Coping with high food prices

Coping with high food prices

Even as Indian consumers continue to reel under the impact of accelerating food prices, the Food and Agriculture Organization said on Wednesday that its global food price index was at its highest level in December. Food prices are now higher than their level in June 2008, which saw riots in several countries and bans on cereal exports in others.

There are several reasons to believe that high food prices are here to stay for many years. Incomes are rising in developing countries, farm productivity has stagnated, farmland is being lost to expanding cities and industrial zones, and climate patterns have become erratic. High food prices should eventually be an incentive for farmers to produce more, assuming that there are policies in place to invest in agriculture and open markets to allow farmers to sell profitably.

That still leaves policymakers with substantial immediate risks. The first response is usually to pretend the problem is temporary, then blame speculators when it persists, ban forward trading in agricultural commodities and finally ban exports. The first two are pure theatre and the second two do not constitute sensible policy. Banning forward trading is akin to shooting the messenger; there is ample empirical evidence that forward prices are very good predictors of future prices. Export bans are a tax on farmers.

The government needs to let food prices find their own level while protecting the poor (who spend most of their income on staples) with higher food subsidies. The extra expenditure should be funded by spending cuts elsewhere rather than higher taxes or public debt. The central bank has to increase interest rates as evidence mounts that the inflation expectations of urban households are climbing. And modern retail stores need to be encouraged to build cold chains that will prevent the colossal wastage of fresh food in India.

However, the biggest challenge is to increase the supply of food in the long run. That requires fresh investment in agriculture and funding the science needed for the next green revolution.

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