Grains of truth about price rises

Tion Kwa, Straits Times 30 Jan 09;

RECENT declines in the price of food are temporary. Once we recover from the economic crisis and fuel prices rise again, food costs will spiral into higher orbits. The future is ominous; this is no time to stop worrying about food security.

And so on. All courtesy of a report this month by Chatham House, a research institution in Britain. And all of it blindingly obvious.

The report's preamble, however, was meant only as a hook to more substantive sections on what governments should do to forestall another rise in food prices. Too bad that many news reports went no further than the sensational, though strictly pedestrian, preamble. If they had bothered to look into the background, they might have discovered some interesting issues over the shorter term that would affect food prices.

The food item that's most important is rice. In middle-income countries, more expensive rice will strain family budgets during already difficult times; in poorer parts, it can be a disaster. Of course, prices now are nowhere near levels where they caused riots last year. And in the foreseeable future, it's unimaginable that they would reach those highs of around US$1,000 (S$1,500) a tonne. But that doesn't mean prices will stay moderate.

The irony is that while financial-world speculation helped drive prices up last year, and then down again when wholesale deleveraging brought the cost of everything to floor level, the credit crisis once again is about to influence the price of rice. And consumers won't be happy with the outcome.

First, when rice was fetching higher and higher prices, farmers rushed to plant more of the crop. The higher price of fertiliser and pesticide - caused by the then-increasing cost of fuel - would be more than offset by higher returns after harvesting.

But when crop prices began to falter, as did fuel prices, fertiliser and crop protection costs did not fall into line immediately. Small-farm operators in the developing world then reacted by reducing their use of inputs.

Tight credit conditions didn't help either, as farmers now not only had difficulties getting loans, but also had to pay more for credit when they got it. So farmers used even less fertiliser and pesticide. As a consequence of all this, yields are expected to decline.

What often is insufficiently acknowledged is that the ability of farmers to get and pay for agricultural chemicals is crucial to the well-being of a vast number of people for whom food expense is the largest part of their budget - the poor.

For despite all the fuss about organic farming, this is really an indulgence of the rich, the privileged and those excruciatingly irritating foodies. There isn't enough manure in the world to grow enough food for every mouth that needs feeding. Nor for that matter is a tonne of horse, cow, pig or whatever dropping as efficient as a tonne of chemical fertiliser.

And neither can anything nature provide be as effective against weed, insects and infection as chemical crop protection. 'Sustainable agriculture' is great advertising, but it can't come up with enough calories for six billion people.

Agricultural chemicals are the bulwark against hunger, and ultimately against ever-higher prices. Estimates are that without chemicals to protect crops, we would need to increase the size of land under cultivation by 65-200 per cent, depending on the crop, to harvest as much food as we get now. This is particularly important to rice farmers, who are more often small cultivators in the developing world. If they can't afford chemicals, they can't produce enough of the staple on which half the world depends.

Right now, these farmers are being pinched. And if they get squeezed harder, they will plant even less. A combination of reduced yield and less planting would then put fresh pressure on prices.

Of course, prices can be mitigated by ending the export bans that some countries imposed last year. Still, restrictions have greater impact pushing up costs than their removal has on reducing prices. Moreover, there is the likelihood that demand could rise as countries like China, which had been consuming more meat, begin to bulk up on starch again as a result of the economic crisis.

Even without these considerations, supply and demand conditions have long been finely balanced. Changes to either side of the equation could vastly alter the maths. For example, a deal by the Philippines earlier this month for a million tonnes of rice from Vietnam sent prices up about 5 per cent in the latter's market.

The upshot is that farmers deserve a little more attention and assistance than they've been getting, particularly in the past four months. Otherwise, a credit and economic crisis might spark a problem even more elemental. And that, by the way, was basically the point of the Chatham House report.