It takes courage to fight food inflation

INFLATION is hitting food prices hard. Many consumers noticed that their grocery bill was slowly increasing; and employees paying more for their meals.

The consumer price index for “out-of-home food” and “in-home food” increased, ranging from vegetables, cereals and meat to other animal proteins.

Rising food inflation has taken away the disposable income of low- and middle-income households for non-discretionary spending.

Put simply, the following factors explain the spike in consumer food inflation; and have fueled the global food crisis, particularly in emerging economies and low-income countries that have experienced foreign exchange shortages and are more vulnerable to food price shocks.

> Food price inflation rose years before the pandemic due to both demand and supply. Demand was sustained by better economic growth, rising purchasing power and demographic pressure.

Food production has been limited by uneven agricultural production, climate change (poor harvest), rising production costs, disease, quality and variable yields.

> The prolonged crisis of the Covid-19 pandemic has imposed sporadic containment and movement restriction measures as well as supply disruptions which have caused a spike in consumer food prices.

After the economy reopened, the release of pent-up demand and the recovery in demand exceeded the capacity of supply chains, pushing prices higher.

Soaring costs

> Business costs and raw materials used in food production and processing have also increased, as evidenced by global food producer prices in 2020-2021, which have soared and will impact consumer prices. consumption with a lag of at least six months or less if producers could not absorb higher costs.

From the end of 2019 to the end of April 2022, the World Bank’s food price index increased by 54%; chicken meat up 83.4%; corn increased by 108.5% and soybeans by 88.1%.

> The pandemic has led to increased shipping and transportation costs as well as delivery services. Higher shipping costs have hit the inflationary cost of imported food, apart from the cost of obtaining and delivering goods to customers.

> The war in Ukraine has caused further disruptions in supply and this has pushed up the prices of raw materials such as corn and wheat; energy, industrial materials, fertilizers and animal feed.

Rising wheat prices will translate into higher food prices, while more expensive feed and fertilizers have increased the cost of food production.

> Since most food is traded in US dollars, countries with weaker currencies have seen their food import bills increase.

Intervention

Rising prices have prompted some countries to implement short-term interventions and administrative measures such as granting subsidies, setting price controls and a price cap, relaxing approved authorizations , reduction of import tariffs and export restrictions to maintain or improve domestic supply and curb food price inflation. .

Unfortunately, adverse global developments have larger forces influencing agricultural market prices, making stopgap measures to tackle food inflation limited success.

The integration of Malaysia’s domestic market into the world market means that our domestic producers and consumers will have to deal with the global influences of food supply and demand and the resulting impact on food prices. food.

Malaysia’s reliance on imports of agricultural products to meet domestic demand fell from 7.3% to 13.7% over 28 years (1987-2015).

In 2020, eight items recorded an import dependency rate above 50% – cuttlefish (52.2%), fresh milk (53.5%), round cabbage (63.6%), chilli (72.4% ), beef (78.1%), ginger (81.5%), mango (86.2%) and mutton (90.4%).

In 2020, the self-sufficiency ratio was 63.0 for rice; 65.0 for fresh milk, 75.6 for sweet potato, 88.2 for mackerel, 80.7 for sardines, 94.9 for pork, 98.1 for poultry and 115.1 for eggs .

Food security, affordability and stability remain a national priority. There are no simple solutions but complex tasks to fight against food inflation and food security. Government and the private sector must work together to ensure a sustainable food supply.

Some of the short-term measures (subsidies and price cap controls on food products for consumers and producers, including fertilisers, and a ban on the export of chicken) come with opportunity costs and poor resource assessment.

> Government subsidies and the ceiling price to make food affordable will further increase the budget deficit and, if it becomes unsustainable, will pose significant political risks for the country’s creditworthiness.

Therefore, food subsidies should be targeted to vulnerable households through food stamps/vouchers or cash assistance. Savings from targeted subsidies can be reallocated to the implementation of food production programs.

Worst shortage

> Price caps and controls cannot address scarcity. Setting prices at artificially low levels will only reinforce existing demand patterns, making shortages worse for many consumers down the line.

> For producers, if price subsidy and caps are set at levels below cost to producers, this will result in loss of economies of scale for producers, and reduced supply for consumers who would be prepared to pay more than the ceiling price.

In the current supply situation, which is severely constrained by sharp increases in commodity prices due to the disruption of international supply chains, it is unclear how price controls would incentivize suppliers and producers to increase production.

> Prices are the signals on which the market economy relies for supply and demand responses. The influences of global market development have resulted in supply pressures and increased costs. Limiting price increases for a longer period will not help consumers or alleviate shortages.

To ensure the sustainability of the agricultural sector and food security, we propose the following action plans in the short and medium term:

> Stop intervention in the market. Government regulatory interventions, while well-intentioned, are often counterproductive. They distort the functioning of the market and the allocation of resources and discourage agricultural production.

The main objective of the government is to create competition (not protection) in each segment of the food supply chains (producer, supply, storage and food distribution system) in order to reduce costs, curb research cash flow and plug leaks in the food management system. .

Smart farming

> Encourage technology diffusion and smart agriculture. Government and the private sector must accelerate the uptake of technologies in food and agriculture regarding environmental sustainability, climate change, crop yields and mechanization.

This will reduce reliance on expensive inputs, labor, fertilizers and pesticides and boost food production.

> Increase arable land for agriculture. Only 5.5% of the total planted area (nearly 450,000 ha) was allocated to fruits, vegetables, herbs, species and other crops.

On average, less than 200,000 ha occupied by fruit crops and less than 100,000 ha for market gardening and cash crops in 2016-2020. This compares to 5.9 million hectares for oil palms and 1.1 million for rubber trees.

> Strengthen all links in the food supply chain, from producers to consumers (growers/harvesters, agri-food industry and the wholesale and retail food distribution sector).

Establishing a more resilient food supply chain and management system with more collection, processing, transportation and storage capacity in different geographies of the country will provide market options more and better for consumers and producers.

> Provide real-time market information. Invest in a market information system to provide reliable and timely data on food production, demand and supply, trade and prices.

This will send the right price signals from producers to consumers; to strengthen the supply chain, stabilize prices, reduce business risks and increase response time.

Lee Heng Guie is executive director of the Center for Socio-Economic Research. The opinions expressed here are those of the author.

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