Analysts say years of underinvestment in agriculture is at the root of crisis
Conrad Tan, Business Times 2 May 08;
(SINGAPORE) Soaring food prices have become an urgent problem for governments and central banks in many countries but imposing price controls or export bans is not the right solution, say economists and analysts.
Instead, there needs to be an immediate investment in boosting the supply of arable land and farm yields in developing countries, they say.
Paul Schulte, chief regional equity strategist for Asia ex-Japan at Lehman Brothers said in an interview last week that higher food prices are likely to persist 'until we get a very powerful supply response globally'.
'What we need is an immediate, crash-investment programme in agriculture.'
The recent spike in prices is not simply the result of a sudden increase in demand for food commodities or temporary supply shortages caused by floods or drought, but a whole range of factors - some of which are here to stay.
Among them are 'continued subsidies to agricultural producers in the US, Europe and Japan, which have made efficient and cheaper production elsewhere unprofitable'; falling inventories due to a 'just-in-time' approach in managing food stocks; and higher fuel costs, which have raised the cost of producing and transporting food, said Glenn Maguire, Societe Generale's Asia chief economist, in a recent report.
Changing diets and rising disposable income among the world's developing countries such as China are also placing greater demands on basic food crops such as grains, which are used not just as food for people but as animal feed in raising livestock for milk and meat.
And the use of foodstuffs such as corn and palm oil to produce ethanol and biodiesel has also strained food supplies. The growing popularity of commodities as financial investments or speculative instruments has also fed the recent price increases.
But at the heart of the looming food crisis is neglect and the relative lack of new investment in agriculture over the past 2-3 decades, say economists.
'The problem is low farm productivity and the absence of investment', said Gerard Lyons, chief economist and head of global research at Standard Chartered Bank, in a report on April 17.
For optimists, the solution seems relatively simple: boost supply and investment in agricultural land and infrastructure. The pessimists may agree, but they see many obstacles to this: protectionist measures such as price controls, subsidies and bans on food exports that threaten to limit the world supply of food further.
If anything, such measures have made things worse. 'Misguided policy actions have exacerbated the recent rise. Even in countries with excess production, such as Vietnam, governments have become alarmed at the overall rate of food inflation,' said HSBC's Asian economics and strategy team in a report on April 15.
In fact, 'the most worrying aspect of the food inflation crisis is the breadth and depth of 'starve thy neighbour' policies introduced across emerging markets, but particularly so in Asia', said Mr Maguire.
Such subsidies and restrictions create artificially low prices that discourage farmers and suppliers from producing more, while encouraging consumers to keep buying certain types of food at an unsustainable rate, say economists. This perpetuates the imbalance between supply and demand of food and may actually reduce world food supplies in the longer term, forcing prices higher, they say.
'It's natural for governments to panic and put price controls on, but it's not a good idea because it almost guarantees higher inflation later on,' said Mr Schulte.
Instead, 'liberalisation of imports is the most promising policy option', said Mr Maguire. 'It immediately lowers distortions and provides lower costs for consumers. In the short run, however, an increase in competitive pressures may penalise domestic producers, so governments have been highly reluctant to use it.'
