Bloomberg recently reported that the pandemic had sparked a labour shortfall for many parts of the economy. But the impact is particularly stark in food and agriculture, which are among the world’s least-automated industries.
Food prices in July were up 31% from the same month last year, according to an index compiled by the United Nations’ Food and Agriculture Organisation.
The Boston Consulting Group (BCG) said that food security was a sensitive issue in many parts of the world and thin margins mean rising costs generally are passed through to buyers.
Bank Islam Malaysia Bhd chief economist Mohd Afzanizam Abdul Rashid (pic below) said food prices would continue to increase. This is especially true when most of the country’s foodstuffs are imported from abroad.
In 2020, the total import for foodstuff stood at RM21.8bil from RM17.4bil in the preceding year.
Therefore, he said, the weakening of the ringgit could easily seep in resulting in a higher import bill for food-related products.
“The way we see it, the agriculture sector has been very imbalanced as the focus has been towards the plantation sector.
“It was reported that 5.8 million ha of land in the country are devoted towards palm oil while for food crops, it has only one million ha of land cultivated for this purpose.
“And the trade deficit in foodstuff had persistently widened from RM1.1bil in 1990 to RM21.8bil in 2020,” he told StarBiz.He pointed out that foodstuff such as cereals and cereal preparations; vegetables; meat and meat preparations; sugar, sugary preparations and honey and dairy products have been the main drivers for wider trade deficits in foodstuff.
“So clearly, there is a serious gap in the agricultural sector which requires serious attention,” Afzanizam added.
As for inflation, he expects it to remain above 2% this year and next.
AmBank Group chief economist Anthony Dass (pic below) said he expects food inflation in the country to be on an uptrend due to higher operating costs.
According to him, food and beverage (F&B) manufacturers, confectioneries and others would face higher raw material costs.
As their intermediate input costs are higher, these may ultimately be passed on to the final consumers.
Food and non-alcoholic beverages make up close to a third of the consumer price index (CPI) basket. This index peaked at 1.9% year-on-year (y-o-y) in April and eased to 1.3% y-o-y in July – bringing the average first seven months to 1.5% y-o-y due to higher prices of selected food items.
“We expect the average price of food and non-alcoholic beverages for 2021 to be around 1.6% to 1.9% from 1.3% in 2020.
“Despite projecting upward price pressures, what is comforting is that it is still low compared to the average annual of 3% over the last 10 years and 2.5% over the last five years,” he said.
Malaysia’s inflation rate rose by 2% in August from a year ago.
The CPI rose to 122.5 from 120.1 a year ago, making it the seventh consecutive month of increase since February 2021 due to the base effect last year.
For 2021, Dass expects the headline inflation to average between 2.6% and 2.8% partly due to a low base effect.
Upwards pressure, he said, would come from the cost side due to supply disruptions due to the movement control order (MCO), as well as from from commodity and food prices.
Malaysian Rating Corp Bhd (MARC) chief economist Firdaos Rosli (pic below) said the food and agriculture sector is still affected by low productivity and efficiency due to supply disruptions brought upon by the previous enacted full lockdown. Besides this, the sector faced rising production costs as producers would not be able to restore their foreign labour supply quickly enough.
Other factors contributing to this are adverse weather conditions and soaring raw material prices like crude oil.
Depreciation of the ringgit would also lead to high food prices as Malaysia is still heavily reliant on meat and dairy imports.
Firdaos said CPI on food and non-alcoholic beverages has been trending around 1.2%-1.9% y-o-y on a monthly basis since the start of the pandemic.
He noted that it has been trending downwards since April 2021. But if one were to take a more granular look into, say, fresh seafood, the CPI recorded a much higher increase in prices to as high as 4.87% in February 2021. Milk powder and other dairy products have been consistently high since January this year, he said.
As the agriculture and food sector is mainly dominated by foreign labour, Firdaos said a higher technological adoption should be the answer to increasing productivity. But this requires higher capital expenditure and technological know-how.
“So my concern is where the labour supply in the said industry would face a skills mismatch, this in turn may lead to structural employment if they are not adequately trained,” he said.
According to him, automation in food production also would aid the country’s food exports in meeting ESG requirements, avoiding excess supply, meeting hygiene and quality standards as well as dealing with a high staff turnover environment.
Towards this end, financial aid and tax incentives could be given to food producers to encourage them to adopt technological advancements. Upskilling labour would also be beneficial, he said.
MARC expects headline inflation to ease to below 3% in the third quarter of the year as the low base effect dissipates.
Going forward, Dass said a relook at the country’s food strategy was needed.
“Malaysia continues to depend on food imports. In 2020, it stood at a record-setting RM55.5bil.
“Such a trend is clearly unsustainable. As a net importer, it is vital for Malaysia to focus on food security. And the seriousness of this topic regained strong attention following the Covid-19 pandemic,” he added.
Bank Islam’s Afzanizam opined that a sudden cut in foreign labour hiring may not be wise as it would lead to shocks to the industry.
What is needed is a clear plan on how the sector can be the main driver for quality job creation by leveraging on technology and local talent.
Apart from that is the development of the downstream sector.
“Promoting research and development in areas relating to fertilisers and pesticide that will lead to the usage of organic stuff could be another area to look at, as this would result in the engagement of skilled labour.
“If we can do it right, I believe the proportion of foreign to domestic labour and unskilled to skilled labour can be improved systematically,” he said.