Saturday July 28, 2012
The spectre of food inflation
By Cecilia Kok
The writing is on the wall: Food inflation will likely rear its ugly head again soon, and countries in Asia, including Malaysia, will also be feeling the heat.
According to analysts, global food prices are set to soar towards the end of this year and into next year because the prolonged drought in mid-western US has severely affected production of key agricultural commodities such as corn, wheat and soybean, and caused the prices of these grains to rise.
The United States is a major exporter of these key grains, upon which many countries around the world have become dependent. In the United States alone, the Government has predicted that food prices in the country would rise by about 3% to 4% in 2013 as a result of higher key agricultural commodity prices.
Meanwhile, the United States is not the only one affected by the hot dry spell. Other grain-exporting regions such as the Black Sea in Europe are also facing lower crop yields because they have also been affected by poor weather conditions.
Many economists are, therefore, raising the red flag on food inflation.
Analysts at global financial services provider, Barclays plc, for one, argue in their report that the risk of another wave of food inflation is rising fast, as grain prices over the week traded near their historical highs. They note that if such risk materialised into reality, it would be the third round of food inflation to affect the world since 2007.
Prices of corn, wheat and soy reached their highs on July 20, with the benchmark Chicago Board of Trade (CBOT) December corn closing at around US$7.95 a bushel, CBOT September wheat at around US$9.43 a bushel and CBOT November soybeans at around US$16.86 a bushel. Prices of these key grains have since eased but they are still significantly higher compared with previous months. On July 26, CBOT December corn closed at around US$7.76 a bushel, CBOT September wheat at around US$8.84 a bushel, and CBOT November soybeans at around US$15.67 a bushel.
According to investment bank Goldman Sachs' forecast, corn prices could rise to a record of US$9 a bushel in the three months, while that for soybeans could hit US$20 a bushel, and wheat at US$9.80 a bushel. Natural causes aside, speculators who are commodity bulls could also be exacerbating the risk of global food price inflation, as these speculators position themselves to take advantage of the current market situation and further drive up commodity prices.
Preparing for the storm
In Asia, those immediately feeling the impact of the recent global grain price increases are tofu and tempeh manufacturers in Indonesia. According to wire reports, makers of these soybean-based food products went on strike over the week and halted production as the soaring grain prices made it unfeasible to manufacture profitably without significantly raising prices to consumers.
Bloomberg reported that the Indonesian government has since responded by proposing to suspend a 5% duty on soybean imports until the end of this year, and at the same time, hold talks with importers to limit margins to help manufacturers in the country, which imports 70% of its soybean needs, cope with the price increases.
Bloomberg also reported that the South Korean government was also planning measures to cope with rising grain prices by stockpiling soybeans, corn and wheat.
According to Morgan Stanley's recent report on inflationary pressures faced by Asia-Pacific economies, South Korea and China are likely to be the most exposed to global food price movements, while Malaysia, Indonesia and Thailand are “moderately exposed”.
It points out that “within Asean, Malaysia has relatively higher overall exposure to global food price movements, as corn and wheat consumption per capita and import requirements are comparatively higher than other member countries of the region”.
At present, inflationary pressures in Asia are still considered pretty mild, as headline inflation as measured by consumer price indices (CPIs) in most countries in the region, except for Singapore and India, have been trending down over the past several months.
But according to CIMB Investment Bank chief economist Lee Heng Guie, that tame outlook may not last long.
“We expect inflation in most countries in Asia to show an upward bias in the second half of this year and next year,” Lee argues, pointing to ebbing favourable base effects, festive demand and anticipated bad weather-induced risks such as higher commodity prices and rising food costs as the main contributing factors.
Nevertheless, Lee says, the headline inflation outlook for the region is still benign compared with 2007-2008 levels.
His concern, though, remains that the possible rise in food costs in the coming months due to drought in major producing countries could have a negative impact on Asian economies that are already battling with slowing growth momentum by biting into consumer spending.
Already, inflationary pressures seem to have increased as more businesses have reported rising input costs.
According to the Global Economic Conditions Survey of 2,700 professional accountants undertaken by the Association of Chartered Certified Accountants and the Institute of Management Accountants, 50% of all respondents have reported increased input costs such as that for labour, fuel and raw materials, for the second quarter of this year, compared with 48% in the preceding quarter.
The same survey on Malaysia also finds rising inflation as a consistent pattern, with 72% of respondents recognising the existence of such a challenge, as supply chains remain under pressure.
There are reasons to be concerned, as most signs seem to point to further increase in the cost of living for Malaysians. While the existence of a subsidy scheme and price control measures in the country could somewhat minimise the price pressure felt by consumers, policymakers have to be even more sensitive in coming up with long-term measures that can ensure that the living standards of the people would not be eroded, while at the same time, ensuring that the country can achieve sustainable economic growth.
The recently unveiled Government Transformation Programme (GTP) 2.0 included tackling the rising cost of living in Malaysia as one of the seven National Key Result Areas (NKRAs), as the Government reckons that average household expenditure has been on the rise in recent years because of the rising costs for housing, utilities, fuel and food, among others. It's necessary, therefore, to have measures to tackle the problem, and this particular NKRA has been placed under the responsibility of Deputy Prime Minister Tan Sri Muhyiddin Yassin.
It's been noted by some analysts that the rising cost of living, especially that for basic necessities such as food and fuel, had been one of the factors giving rise to social unrests in some parts of the world like the Middle East and Africa.
In Malaysia, the Government has resorted to several measures to mitigate the effects of the rising cost of living in the country. Direct cash handouts such as the RM500 under the 1Malaysia People's Aid (BR1M) for each household that earns less than RM1,500 is a case in point. But it's widely recognised by experts that direct handouts such as these could only give temporary relief and do not really have long-term benefits.
According to Prime Minister Datuk Seri Najib Tun Razak, the upcoming Budget 2013 that would be tabled on Sept 28 this year would focus on ensuring quality and balanced economic growth for the country and achieving a higher quality of life for the people. As it stands, many are already expecting Budget 2013 to be another populist budget with many goodies in store in the run up to the general elections that must be held by April next year.