High food and energy prices are here to stay: Top IMF official warns

Straits Times 10 May 08;

He attributes surge to fundamental market conditions rather than speculators
NEW YORK - A TOP International Monetary Fund (IMF) official has bad news for consumers: High food and energy prices are here to stay and they cannot even lay the blame on speculators.

'Demand for commodities has remained robust because of strong growth in emerging and developing economies, led by China and India,' said IMF's first deputy managing director, Mr John Lipsky, at the Council on Foreign Relations in New York.

The recent spike in energy and commodity prices is reflective of fundamentals and is already causing food shortages in some poor countries, he said.

'With only temporary relief likely, we expect that agricultural prices will remain high for the foreseeable future as supply responses may require both new investment and policy reforms,' he added.

'Emerging and developing economies as a group have accounted for about 95 per cent of the growth in demand for oil since 2003,' Mr Lipsky said.

The IMF attributes 70 per cent of the climb in corn prices and 40 per cent of the rise in soya bean prices to the increased demand for biofuels - energy processed from agricultural products, including corn, soya beans, sugar and wheat.

'Oil prices probably would have been higher in the absence of these biofuels, making overall judgments more complex,' Mr Lipsky said.

The falling United States dollar has also played a role.

The IMF estimated that oil prices would have been US$25 a barrel lower and non-fuel commodity prices 12 per cent lower if the US dollar had held its 2002 peak through the end of last year.

Some countries have implemented export restrictions to ensure that domestic populations have sufficient food, but these are having a negative impact on those that rely on food imports.

'Such restrictions are also reducing incentives to increase production in exporting countries,' Mr Lipsky said.

Preliminary estimates suggest that these restrictions, combined with panic buying, account for about 50 per cent of the recent rise in rice prices, he added.

Mr Lipsky's view that the surge in food and energy prices is being driven by fundamental market conditions rather than speculators was echoed in a Wall Street Journal survey of economists published on Thursday.

Fifty-one per cent of those polled said demand from China and India was the prime factor behind soaring energy prices.

Tight supply was cited second most often by the 53 respondents as the reason for spiralling prices. Twenty per cent blamed higher food prices on supply problems, while 15 per cent said they were behind increasing energy prices.

Only 11 per cent saw a potential bubble driven by speculation.

REUTERS, AGENCE FRANCE-PRESSE