Across the developing and emerging economies of the world, and in some developed economies for that matter, governments are opting to shoulder some of the burden of higher food prices or control their direction.
From India to Egypt governments are slashing import tariffs on foodstuffs and curbing exports, as well as boosting subsidies: all to try and ease the impact of what will be the big story of 2008 and 2009 – the soaring cost of food.
As we reported this week, an exploding price for rice is the latest cause of much government action.
Egypt, India, the Philippines, Vietnam, Indonesia, Cambodia, parts of Africa, Mexico, Italy, China, Russia, Argentina: the list is growing by the day of governments who now see the rising cost of food and all the social and political problems that brings, as far more important that good governance, low debt, the US recession, subprime debt or American foreign and economic policy.
Even in the developed world the impact is startling. Biofuels in Asia, Europe and the US are withering because of rising costs for corn, canola and palm oil. Food riots have happened in Mexico over the cost of tortilla flour. Italians have protested about the sharp rise in the cost of flour for pasta and bread.
Farmers are being blamed in some countries, such as Argentina and parts of Europe; in the US it’s causing an explosion in land values and incomes in parts of the country that have been slowly withering away.
The irony won’t be lost on Americans that in the midst of a recession farmers and some of the biggest companies in the US (think Cargill and Archer Midland) will be booming, some with record incomes, and much of it (like Europe) subsidised.
Longer term, however, the side-effects of this largesse are ugly. Forgoing revenues and paying subsidies hurts national budgets.
India, for example, spent $US600 million on rice and wheat subsidies in 2004-05. Given the surge in rice, maize and wheat prices since then, the cost could be up by a third to a half: something approaching $US1 billion, which a country like India can ill afford, even in the midst of its boom (which is slowing anyway).
In the Philippines, the rice subsidy could top the half a billion dollar mark this year, according to the Asian Development Bank, and the country is scouring Asia and the US for around 1.5 million tonnes of rice at subsidised prices because its stocks have run down.
Indonesia which is thinking of banning rice exports, like China, India, Vietnam and Egypt, may have to pay $US2.2 billion in food subsidies this year, or around 3% of spending by the national government.
That’s three times earlier estimates.
Nearby Malaysia is looking to boost rice imports and hitting a wall because the Philippines has been mopping up as much grain as it can get.
Indonesia and many other countries in Asia also subsidise energy costs and they have skyrocketed with the rise in oil prices over the past three years.
Indonesia is thinking of cutting rice exports, even though it will have a surplus this year of around two million tonnes (it imported just over 1 million tonnes in 2007).
Soaring food and fuel prices are driving global inflation. Consumer prices in China hit an annual rate of 8.7% in February, an 11-year high, and reached a 13-month peak in India of 6.8%.
World prices for rice, wheat, soybeans and corn have all increased sharply: rice and wheat prices have doubled in the year – rice is up 30% or more in a week.
Oil prices are up more than 50% in the past year, and more for some derivatives. High petrol prices in the US, now at record levels, are pointing to further upward pressures in the American summer and the so-called driving season when they usually spike in July-August.
The United Nations warned in February that 36 countries, including China, face food emergencies this year, as stockpiles of grains such as rice, wheat, corn and soybeans drop to multi-decade lows around the world and in key supplier nations like the US and Australia.
The World Bank said this week it considered soaring food and fuel prices as greater challenges to East Asian governments than the financial turmoil in the United States and slowing global growth.
Since 2003, oil and non-oil commodity prices have respectively more than tripled and doubled. However, of greater immediate concern for policy makers is the surge in commodity prices over the last 6–9 months––especially for food––that has pushed headline inflation higher and sparked concerns about the adverse effect on the poor.
"In the medium-term the answer clearly lies in greater fuel efficiency, stronger and more productive global agriculture and an open international trading system. But in the short-term the bigger concern is to alleviate the harsh burden this imposes on the poor," the bank said this week.
As we said yesterday, it’s a similar outlook from the Asian Development Bank.
"The major risk lies not so much in softer growth but in rising commodity prices and accelerating inflation,” the Bank said yesterday. "Appropriate macroeconomic responses to accelerating inflation are likely to include tighter monetary policy and some exchange-rate appreciation.”
”Indeed, published inflation rates disguise the true extent of underlying inflation pressures due to the presence of subsidies, administrative price controls and cuts in excise taxes,” it said.
The subsidies used by many governments in the region to cushion the impact of soaring fuel and food prices were posing a threat to budgets and the bank said that cash handouts to the poor may be a better and cheaper option.
”If governments do not rethink these expensive and inefficient subsidy programs, fiscal costs could escalate sharply and require p
