Challenges and tradeoffs in trade in food staples

Background

Rice and maize is the widely produced and consumed staple food for a large part of world’s population, especially in Asia. The access to such food is associated to human health and survival.  Staple foods supply one or more of the three organicmacronutrients such as carbohydratesproteins, and fats.  However, as 70 percent of the people’s calories in sub-Saharan Africa and South Asia come from a single staple food, they are limited to consume enough vitamins and minerals. This suggests the need for consuming diverse diet to remain healthy.

The World Bank’s report entitled Managing Food Price Inflation in South Asia published in 2010 states – in South Asia, food consumption in total consumption constitutes 50 percent. The increase in food price is linked to human welfare especially the poor. Therefore, for the reduction of poverty, efforts are needed to stabilizing domestic food prices and reducing inflation. On a net basis it is estimated that South Asia’s income loss between January 2003 and April 2008 is equivalent to some 9.6 percent of GDP. Therefore, continuous surge in commodity prices has become the key development challenge.

Population Growth, Food Production and Food Prices:

OECD-FAO’s Agricultural Outlook, 2013-2022 shows global agricultural production is expected to grow 1.5% a year on average over the coming decade, compared with annual growth of 2.1% between 2003 and 2012. This reveals the severity of the huge gap between the rate of growth of population and anticipated food production.

The impact on domestic economy is not very predictable. There is a weak association between global food prices and domestic food prices in some cases. The study in Eastern and Southern Africa shows, global price changes have not fully transmitted to domestic markets. Between March 2007 and March 2008, the FAO food price index (FPI) jumped 56%. In the same period, the FPI increased 39% in Ethiopia, 20% in Kenya and 11% in Tanzania. In several other countries including Zambia, Uganda, and Malawi, the increase was less than 10%.

Literatures show, in short run, trade creation effects should outweigh trade diversion effects in order to achieve beneficial trade liberalization. The long run benefits include, access to large markets and opportunities to attract meaningful investment; economies of scale; benefits of risk sharing and increased competitiveness.

Despite the fact that Intra-regional trade can contribute to agricultural growth, food security and price stability, South Asia has not been very successful in harnessing the benefits from regional market integration. Recent publications estimate prices to remain above historical averages over the medium term for both crop and livestock products due largely to a combination of slower production growth and stronger demand. FAO states, if the wide-spread drought, which was experienced in 2012 occurs, it is estimated that world prices may rise by 15-40 percent.

Limited expansion of agricultural land, rising production costs, growing resource constraints and increasing environmental pressures are the main factors behind the trend. IFPRI estimates a 14 percent decline in rice production, 44-49 percent in wheat production and 9-19 percent in maize production by 2050 in a climate change scenario relative to the no climate change scenario.

As long as households possess ability to generate sufficient income, access can be achieved without the HHs being self-sufficient in food production. Therefore, it looks justifiable that commercializing agricultural sector activities and boosting farm incomes can reduce poverty and increase access to food and nutritional security.

South Asian Scenario

Impact of commodity prices in inflation is large and the effect of wages is much smaller than other economies – efforts have been made to offset this trend by increasing productivity gains. India’s food inflation has however, accelerated to a three-year high of 18.18 percent in August driving overall inflation to 6.1 percent. The revival of agricultural growth depends largely on government policy – it is believed that public spending on agricultural subsidies is crowding out productivity-enhancing investments. Also overregulation of domestic trade has increased costs, price risks and uncertainty undermining the competitive strength of Indian agriculture.

In Nepal, the price index of food and beverages group has increased by 10 percent during the FY 2012/13. The World Food Program (WFP) shows around 3.7 million Nepalese are food insecure. Private stock, black marketing by middlemen, real fear of shortage also play a role. Prices in Nepal also need to align with those in India otherwise food stocks would easily seep into India through the open and unregulated border despite a formal export ban.

During the year 2012, net food importing countries like Afghanistan, Sri Lanka and Bangladesh suffered the most. For the first time in South Asia’s history all countries simultaneously experienced double digit inflation rates, with 20 plus rates in Afghanistan, Pakistan and Sri Lanka. The share of food consumption in total consumption is also very high in South Asia, averaging nearly 50 percent. The effectiveness of food price stabilization and safety net programs should be judged in terms of their outcomes and consistency with fiscal sustainability against external shocks.

Lessons to be learnt

(i)  Large amount of liquidity has a potential to fuel inflationary pressure – The fiscal stimuli has also increased public debt – from policy perspectives, it is therefore, necessary to track the magnitude, manner and timing of the withdrawals of such policy

(ii)  Countries in South Asia suffer from the inadequate monetary policy that can establish the linkages between the real sector and financial sector of the economy. This has happened when inflation is internationalized and the role of the Central Bank is underestimated.

(iii)  Greater integration of the economy means that inflation in domestic economy is more open to outside pressures. Therefore, although globalization is expected to reduce inflation, in South Asia this is not wholly true largely because of higher import dependence, externality, lower productivity growth and inherent structural rigidities.

(iv)  Demand reduction has very little impact on inflation but a big impact on growth. In South Asia in general, import bill is higher than export gains. Therefore, from policy perspectives, it is advisable to efficiently use and produce and aggressively push their products globally.

(v) For this to happen, there is a need for cost-effective long-term financing at reasonable rates because investment decisions are based on long-term rates.

(vi) Holding up expansion plans due to high financing costs is not a good sign for sustainable and predictable economy. However, as the killer is inflation, what we should consider is the fact that when the growth prospect remains robust, growth-inflation trade-off appears favorable. But in the region, growth has been estimated to remain at a lower edge for some time period.

Conclusion

As 75 percent of the poor in developing countries live in rural areas, growth in the agriculture sector, on average, is at least twice as effective in reducing poverty as growth in other sectors. Currently 1 billion people go to the bed hungry every day. It is expected that the world population will grow by 9 billion by 2050; the world therefore, needs to double its food production. Is it possible?