SRI English

India’s spiralling food prices

By Dirk Seel

The recent high volatility in the price of rice, fuelled by fears of severe supply shortages, has further strengthened our belief that the world is currently merely taking a break from the food crisis that started in late 2007. The structural imbalances, exacerbated by increased incomes in emerging markets, rising production of subsidized biofuels, and climate change-induced weather anomalies, have not gone away. Currently, the dramatic consequences of spiralling food prices are particularly visible in India.

Historically, the country has been self sufficient in major crops such as rice, wheat, corn, millet and pulses. However, this obscures the fact that after decades of financial neglect, India’s agricultural sector is stagnating, while its people’s income and appetite are growing. As a result, local prices for lentils, meat, dairy products, vegetables and fruit – in short, prices for all nutritious foods – have sharply increased. The ones who suffer most from this are low-income urban and rural households who no longer can afford their usual consumption patterns. What is more, global prices are affected, too. Most notably, sugar prices continue to trade near 29-year highs, not least due to the negative impact of drought on India’s sugar production. The latter aspect illustrates another alarming signal: although cropland constitutes two-thirds of its land area and half of its labour force is employed in agriculture, India depends more and more on importing goods to balance its own production shortfalls.

The country’s failed agricultural policies have caused hunger, food insecurity and malnutrition. In order to ensure that staple foods are available to the poor and to avoid social unrest, the Indian government will have to declare food security the top priority on its political agenda. Significant investments into the infrastructure of farmland must be undertaken. For example, small-scale irrigation projects are a feasible and sustainable means by which to raise farmers’ productivity while reducing their dependence on monsoon rainfall. Likewise, grain supply is in need of reform. The country’s existing public distribution system is not capable of reaching the specific needs of its various working classes. Last but not least, the country needs to address the detrimental influence of lobbying interests. Only then will there be a chance for food price inflation to stop.

Sugar price hike: a reminder of what looms around the corner

By Dirk Seel

'Breakfast’ commodities currently capture headlines as their prices hit multi-decade highs. Although sugar, coffee, tea and orange juice do not qualify as vital crops, their price hike should still be seen as a warning sign of a potential food crisis repeat.

Let’s recap: driven by drought-impacted poor global harvests, growing consumer demand, rising energy costs and financial speculation, the prices of agricultural commodities dramatically increased in 2007-08, causing food riots and political instability worldwide.

Given that the prices of rice, corn, wheat and soy have fallen amid the recession to today’s relatively depressed levels, can we assume that the threat of another food crisis is history? Clearly not. Instead, the driving forces behind the current production shortfall in breakfast commodities seem to be very familiar.

Take sugar. Following a global production deficit, its price has so far risen to a 28-year high. Government authorities around the world blame poor weather conditions for the severe shortage. But there are fundamental problems too. One is regulation. Sugar is among the most heavily manipulated agricultural commodities. From import levies to production quotas and statutory minimum prices, governments worldwide use interventionist mechanisms to maintain certain price levels. The real price of this policy can be seen in India. Millers, angry about imposed higher minimum prices, made their payments late, which led farmers in 2007-08 to abandon sugar for more profitable crops such as rice. With production down 40%, the country this season switches from being a net exporter of sugar to a net importer.

A lack of arable land dedicated to cane cultivation is not the only problem. Consider the world’s ever-increasing demand for energy. Already today, about 60% of Brazilian sugar cane is used to produce ethanol, a petrol substitute. With a rising oil price, this percentage looks set to increase further. Add developing countries’ growing appetite for sweet food, and you get an idea of the heavily imbalanced supply-demand curve.

As such, the current price hike of breakfast commodities should be seen as a reminder that another food crisis is looming. After all, the fundamental drivers that contributed to last year’s crisis have not disappeared.