overblown? Tell us at