Joint effort: A farmer in a cucumber field in Sekinchan, Selangor. Both the government and private sector have to accelerate technology assimilation in food and farming concerning the environmental sustainability, climate change, crop yields and mechanisation. — Bloomberg
INFLATION is hitting food prices hard. Many consumers have noticed their grocery bill creeping up; and wage earners paying more for their meals.
The consumer price index for “food away from home” and “food at home” have been rising, ranging from vegetables, cereal and meat as well as other animal protein.
Rising food inflation has taken away the disposable income of the low and middle-income households for spending on non-discretionary expenditure.
To put in simply, the following factors explained soaring consumer food inflation; and have stoked global food crisis, especially in emerging economies and low-income countries that have experienced foreign exchange shortages and are more vulnerable to food price shocks.
> Food price inflation has been on the rise years before the pandemic due to both demand and supply driven. Demand was supported by better economic growth, rising purchasing power and population pressure.
Food production was constrained by uneven farming output, climate change (poor harvest), rising production costs, diseases, variable quality and yields.
> The prolonged Covid-19 pandemic crisis inflicted sporadic lockdown and movement restriction measures as well as the supply disruptions caused a spike in consumer food prices.
Post-reopening of the economy, the release of pent-up and recovering demand overwhelmed the capacity of supply chains, pushing prices higher.
Soaring costs
> Business costs and raw materials used in the production and processing of food also increased as reflected in global food producer prices in 2020-2021, which have soared and will pass-through onto consumer prices with a time lag of at least six months or less if producers could not absorb higher costs.
Since end-2019 till end-April 2022, the World Bank’s food price index had increased by 54%; chicken meat up 83.4%; maize rose by 108.5% and soya grew by 88.1%.
> The pandemic has caused elevated shipping and transport costs as well as the delivery services. Higher shipping costs hit the cost of imported food inflation apart from the cost of getting and delivering goods to customers.
> The war in Ukraine has caused further supply disruptions and this has pushed up prices of commodities such as corn and wheat; energy, industrial materials, fertilisers and animal feed.
Higher wheat prices will translate into higher food prices, while costlier animal feed and fertilisers have increased the cost of food production.
> Since most food commodities are traded in the US dollar, countries with weaker currencies have seen their food import bill increase.
Intervention
Rising prices have prompted some countries to implement short-term intervention and administrative measures such as providing subsidies, putting in place price controls and ceiling price, easing approved permit, import tariffs reduction and export restrictions to maintain or improve domestic supplies and quell food price inflation.
Unfortunately, unfavourable global developments have larger forces impacting agricultural market prices, rendering the stop-gap measures to battle food inflation limited success.
Malaysia’s domestic market integration with global market means that our domestic producers and consumers will have to contend with global influences in the supply and demand of food as well as the consequential impact on food prices.
Malaysia’s imports dependency on agricultural commodities to meet domestic demand increased to 13.7% from 7.3% over 28 years (1987-2015).
In 2020, eight items have recorded imports dependency ratio exceeding 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-sufficient ratio was 63.0 for rice; 65.0 for fresh milk, 75.6 for sweet potato, 88.2 for mackerel, 80.7 for sardine, 94.9 for pork, 98.1 for poultry and 115.1 for eggs.
Food security, price affordability and stability remain a national priority. There are no simple solutions but complex tasks to tackle food inflation and food security. Both the government and private sector need to work together to ensure sustainable food supply.
Some of the short-term measures (subsidies and ceiling price controls on food items for consumers and producers, including fertilisers, and exports ban on chicken) come with opportunity costs and mispricing of resources.
> Government’s subsidies and ceiling price to make food affordable will burden further the budget deficit, and if it becomes unsustainable, will pose material policy risks to the country’s creditworthiness.
Hence, the food subsidies should be made targeted at the vulnerable households through food voucher/stamp or cash assistance. The savings from the targeted subsidies can be re-channelled to implement food production programmes.
Worse shortages
> Price ceilings and controls cannot address scarcity. Fixing prices at artificially lower levels will merely enforce existing demand patterns, resulting in worse shortages for many consumers down the line.
> For the producers, if the price subsidy and ceilings are set at levels below the producers’ cost, it will result in the loss of economies of scale for producers, and the decrease in supply for consumers who would be willingly pay more than the price ceiling.
During the current supply situation, which is severely constrained by sharp price increases of raw materials due to international supply chains disruption, it is unclear how controlling prices would incentivise the suppliers and producers to increase output.
> Prices are the signals on which the market economy relies on for the supply and demand responses. Global market development influences have caused supply pressures and increasing costs. Restraining price increases for a longer period will not help consumers or alleviate shortages.
In ensuring the sustainability of agriculture sector and food security, we propose the following action plans in the short and medium term:
> Stop market intervention. Government’s regulatory interventions, though well intended, are often counterproductive. They distort the functioning of market and the allocation of resources as well as disincentive towards farm production.
The government’s primary focus is to create competition (not protection) in every segment of the food supply chains (producer, procurement, stock piling and food distribution system) so as to reduce costs, curb rent-seeking and plug leakages in the food management system.
Smart farming
> Encourage technology diffusion and smart farming. Both the government and private sector have to accelerate technology assimilation in food and farming concerning the environmental sustainability, climate change, crop yields and mechanisation.
This will reduce dependence on costly inputs, labour, fertilisers, and pesticides as well as stimulate the food production.
> Increase arable land for farming. A mere 5.5% of total planted areas (close to 450,000 ha) was allocated for fruits, vegetables, herbs, species and other crops.
On average, less than 200,000 ha land use for fruit crops and less than 100,000 ha for vegetables and cash crops in 2016-2020. This compared to 5.9 million ha for oil palm trees and 1.1 million for rubber trees.
> Shoring up all elements of the food supply chain from producers to consumers (planters/growers, food processing industry and food wholesaler and retail distribution sector).
Building a more resilient food supply chain and management system that has more capacity to gather, process, move and store in different geographic areas of the country will provide more and better market options for consumers and producers.
> Provide real-time market information. Invest in market information system to provide reliable and timely data of food production, demand and supply, trade and prices.
This will send right price signals from producers to consumers; to strengthen the supply chain, stabilise prices, reduce business risk and increase response time.
Lee Heng Guie is executive director of the Socio Economic Research Centre. The views expressed here are the writer’s own.
