Perilous
Times
Record high food prices stoke fears for World Economy
2:54am EST
By Neil Fullick and Peter Apps
SINGAPORE/LONDON (Reuters) - Record high food prices are moving to
the top of policymaker agendas, driven by fears it could stoke
inflation, protectionism and unrest and dent consumer demand in
key emerging economies.
The United Nations' food agency (FAO) said on Wednesday that food
prices hit a record high last month, above 2008 levels when riots
broke out in countries as far afield as Egypt, Cameroon and Haiti.
In Asia, official data and analyst estimates both pointed to
inflationary pressures. Chilli prices have increased fivefold in
Indonesia in the last year and the country's president called for
households to plant food in their own gardens.
President Susilo Yudhoyono Bambang told a cabinet meeting people
should be "creative" in planting, with Trade Minister Mari
Pangestu leading the way in planting at home.
"I have 200 chilli plants in flowerpots," Pangestu told a briefing
on Thursday. "The agriculture ministry is informing farmers how to
take care of the plant and also encouraging consumers to plant
chilli in their own yards."
Surging food prices have often provoked unrest in urban areas of
poor countries, where food makes up a high proportion of household
purchases.
Analysts say African and Caribbean economies dependent on food
exports could be particularly hard hit, helping stoke unrest and
potentially pushing governments toward imposing export bans and
expropriating foreign-owned farmland.
If Asian and other emerging consumers have to spend more of their
income on food, other purchases will fall -- and that could be bad
news for a global economy that has placed much of its hopes for
recovery on consumption in developing economies.
World Bank President Robert Zoellick urged governments in a
newspaper opinion column to avoid protectionist measures as food
prices rose and called upon the Group of 20 leading economies to
take steps to make sure the poor get adequate food supplies.
French President Nicolas Sarkozy has asked the World Bank to
conduct urgent research on the impact of food prices ahead of G20
meetings later this year, a source familiar with the matter said.
INDIAN INTEREST RATE PRESSURE
Food price protests were seen a factor in the ousting of
Indonesia's long-term autocrat Suharto in 1998, and anger over a
farmland purchased by South Korean firm Daewoo at a time of rising
prices was in part blamed for a 2009 coup in Madagascar.
India's food price inflation rose to a one-year high of more than
18 percent in the year to the end of December, data on Thursday
showed. That, along with rising fuel prices, is the main reason
analysts expect the central bank to raise rates this month.
The Indian government has used a range of measures for years to
ensure stable food prices, but since last year has boosted the
release of national stocks of grains and has pledged to continue
duty-free imports of crude vegetable oils.
In China, several cities have implemented direct controls to limit
food price increases and the central government has vowed to
eliminate speculation in the country's commodities markets.
The cost of food rose 11.7 percent in the year to November, while
non-food items were up just 1.9 percent. But, reflecting concerns
that inflation is creeping beyond food to the wider economy,
consumer goods prices and housing costs showed clear jumps.
Fu Bingtao, an economist with the Agricultural Bank of China in
Beijing, said in a report the price of grains, the country's most
important food, would rise in 2011 by 10 percent, adding to an
11.7 percent rise in 2010.
"Speculative trading and hoarding of specific agricultural
products may continue," he said.
The FAO said sugar and meat were at their highest since its
records began in 1990. Prices were at their highest since 2008
crisis levels for wheat, rice, corn and other cereals.
Benchmark prices solely in Asia for rice suggested a different
picture.
The region's staple food now stands at $535 per metric ton -- less
than half its 2008 levels of more than $1,000 a metric ton that
prompted several governments at the time to impose curbs on
exports to protect their domestic markets.
ASIAN POLICY DILEMMA
But most experts expect upwards price pressure to continue,
particularly if countries slap on export bans and further squeeze
supply, and short-term investors again buy into agricultural
commodities as they did in 2008.
Last year, wheat futures prices rose 47 percent, buoyed by a
series of weather events including drought in Russia and its Black
Sea neighbors. U.S. corn rose more than 50 percent and U.S.
soybeans jumped 34 percent.
Alongside bad weather in Australia, Europe, North America and
Argentina, rising Asian demand is at the heart of the spike.
China, for example, is expected to buy 60 percent of globally
traded soybeans in 2011/12, double its purchase of four years ago.
Dry, hot weather has hit soy and corn crops in Argentina, a
leading exporter, fueling a rally in U.S. grains futures in recent
weeks on supply fears. After an uneasy start, climate conditions
have improved in neighboring Brazil, the world's No. 2 soy
provider.
Higher interest rates do little to ease pressure on food prices.
Demand is inelastic because people have to eat, but current price
pressures are largely supply-led, so tighter monetary policy would
not directly help.
The danger, however, is that food inflation spreads to the wider
economy.
"I think there's an urgent need to be more pre-emptive in
tightening monetary policy to prevent some of these inflation
pressures from erupting," said Frederic Neumann, regional
economist at HSBC in Hong Kong.
Some central banks had taken some action but more needed to be
done.
South Korea, like other Asian countries that run trade and current
account surpluses, could give more room to its currency to rise to
offset rising import costs on food.
But higher interest rates or the likelihood of a rising currency
would just encourage a flood of portfolio capital from investors
spurning sluggish growth in developed economies. And rising
currency could hurt exports, the major pillar of many economies.
(Reporting by Reuters bureaux; Writing by Neil Fullick; Editing by
Vicki Allen)