'Silent tsunami' sends shockwaves over Asia

An Asian solution is needed to address 'agflation' and food security issues in the region
Mshahidul Islam, Business Times 27 May 08;

AGRICULTURAL commodity prices have reached nosebleed levels in recent months. The impact of the ongoing 'agflation' across the world, especially on the low and fixed income groups, is so severe that the World Food Programme has described the phenomenon as a 'silent tsunami'. The Asian Development Bank (ADB) reckons that one billion people in Asia are seriously affected by surging global food prices.

The rising demand from emerging markets, the sliding US dollar, higher energy prices, excessively loose monetary conditions, commodity speculation, weather woes and development of biofuels, among other things, are the drivers of the current 'agflation'.

Further, adding fuel the fire, some Asian countries, including China, India and Vietnam, have banned or restricted several key cereal exports that have created food shortages in many parts of Asia.

In the last four decades, cereal production more than doubled, largely owing to the Green Revolution in the late 1960s. After maintaining equilibrium in the food grain market for a long period, some important factors have emerged in the global food supply-demand scene in recent years.

Firstly, there has been a sudden shift from a demand-constraint to supply-constraint environment in the agriculture market. Since 2007, higher demand has led to an increase in food prices and supply is not able to cope.

Secondly, the growth of China and other emerging economies has lifted millions of people from poverty and thus the demand for high-protein diets has increased. Consequently, a significant portion of cereals has been diverted towards meat production.

Thirdly, climate change concerns have promoted the development of alternative fuels. The road to biofuel is paved with good intentions. But the result - diversion of food to fuel - is doing more harm than good.

Finally, the world is depleting resources much faster than they are being replaced.

Agriculture portfolio has changed

Asia accounts for 42 per cent of global cereal (91 per cent of global rice) production and 39 per cent of global meat production. China and India are the two largest homes to agriculture. In the current decade, the portfolio of Asia's agriculture, particularly the Chinese, has changed significantly. The share of cereal in total agriculture products has declined both in China and India compared to the period of 1999-2000. Meat, vegetables, fruits and fish production have witnessed a tremendous growth in China.

Agriculture diversification in China, coupled with higher demand for protein meal, has forced the country to slash its food exports steadily. Its share in the global food export market declined from 13 per cent in 1990 to 3 per cent in 2006.

India's agriculture sector grew 1.66 per cent annually from 1996-97 to 2004-05, compared to 3.29 per cent growth from 1980-81 to 1989-90. Consequently, the share of agriculture in total gross domestic product (GDP) has decreased without a commensurate decline in the number of agricultural workers in the country.

As the recent growth in the Indian agriculture sector has been below its population growth, the country has lost its position as a food surplus country. India's share in global food export market has declined from 16 per cent in 1990 to 9 per cent in 2005.

The recent decline in cereal production in China and India has not been fully compensated by a production increase in other parts of Asia, particularly in Vietnam, Indonesia and Thailand.

There is a little reason to hope that food prices will return to their long-term trend soon unless there is a sea-change in the agriculture sector. Even if all factors work for the agriculture sector favourably, in the short run, it is a daunting task to shift the agriculture supply curve rightward.

So, higher food prices are likely to stay for the next few years. After that, a greater involvement of market and state could augment cereal production and other food items.

Agriculture has been neglected both by the state and multilateral organisations for a long period. For example, the World Bank's lending to agriculture totalled US$1.75 billion in 2006, just 7 per cent of total bank lending, compared with more than 30 per cent in 1982.

A meagre 4 per cent of official development assistance goes to agriculture sector in developing countries.

Intensive research and development in the agriculture and more investment in irrigation, fertiliser, seeds, among others, could increase agriculture productivity, even if there is a constraint to expand the sector horizontally.

For instance, it is estimated that 85 per cent of increases needed in global food production must come from agricultural land already under cultivation. Technology and economic forces can spur solutions. But all these developments will take substantial time to have an impact.

But there is a flip side too. The current export ban on key agricultural commodities by many agriculture commodity producing countries is sending the wrong signal to the farmers to judge actual demand.

Further, climate change could emerge as an important barrier to increasing food production both vertically and horizontally, especially in Asia. Water shortage is another huge challenge in this regard.

Moreover, as many Asian economies rapidly industrialise, the wage level is rising both in farms as well as off-farms. As a result, the cost of producing food and other agricultural products is set to increase.

Cheap food is a double-edged sword. High food prices are essentially a regressive tax on the poor, especially those who are net food buyers. At the same time, any attempt to keep food prices low will do more harm than good, as farmers should be properly compensated for their hard work and increasing uncertainties in food production.

There is a need for both short and long-term solutions to address food security in Asia. Food aid can help to avoid hunger and starvation in the short run. But higher cereal and other food production are the ultimate solutions in stabilising prices in the medium to long run.

The chances of world leaders reaching a consensus over key issues concerning agriculture soon are not good. Moreover, neither the United States nor the European Union has shown any sign that they would revise their current biofuel policies that are driving up the food prices across the world. It is energy that affects developed countries' consumer price inflation greatly, not food.

So, an Asian solution is the need of the hour. Thailand's recent attempt to form an Organisation of Petroleum Exporting Countries (Opec) style cartel with some of its South-east Asian neighbours will create further distortion in the grain market. Such an oligopolistic structure is not viable in the long run, as unlike oil, rice is a renewable commodity and it has close substitutes.

Policymakers in this part of the world should instead address issues such as research and development in agriculture, technology sharing, water sharing, market access and potential free flow of agriculture commodities within the region, among others.

Asia needs to act now - any further delay could exacerbate the current food crisis and it would lead to great economic and political uncertainty, if not conflict, in Asia.

The writer is a research associate at the Institute of South Asian Studies, an autonomous research institute within the National University of Singapore