Food Costs Push Up Asia Inflation

The Wall Street Journal reports that food costs push up asia inflation.

(emphasis mine) [my comment]

FEBRUARY 10, 2010, 3:47 P.M. ET
Food Costs Push Up Asia Inflation

HONG KONG—The rising cost of food is driving Asian inflation rates higher, increasing the stakes for a successful harvest this year in a region still bruised by the 2008 food crisis.

Prices for rice, sugar, milk, and in some places, fruits, vegetables and cooking oils, have risen in recent months, putting pressure on overall consumer prices. The region's most important economies, including India, China, Thailand and Indonesia, are all grappling with how to handle rising prices without snuffing out their economic rebounds. Food-price increases are leading to higher inflation rates across much of Asia, though energy costs and tighter labor markets are also putting pressure on prices.

Asia was hit hard in 2007 and 2008 when shortages of foodstuffs, especially rice, led to hoarding and riots. Armed guards were dispatched to protect rice warehouses in Thailand and the Philippines; Indonesia deployed border agents to prevent smuggling.

Some analysts warn that
the structural issues that caused the 2008 food emergency—too much demand and not enough food—are still in place.

For now, prices aren't near levels that would create major dislocations. For example, in Bangkok, rice is trading at $592 a ton, according to the Thai Rice Exporters Association, after rising 10% from September through December to $618 a ton.

But prices are climbing and businesses hit by rising food costs in 2008 are again feeling the heat. Macquarie Group analysts recently downgraded Hong Kong fast-food company Café de Coral, citing higher food prices. Many of Café de Coral's dishes are a combination of meat and rice.

A company spokesman said in an email that food prices are a challenge.

"We are not able to raise prices across the board and we have to absorb a substantial portion of the increases," the Café de Coral spokesman said. "We will need to change the menus periodically to accommodate some of these increases."

Associated Press - People in New Delhi, India, stand in line earlier this month to receive free food. Prices for rice, sugar, milk, and in some places, fruits, vegetables and cooking oils, have risen in recent months.

India is particularly vulnerable, after suffering a dry monsoon in 2009 that led to double-digit food inflation as rice and sugar crops failed.

In the Philippines, too much rain ruined crops last year and forced the state to purchase almost two million tons of rice from abroad.
As it ramped up purchases, prices at government-run auctions went from $480 a metric ton in early November to as high as $689 in mid-December, according to the National Food Authority.

Food prices in Asia make up a greater portion of consumer spending than in other parts of the world. In developing Asia, food makes up 34.5% of consumer prices, according to HSBC economists, compared with about 15% in the U.S.

In some countries such as India and Vietnam, the cost of rice alone has a bigger impact on inflation levels than energy costs. A 20% increase in rice prices regionally adds 1.5 percentage points to inflation. A 50% jump adds 3.7 percentage points, according to HSBC.

Over the short term, policy makers are counting
on [praying for] a good growing season this year to swell supply and keep prices stable. Early signs are promising.

"The March-April crop is more or less in the bag,"
[Dry conditions in western India are tainting the outlook, spoiling chances for a bumper wheat harvest (See below)] says Chetan Ahya, economist at Morgan Stanley in Singapore. He predicts inflation across the region will continue to accelerate for a few more months before leveling [There will be no leveling off if the US runs out of soybeans, which will begin to happen around April (give or take a month)]. The real test will c ome with the larger autumn harvest, he says.

In Indonesia, food prices in January rose 3.72% from a year earlier, a faster pace of inflation than the 2.78% rate recorded in December. Indonesia's central bank kept its benchmark interest rate steady last week, saying the recent jump in the level of inflation was "temporary," driven by prices of food, especially rice, and that the coming rice harvest will increase supply.

Some forecasters say the El Nińo phenomenon behind
last year's extreme weather could fade by the summer.

India has held off from importing rice—a move that would have sent prices on the international market even higher
[the US probably begged them not to do it]. A weak global economy also limits demand for biofuels, taking pressure off crops such as corn, which is used to make ethanol.

Asian governments, including India, have stockpiled reserves of rice and wheat.
[They haven't. Do you think India would be allowing 20 percent food inflation if they had any stockpiles left?]

A crisis, however, can't be ruled out. Another dry monsoon season would pose serious problems for India.

World-wide demand for cereals remains precariously close to overall production levels, according to the United Nation's Food and Agriculture Organization.

"My fundamental belief is that we are in short supply," says Jeremy Zwinger, chief executive of the Rice Trader Inc., an industry research and news service.

An unexpected bad harvest could cause governments to react by hoarding food and blocking exports, sending prices skyrocketing.

Martell Crop Projections reports about Indian wheat production.

Wheat Highlights

The India government is hoping for a bountiful wheat harvest to offset a serious shortage in summer rice. The summer monsoon was very poor causing the lowest rainfall in 37 years. Rice growing areas were especially hard hit by drought leading to a 15% cut in the rice output on the year, only 81.65 million metric tons. India hopes wheat production will reach 82.4 million metric tons, boosting food grain supplies. Last season, the wheat harvest was 78.57 mmt. Wheat harvesting will begin in central India in March, advancing northward in April.

Dry conditions in western India are tainting the outlook, spoiling chances for a bumper wheat harvest.

[ the map below shows where India wheat is grown

Northwest India received beneficial rainfall in scattered strong thunderstorms earlier this week, but hail and damaging winds also damaged the crop. Heavy soaking rains boosted wheat development in Madhya Pradesh and Uttar Pradesh. Rajasthan also received heavy rain, but too late to make much of a positive difference.

The vegetation index in Northwest India has been persistently bad, reflecting stress throughout December and January. Sub-par wheat yields seem likely in the normally productive irrigated wheat states, Punjab and Haryana. The Pakistan wheat potential looks terrible in the northern growing areas bordering India. January was particularly dry.

The best wheat potential is in Madhya Pradesh.

In summary a 82.4 million metric ton India wheat harvest seems overly optimistic, given weather stresses in the western wheat states.

The Economic Times reports that rising milk prices may fuel india inflation.

Rising milk prices may fuel India inflation: Citi
9 Feb 2010, 1224 hrs IST, REUTERS

MUMBAI: Rising prices of milk and dairy products are a potential pressure point for food inflation, Citigroup said in a recent note.

Government data on wholesale price inflation pegs the annual jump in milk and dairy at 13.4 per cent in December from 6-7 per cent in the previous year and the 7 per cent increase in milk prices last week could aggravate the situation further, it added.

"Among the worst affected dairy products is butter, where prices have doubled... all this is resulting in a knock-on impact across the food chain," Economists Rohini Malkani and Anushka Shah wrote in a note on Monday.

Accelerating food inflation, largely because of a poor harvest and rising global commodity prices, has become a major concern for the government, as about 42 per cent of the Indian population lives o n less than $1.25 a day.

Daijiworld reports about The Great Indian Price Rise.

The Great Indian Price Rise
By Ayush Prasad

Feb 10: Mrs. Kapoor a home-maker in Delhi is complaining that her household budget for the month has gone up several times in the last one year. She says that she cannot afford to buy food items like Sugar and Pulses. The Kapoor family has been forced to do away with Dal, which adored their table for every lunch and dinner. Mr. Kapoor a government servant is blaming the government for this crisis. He smells corruption and black marketing, though he cannot explain where the hoarders are sending the food items given that India is the only consumer of pulses like Dal and without exponential boom in new cold-storages, why would a black marketer waste the food items rather than sell it. The 24X7 News Channels and the news papers are filled with stories of the price rise and how it has affected the lives of millions of people in the country. [can you feel the political pressure?]

The Government remains defiant and not doing anything, something rare in a parliamentary form of government, as its survival is dependent upon the happiness of the electorate. The impression being created is that the entire nation is unhappy. Dr. Tiwari, Chief Medical Officer at a Private Hospital has also mixed feelings as there is a sudden drop in patients. Most of the patients who visit his hospital are Urban Middle Class, with the most common ailment of heart diseases. This is triggered by obesity and high sugar levels, as Indians love having tea multiple times during the day. With the rise in sugar prices, people are forced to have sugarless tea, reducing the number of patients who visit Dr. Tiwari's hospital. [a twisted silver lining to food crisis]

Sharad Pawar, the Union Minister for Agriculture is a troubled man. He is being blamed for the food prices from all parties, the opposition and the ruling. BJP the main opposition party plans to have a three phase protest over it, culminating in the circumcising the Parliament in Delhi in protest to the rising food prices. This is a major issue for BJP, which wins most of its seats in urban areas, but since reorganization of seats, there are more seats in urban than in rural areas, no party can afford to ignore the issue. The Marxist (CPI, CPI-M) and the Socialists (Samajwadi Party, sans "Capitalist Garbage" Amar Singh") all have taken on the Government on this issue. During a recent conference of Chief Ministers, all the opposition Chief Ministers was gunning for the Union Government. The Central Government said that Agriculture was a State Subject (issues of Governance has been divided into Union and State Subjects).Committees were formed and the meeting ended with strong sound bites for the media.

The Khaleej Times reports about public anger over spiralling prices in India.

A Sweet Surrender in India
9 February 2010

India's Minister for Agriculture Sharad Pawar has an ingenious remedy for millions across the country who are firmly holding their purse strings because of rising food inflation.

"Not eating sugar won't kill you," argues Pawar's Nationalist Congress Party that is part of the ruling coalition in Delhi. As a key voice in the multiparty government, the NCP audaciously reminds people that consuming too much sugar can cause diabetes. Sugar is one of the essential commodities that have seen their prices more than doubled. And it looks like the consumers, who voted the UPA coalition back to power eight months ago with great expectations — are in for more rude shocks ahead. The minister has linked the price rise to the increased purchasing power of people belonging to different economic strata, saying this has led to a shortage of essential commodities thereby pushing up prices.

While this hypothesis may be unjustifiably fallacious in Indian context, where millions below poverty line still earn less than $1 a day, it is appalling that the minister should offer such flimsy explanations for unprecedented food inflation. Essential commodities have become prohibitively expensive for more than 45 per cent, extremely poor Indians. Edible oil, wheat, rice, milk, vegetables etc. have seen a price rise of almost 35-50 per cent, and even the fast expanding middle class is acutely affected by the growing food inflation.

Opposition-ruled states are holding the federal government, particularly Minister Pawar, responsible for spiralling prices. Even many in the ruling Congress that heads the coalition in Delhi are baying for his blood. Public anger is palpable.

Rediff Business reports that India's food crisis was foretold.

India's food crisis was foretold, but. . .
February 09, 2010 15:19 IST

The food crisis was obvious in July but the government had unrealistic hopes of a good rabi, says Shreekant Sambrani.

Pity poor Mr Pawar. The agriculture minister is grilled so badly these days that he often loses the thread of what he has said only recently. Two weeks ago, he said he was no astrologer and could not predict when prices would start coming down.

Since then, he has gone on to do just that, with sugar, pulses and so on. He said he would resign if weather could be guaranteed. What if it turns out that he was forewarned, and accurately so?

He is not alone. Policy-makers, from the PM to the UP chief minister, have engaged in the time-honoured game of finger pointing. The usual suspects are all there: Recalcitrant states, greedy hoarders, exploiting capitalists and, of course, God, for having visited upon us a terrible drought.

Our leaders, lost in the labyrinth of passing the blame, fail to understand that < i>the present crisis was waiting to happen, both in the short run and the medium term, and nobody saw it coming (if one wants to be charitable), or (more realistically) chose to make believe that it would go away even as Cassandras including this writer were crying themselves hoarse.

First, the current year: I wrote four columns from July 5, 2009 to August 29, 2009, pointing to the seriousness of the situation and the increasing likelihood of its worsening, causing runaway inflation.

This was met first with denial and then with talking down the drought. The PM refrained from uttering the dreaded D word, calling it instead a monsoon deficit.

The finance minister chided his interlocutors by saying that if they continued to chant drought, the situation would not improve. Pawar said in the last week of July, when the kharif situation was pretty much lost, that things were "difficult", but improving, as the India Meteorological Department (IMD) had forecast 101 per cent of the normal rainfall for August.

Well, IMD was true to its calling of not getting things right and we ended up with a 23 per cent deficit monsoon. Our last bad drought, 2002-03, had a 21 per cent deficit, and the worst since Independence, 1972-73 had a 25 per cent shortfall.

No question then that we had a terrible calamity facing us, but we continued to believe rabi would be better, and that the buffer stock of 30 million tonnes (mt) would ward off shortages and inflation. The rabi optimism still persists, with even RBI saying that there would be no decline in agricultural production.

The facts are otherwise. Winter rains have played truant, most notably in the rabi bowl of the north-west, as they did during the monsoon. The rabi cereal sowing is down by 0.6 per cent (wheat area unchanged) as of mid-January.

This is on top of at least a 15 per cent drop in the kharif rice harvest, amounting to about 12 mt. A 230 mt of foodgrain production in 2009-10, the same as the last two years, would require other grains, mainly wheat, to make up the shortfall.

That would be a phenomenal 15 per cent increase in the winter crop, mostly wheat, which is a very tall order any time, and especially so this year. By comparison, food production dropped from 105 mt to 97 mt (8 per cent) in 1972-73 and from 212 mt to 174 mt (18 per cent) in 2002-03.

To expect that we would escape this fate in a drought of comparable magnitude and spread is an act of unwarranted optimism.

The story has a further twist: The present price rise is only partly due to the drought. The food inflation after the last drought from 2002 to 2004 averaged only about 4 per cent a year, based on the consumer price index for urban workers.

It is now hovering around 20 per cent, coming on top of a 10 per cent spike in 2008-09 and a similar one the year before. In fact, since the new series started in January 2006, the food index has gone up to 180.

Monetary tightening in 2007 and 2008 then helped hold the price line a bit, but never pushed it back. Given the global recession last year, that option was barely available.

The Indian per capita income went up by 56 per cent between 2001 and 2009,
from Rs 16,000 to Rs 25,000, while the population went up by 15 per cent, from 1 billion to 1.15 billion.

Considering that most Indians have still not had enough to eat, these changes would obviously push up the demand for essentials.

But output has barely kept pace with the population growth or declined: Grain production increased by 15 per cent before falling off this year, sugarcane went up 17 per cent up to 2007, but then dropped to the 2001 level, pulses have stagnated between 13 and 14 mt, tea around 0.8 to 1 mt, and coffee at 0.3 mt. These are all high on the inflation culprit list.

We have been squeezed between rising desires for consumption but constant or declining per capita availabilities for most articles figuring in the food price index for the whole of the last decade.

India's galloping aspirational growth has been yoked to a pair of limping bullocks in case of the most essential commodities. This inflation, which the aam aadmi -- for whom every politician cries a bucket of tears -- has been experiencing for now close to two-and-a-half years, has been a disaster in the making for a while.

My reaction: The 2010 food crisis continues to develop. It will get much, much worse and India will continue to lead the way.

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