In a scenario that is all familiar in India and for that matter in many other countries too, rising food prices have become an extremely sensitive issue with major political and social ramifications that go well beyond the economic ones. Not that the economic consequences are unimportant.
From the macroeconomic management point of view, rising food prices have several undesirable consequences. They can spur inflation and, if left unchecked, lead to protectionism and social unrest. Already there are reports of rioting in Algeria over high food prices although the high and chronic unemployment among youth has been a factor behind the social unrest.
The Food and Agriculture Organisation (FAO) has said in a recent report that the situation is ‘alarming' although it has not yet reached the crisis proportion of the type that last occurred in 2008 when food riots broke out in countries such as Haiti and Bangladesh. However, the dividing line between an alarming situation and a full blown crisis may be thin.
Such gloomy prognosis is justified. Across the globe, there has been a sharp jump in food prices in December 2010, which surpassed the levels seen during the 2007-08 crisis.
Moreover, the FAO admits that there is a possibility of prices going even higher. Its food price index, a basket tracking the wholesale cost of commodities such as wheat, corn, rice, oilseeds, dairy products, sugar and meat, jumped last month to 214.7 points — up almost 4.2 percentage points from November. At its current level, the FAO index is at the highest since it was first calculated in 1990.
High cereal prices
A detailed analysis of the food prices at the global level shows that the problem is all pervasive as the prices of almost all food items have been rising. The FAO takes comfort from the fact that the price of rice — one of the two important cereals — has been relatively stable. However, for wheat, corn and other cereals, prices were at the highest since the 2007-08 crisis. Wheat prices have been climbing up on the back of poor harvests in some of the world's principal producing regions. Last year, wheat futures rose by 47 per cent. Bad weather in Russia and its Black Sea neighbours was the main cause. Gloomy as the outlook for the prices of the two principal cereals has been, it is the sharp increase in sugar and cooking oil that is driving up the overall food prices.
The latest bout of high food prices has imposed a lot of pain in many countries, especially because it covers all cereals as well as agricultural products such as sugar, milk and meat. U.S. corn rose more than 47 per cent and U.S. soyabeans jumped 34 per cent. Sugar recently touched a 30-year high and along with meat, prices are at the highest levels since 1990, the year from which records have been maintained.
Policy responses
The problem of rising prices may be universal but policy responses of individual government have hardly taken into account its global nature. In a sense, each country has to take care of its needs first. India's attempts to import onions from Pakistan have run into difficulties as the latter allegedly wanted India to ease its restrictions on export of cotton.
India has in the past banned exports of wheat and rice ostensibly to check the spiralling prices of these items in the domestic market. During the 2008 food crisis, the ban on export of important cereals by some food producing countries caused riots in several consuming nations. When trade in so sensitive a matter as food items is involved, espousal of protectionist tendencies is perhaps unavoidable.
Elusive solutions
Rising food prices can do even more lasting damage to world trade. Multilateral trade negotiations under the aegis of the WTO sponsored Doha round are bound to become even more complex. Agricultural negotiations have been one of the two most contentious issues so far. Reining in agricultural subsidies and farm support programmes of the U.S. and the EU has figured high up in the agenda. All these issues remain till today, but the soaring food prices can turn the key agenda on their head. Subsidies, farm support and so on become irrelevant.
Very large agricultural exporters from Latin America, who are reaping a bonanza now, seem disinclined to strive toward an agreement on the Doha round. India has fewer reasons to fear dumping of agricultural products by the U.S. In 2009, the then Commerce Minister Kamal Nath walked out of a Geneva WTO meeting after failing to persuade the U.S. to agree to India's position on a special safeguard mechanism.
However, for the present, the Indian government at the highest level is engaged in short-term, fire-fighting measures to get a handle on food inflation, which in the last week of December jumped to 18.32 per cent.
Unfortunately, there seem to be no permanent solutions; at least not those which will be politically acceptable. For instance, streamlining the supply chain for fruits and vegetables has been frequently thought of with very little action to support it. The number of intermediaries between the farmer and the consumer is unacceptably large.
The high prices therefore do not benefit the farmer while they penalise consumers. Evidently the farm infrastructure — cold storages, better distribution channels and so on — needs to be strengthened. All these require big investments. Those who can invest — big retail for instance — are not welcomed in many states for ideological reasons.
