Soaring food prices are temporary

RECENTLY, the issue of global food inflation has received considerable attention from the media, economists and general public.

Despite the implications on development policy, millions of the low and middle-class population are grappling with the increasing prices of goods and this eventually threatens the consumer spending and increases the cost of living.

Recent developments

Global food prices rose 28% in 2021 to their highest level in a decade, mainly attributing to a myriad of factors such as supply chain bottlenecks, soaring commodity prices, the global energy crunch and pandemic-induced labour shortages.

There is little room for optimism about a return to a more stable market conditions given high input costs, ongoing pandemic as well as uncertainties lingering the climate conditions.

The imported inflation in Malaysia has also been dominating the headlines in recent weeks.

Prices of fresh produce such as green vegetables have reportedly surged more than 200% while some staples, including chicken and eggs, are also expensive.

With the pandemic induced disruptions already in place, the spill-over effects from the international price transmission has further exacerbated the cost of inputs, and thereafter causing a rise in food prices.

Prime Minister Datuk Seri Ismail Sabri Yaakob said that the increased price of essential goods was not caused by traders, but instead due to costs accumulated at various levels of the supply chain before goods reached the traders.

Despite several measures, the food prices are still soaring. This is, in fact, reflected in the food consumer price index (CPI) which rose 3.1% year-on-year during November, causing the overall headline inflation to soar above 3.0% year-on-year. Food items which saw the highest price jump were meat, vegetables as well as oils and fats. As food prices were already rising pre-Covid-19, the current situation had further intensified the trend.

This will likely result in food prices to contribute the most to the overall increase in the headline inflation in the near term.

Weak ringgit

The weakening of the ringgit against the US dollar is another issue that could cast a profound impact especially on the stability of food items.

According to a study by Bank Negara, the direct impact of exchange rate changes on consumer prices is often not pervasive and limited to selected items. However, it tends to have a lag effect.

As such, future consumer prices will be based on stock being bought at the current rate. Hence, if the current weakness sustains, the rise in food prices will persist and this could be worsen if supply constraints remain in place.

In December 2021, the global food prices declined from near a record high, offering some relief to consumers and governments facing a wave of inflationary pressures.

Still, soaring food costs are unlikely to stabilise for a while yet. Nevertheless, we can expect the overall food inflationary pressure to be transitory and normalise within three to six months.

This is on the account of anticipated improvement in global supply chain and easing constraints in delivery channels from trading partners.

Strategies to curb high food inflation

Although Malaysia’s inflation rate is reported to be relatively lower compared to other countries, it is associated with the welfare of the society and economic development. In view that higher inflation rate caused a negative effect on the nation, it is crucial for policy makers to design appropriate policies to curb inflation.

Most importantly, the strategy to control the country’s inflation must be implemented on a long-term basis, especially for food items.

Research shows that both global food commodity prices and real effective exchange rate are proven to be major determinants of food prices in Malaysia.

Given the current scenario, both are likely to be more unpredictable in the foreseen future, hence understanding the dynamics of these shocks on domestic food retail price is important for future macroeconomics policy design.

Despite the imported inflation, we often fail to examine the domestic market structure that may cause food price hikes.

There may be few market operators who control supplies and influence the prices for wholesale and retail markets; yet they maybe not perceptible to the public.

At this junction, it is important for public agencies such as the Federal Agriculture Marketing Authority to intervene and facilitate importation of food items at least until prices are returned to normal level. Such intervention could eventually reduce the increasing price, especially imported food.

Providing subsidies across the supply chain is another viable option that government can consider to combat the food inflation. For instance, time-limited subsidy for intermediate inputs and grants to cover logistic costs.

Increase in global commodities will usually increase the cost of production by the producer which is then passed on to consumers, except that the impact will more or less be cushioned by such price control and subsidy programmes implemented by the government.

Technology should be taken seriously in combating the rising food prices. The government is expected to increase the technology dissemination, especially of those related to environmental sustainability, climate change, crop yields and mechanisation.

In the long term, the higher adoption of technology could gradually reduce the dependence on costly inputs, labour and chemicals and consequently stimulate food supply and increase domestic food production.

In conjunction with that, smart farming approaches should be expedited across all subsectors in the agriculture sector including crops.

Effective dissemination of information pertaining to modern technologies can be one of the important factors to increase application of smart farming.

Moreover, it will be encouraging to see the government investing in a market information system for accurate and timely data of crop production, trade and prices.

This will send right price signals from consumers to the supply chain, improve bargaining power and reduce business risk and response time.

Most importantly, farmers should also be encouraged to on-board e-commerce programmes that also reduces the reliance on middlemen in the agribusiness supply chain. To address the common asymmetric market power situation between farmers and middlemen, farmer cooperatives may be the best solution for the small farmers.

Under the umbrella of cooperatives, small farmers can gather strength through a bigger voice to bargain with big time dealers or millers.

Middlemen cannot be eliminated at once, but the supply chain can be shortened through integrated cooperatives among the small farmers for higher income and sustainability.

If chances are grabbed wisely, this could be even the perfect time to bring in more youngsters into modern farming as little attention has been devoted to agriculture in the past few decades.

Given that the labour market is at the early stage of recovery, turning them into modern farmers through smart farming will likely provide us the opportunity to overcome supply shortages, unemployment issues as well as provide income gains.

At this front, the government may assist by introducing a dedicated smart farming fund to support the young entrepreneurs.

The role of Food Banks in Malaysia has been always effective in lightening the impact of the rising cost of living on the populace and increasing the efficiency of food supply chain.

While food banks have an important role in providing immediate solutions to severe food deprivation, they are limited in their capacity to improve overall food security outcomes due to limited provisions of nutrient-dense foods in insufficient amounts, especially from dairy, vegetables and fruits.

As such, high social responsibility commitment and voluntary spirit in the private sector and NGOs to together help the government in tackling the issues is much needed.

So far, this does not have a large financial implication to the government.

Manokaran Mottain is a former chief economist at Alliance Bank (M) Bhd. He is currently the director of Rising Success Consultancy Sdn Bhd.

The views expressed here are the writer’s own.

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