Global Food Price Inflation and Developing Asia

• Situation. Global food prices have been ascending to record-level highs beginning 2010. A new peak was recorded by February 2011, when global food prices increased by more than 30% year-on-year in the first 2 months of the year.
• Causes. Soaring food prices were triggered by insufficient food production because of bad weather conditions. More pressure was added when some countries enforced export bans in anticipation of impending demand upsurges. In addition, the situation was further aggravated by structural and cyclical factors.

o   Structural factors. Rising demand due to rising populations; higher incomes from emerging economies; changing diets; competing use of food grains for biofuel production; falling supply due to stagnant or declining crop yields, diversion of agricultural land, rising water scarcity, increasing input costs, and lack of agricultural investment.

o   Cyclical factors. Strong recovery in emerging economies, US dollar weakness, speculative activities, and rising oil prices.

• Impact on inflation. Rising international prices of rice and wheat—the two key staples of developing Asia—together with increases in other domestic food items, have translated to an average domestic food price inflation of about 10% in January 2011.
• Impact on domestic prices. For import-reliant countries, higher global prices yielded higher domestic prices. Domestic prices were also influenced by other factors like exchange rates, trade policies, and the speed of transmission. This was less evident in countries that are not too dependent on imports because local prices are more determined by local market conditions.
• Impact on growth. If global food prices continue to increase by 30% throughout 2011, GDP growth for some food-importing countries in the region could be cut by up to 0.6 percentage points. If this is coupled with a 30% increase in world oil prices, GDP growth could be reduced by up to 1.5 percentage points.
• Impact on poverty. Higher food prices reduce the purchasing power of households and degrade the standard of living of poor households. If food prices rise by 10%, approximately 64.4 million people will be pushed into poverty. This will lead to a 1.9 percentage point increase in poverty incidence (based on the $1.25-a-day poverty line).
• Projection. Food prices are projected to keep its current increasing trend and remain volatile. This is because grain stocks have been decreasing and extreme weather disturbances are introducing supply uncertainties.
• Short-term measures. Asian governments are currently undertaking projects that seek to reduce domestic food prices, reinforce safety net programs, and stimulate production responses.
• Long-term solutions. In the long run, governments must focus on improving productivity, increasing agricultural investment, strengthening market integration, targeting subsidies to the poor, and encouraging global and regional cooperation.

Source:

Adriano, Lourdes et al, “Global Food Price Inflation and Developing Asia”, Mandaluyong City, Philippines: Asian Development Bank, 2011.