The real cause of food price inflation - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 12 November 2011
PRINTER FRIENDLY | ARCHIVES
The real cause of food price inflation A  A  A

- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
Food price inflation is an extremely important issue facing the Indian economy today. Ever rising food prices inflict considerable hardship on the population. This is especially so for the poor, whereby food expenditure is a signification portion of their overall budget. The issue is significant to the point that incumbent politicians can lose an election simply because food prices went up too much, even if it had little to do with them.

Currently, annual food price inflation is around 12%, considerably higher than the overall inflation rate of 9%. As of now, the primary focus of the Reserve Bank of India (RBI) has been to reduce inflation. To achieve this, they have increased interest rates an incredible 13 times since March 2010. Unfortunately, it has been ineffective. Inflation has remained high, and food price inflation has remained even higher.

---------------------------------------- Have an enriching Saturday! ----------------------------------------

Can Europe find a solution to end the current economic crisis?

Will the new economic reforms drive the stock markets?

Are we paying a price for bad democracy?

Get answers for all such complex issues straight from Jawahir Mulraj.

Click here to sign up for J Mulraj's 'Straight From The Hip' e-letter! It's Free!

------------------------------------------------------------------------------------------------------

There is a good reason why the interest rate hikes have had no impact on food price inflation. Interest rate hikes are designed to take out excess cash in the financial system, and reduce speculative borrowing and investment. Rising food prices are not a result of too much money in the system. Excess cash in the system usually ends up invested in property, stocks, and precious metal commodities. Thus, interest rate hikes will not reduce food price inflation, because excess cash does not cause it in the first place.

If excess cash in the system is not causing food price inflation, then what is? The answer is actually very simple. Consider the following statistics: In the last five years, the Indian economy has grown on average by 8.6% per year. The means our incomes have increased by this amount in real terms every year. Most of the contribution to economic growth has come from service industries, and manufacturing industries to a lesser extent.

On the flip side of this, the agricultural sector has seen extremely poor growth in the last five years. While the overall economy has been growing 8.6% per year, the agricultural sector has growth by a paltry 3.1% per year in the last five years, on average.

Thus, our income is rising a lot faster than food production. Demand is rising much faster than supply, and this is causing the high levels of food price in inflation. In addition, population is also growing by 1.3% per year, further increasing the demand for food.

The only solution to reducing food price inflation is to produce more food. No amount of interest rate changes, taxes and subsidies, or any other quick fix policy will work in the long run. If food production cannot keep pace with rising incomes and a growing population, we are doomed to suffer continuously rising food prices.

Increasing food production is certainly not an easy task. It requires investment in better technology to increase crop yields, investment in better technology to reduce reliance on unpredictable monsoons, a more regulated and transparent food market, and better incentives and adequate compensation for farmers to produce more.

The problem we face today is that policy makers are treating food price inflation as a short-term problem that requires a short-term solution (i.e. raising interest rates). Once we start thinking of food price inflation as a long-term issue, then we can take the right steps to solve it.

Disclosure: I do not hold the currency/commodity that is analyzed in this column.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "The real cause of food price inflation". Click here!

20 Responses to "The real cause of food price inflation"

K.G.Suresh kumar

Aug 25, 2012

There is no assured income in agriculture than other activities , there is no respect for thous who are engage in agriculture so, People are non interested in agriculture,

Like (2)

G.R.Panda

Nov 24, 2011

Food inflation is of recent origin, started 2 years back and aggravated in past one year.

Food produced in villages, (rural area) and consumed 70% by producers (villages) and 30% by urban people.
However, policy makers sit at metros and try to decide on policy to check food inflation.

Reasons:-

Govt has started distributing free rice/dal to BPL families, who mainly constitute unorganized labour class in villages earning their living from daily wages. (Mainly agriculture). Due to free food they are no more willing to work. Labour rates have gone up, almost doubled in last two years in rural areas. However, rate of rice/dal etc have not gone up due to sufficient quantity is available free to BPL families.

Labour being a major input for agriculture, has made farming unviable. Small scale/marginal farmers have found it easier to earn a living from daily wages than from cultivation, leaving their farmland unused. This has lead to reduced food production in the country. The demand is increasing due to rising population.

Govt is not in a position to withdraw free RICE/DAL due to vote bank. Overspending on populist measures has led to deficit financing which is met by printing notes. Making more currency available in the hands of people leads to more purchasing power and spiraling inflation.

Like (2)

VIJI

Nov 18, 2011

MR.ASSAD CONSIDERED TO BE GOOD ANALYST,
--FOOD INFLATION IS ONLY IN INDIA? OR THROUGHOUT THE WORLD?
** AFTER THE EUROPEON CRISES, AND AFTER THE LOOSE MONETARY POLICIES,INCLUDING USA -CHEAP MONEY AVAILABILTY , AND AL THESE FUNDS ARE DIVERTED INTO 'COMMODITY FUTURES' MARKET THAT TOO AGRI BASED PRODUCTS.
** HERE ALSO IN TE NAME OF ' FII'S ' ALL THE FUNDS WERE/ARE DIVERTED INTO COMMODITY FUTURES MARKET ( AS A RESULT PILING UP OF STOCKS , HOARDING ,ARTIFICIAL DEMAND CREATION ETC.,)
***FOOD PRICE RISES DESPITE GOOD HARVEST AND GOOD MONSOON . FCI HAS A CAPACITY OF 63 Million Tonnes(MT)AS ON JULY THE STOCKS IN THE GODOWNS ARE 65.5 MT, IT IS OVERLOWING .
*** LAST YEAR FOOD GRAINS OUT PUT IN INDIA WERE 120 MT , AND THIS YEAR EXPECTED AS PER GOVT. ESTIMATION IS 123 MT (AS MET. DEPT. MONSOON ABOVE NORMAL 9% etc.,) !!!!
***SIMPLY TELLING STORAGE PROBLEM,PDS PROBLEM (AS 1 CAN CONSTRUCT AS MANY GODOWNS IN A MATTER OF PERIOD AS WE ALL KNOW.. HEIGHT OF THE ISSUE IS NOT BUYING FROM THE FARMERS QUOTING REASON AS 'FUNDS INSUFFICIENT' TO BUY FROM FARMERS.
***THE FARMERS FORCED TO GO TO PVT. PLAYERS HAVING CAPACITY &GODOWNS AT A THROW AWAY PRICES ,AS FOOD GRAINS YOU CANNOT KEEP FOR A LONGER PERIOD AS IT 'IS PERISHABLE' &STORAGE FACILITY WITH FARMERS, HENCE IT HAS TO BE SOLD OUT AT THROW AWAY PRICE. ONE'S LOSS IS ANOTHER'S GAIN AND VICE VERSA.

COMMODITY FUTURES., COMMODITY FUTURES.,COMMODITY FUTURES...... MARKET.,MARKET.,MARKET.,!!!!!

SO., THE QUESTION IS VERY MUCH GLARE & VISIBLE AND ALSO THE CORRECT AND SUITABLE ANSWERS & CAUSES.....ISN'T?

Like (2)

VIJI

Nov 18, 2011

ASSAD CONSIDERED TO BE GOOD ANALYST, (?)
--FOOD INFLATION IS ONLY IN INDIA? OR THROUGHOUT THE WORLD?
** AFTER THE EUROPEON CRISES, AND AFTER THE LOOSE MONETARY POLICIES,INCLUDING USA -CHEAP MONEY AVAILABILTY , AND AL THESE FUNDS ARE DIVERTED INTO 'COMMODITY FUTURES' MARKET THAT TOO AGRI BASED PRODUCTS.
** HERE ALSO IN TE NAME OF ' FII'S ' ALL THE FUNDS WERE/ARE DIVERTED INTO COMMODITY FUTURES MARKET ( AS A RESULT PILING UP OF STOCKS , HOARDING ,ARTIFICIAL DEMAND CREATION ETC.,)
***FOOD PRICE RISES DESPITE GOOD HARVEST AND GOOD MONSOON . FCI HAS A CAPACITY OF 63 Million Tonnes(MT)AS ON JULY THE STOCKS IN THE GODOWNS ARE 65.5 MT, IT IS OVERLOWING .
*** LAST YEAR FOOD GRAINS OUT PUT IN INDIA WERE 120 MT , AND THIS YEAR EXPECTED & ESTIMATED IS 123 MT (IN ADDITION MET.DEPT. MONSOON ABOVE NORMAL @9% etc.,) !!!!
***SIMPLY TELLING STORAGE PROBLEM,PDS PROBLEM (AS 1 CAN CONSTRUCT AS MANY GODOWNS IN A MATTER OF PERIOD AS WE ALL KNOW.. HEIGHT OF THE ISSUE IS NOT BUYING GRAINS FROM THE FARMERS (?)QUOTING REASON AS 'FUNDS INSUFFICIENT' TO BUY FROM FARMERS.
***THHE FARMERS FORCED TO GO TO PVT. PLAYERS HAVING CAPACITY &GODOWNS AT A THROW AWAY PRICES ,AS FOOD GRAINS YOU CANNOT KEEP FOR A LONGER PERIOD SD IT 'PERISHABLE' &STORAGE FACILITY WITH FARMERS, HENCE IT HAS TO BE SOLD OUT AT THROW AWAY PRICE. ONE'S LOSS IS ANOTHER'S GAIN AND VICE VERSA.

SO., THE QUESTION IS VERY MUCH GLARE & VISIBLE AND ALSO THE CORRECT AND SUITABLE ANSWERS & CAUSES.....ISN'T?

Like (2)

Pawan

Nov 15, 2011

I am sorry to say your analysis is incorrect as many others have pointed out. Please refer to this link:
www .bloomberg.com/news/2011-11-14/wheat-shippers-battle-for-sales-as-global-grain-glut-expands-commodities.html
Wheat prices globally are down 50% from the 2008 peak. If prices in India are going up, its all because of speculation on commodities exchange.

Like (2)

S.Raju

Nov 14, 2011

HI,
I think if the average food production has increased about 3% where as population growth is 1.3%, then food production is still not bad. However, two important items to be taken into consideration to reduce food inflation:
1. There shall be NO trading on food commodities in BSE / NSE etc including edible oils.
2. All farm produce should be routed only through government procurement and or through farmers co-operative society. All people, be it upper class or lower class (in terms of income)should go to the public distribution cells to procure their food necessities instead of private retail chains. (Instead of Mega ratail malls which try to procure the farm products at large, creating a panic with small traders and control the price).

The government should procure directly (including transport ) from the farmers.

Last, but not least, is that government should back-up continuously in terms of supply of fertilizers, seeds, water resources etc. Even in USA / Europe, the farmers enjoy subsidy from their government.

Like (2)

Ramanand

Nov 14, 2011

Why will any young, intelligent and educated male today continue to remain in a village doing agriculture? If its possible to work in a city in comforts of an ac room sitting on a desk, why should he do hard physical work in hot and sweaty fields? Isn't the lure of a steady job with a regular monthly income more preferable to the vagaries of the monsoon, failed crops or crop price fluctuations? Not to mention terminator seeds that force you to go back to the MNC Seed Co. every year at ever greater prices. Why SHOULD he wear dhoti-kurta when he can wear Pant-Shirt (unaffordable as a farmer)?
There are many more "Why's" that Middle Class India cannot answer, and unless these are answered, food inflation will continue to go much, much higher.

Like (2)

e.v.subba rao

Nov 14, 2011

I do not agree to the views expressed on food inflation by the author. Most of the farmers do not have any storage facility for their produce and handling of the produce to the storage place increases cost of production drastically if he wishes to store due to which he is compelled to sell the produce at throwaway price. This provides an opportunity to the bussinessman to buy the produce at cheaper rate and store. Bussinessmen being small in no. form a syndicate due to their economic power release the produce to the market as per the price dictated by them. This is futher aided by the politicians in power who are loyal to the bussiness lobby due to obivious reason. Today I have sold my coconut crop at Rs.325 per 100 nuts. But when it leaves my premises the value of my produce becomes1000 to1200 rupees after incurring an expenditure of Rs.50 per hundred nuts. Further labour costs are increased due to laziness preached by the Govt programmes like NGRAI.When farmers are surrounded by greedy bussinessmen and govts which are anti-farmer food inflation would not come down.

Like (2)

Raja

Nov 14, 2011

Dear Asad , Thanks for your Analysis.I feel there is lot of differences from one sits and think from Delhi/Mumbai and one from ground Zero along with farmers.

I totally agree with Dhanasekar views.

I am son of a farmer who owns 3 acres land and spend all his life in the field producing grains/vegetables but not prospered in his life.Also not interested in continue farming now and don't want his sons to continue too ...you have to conclude from this that still there will be a supply gap in future ..Food inflation will go up ...

There are too many challenges prevailing in ground zero which are built up as mountain in 20 years

1.Shortage of Farm labourers and wages due to popular scheme like MGNREGA scheme (Farm labourers are Not ready to work since they can earn money without working in MGNREGA - in short reduced productivity) - Don't say machine can solve this problem , 98 percent of farmers in india owns less than 3 acres land and they couldn't afford tractor only they can lease it ... cost has increased now ..

Near by towns & cities offer good opportunity to work in shops & real estate

Freebies

2.Banks are reluctant to lend to Farmers (you have also need to note that farmers are not willing to pay their debt in time ,waiting for elections time so that politician to capture power they will wavier the Farm loans - wrost economics , they might have provided waiver for interest or extended the time to repay or waived only loans less than 50000)

3. Sudden increase in cost of chemical and fertilizer , still increasing ....corporates own these factories ..

4. Farm Subsidies are targeted to specific people in power
5. Transportation cost has increased
6. Online commodity exchanges
7. Irregular climate pattern etc etc .....

Conclusion - Inflation is caused by Worst Government policies,Corporates who owns the Chemical & fertilizer companies , bankers who don't lend loan to farmers and Poltico traced Middlemens (wholesale & retailers)

So don't say allowing FDI in retail will fix the logistics & wastages of food products ... FDI can solve the retailing issue but not farming .... please note it down that If you allow FDI or corporates then Food inflation will be 25% year on year ...
Also want to mention that in the current situation FDI/corporates will be interested in Retailing but not in Farming ...Here they just want to act as a Middlemen ...

Whoever acting as a Middlemen now can be removed anytime but when corporates do that role they will buy the policy makers to make the rules & regulation biased for them ...

We need to make the Farmers to sell their products directly to consumers and government policies should be made transparent & easy for farmers ...

Like (2)

Shalin Mehta

Nov 14, 2011

I absolutely agree with author on Demad Supply gap in food items being the main driver of food imflation. However, being a Gujarati, i have a question for author for deeper insite. Gujrat claims agree growth of 10- 11 % avarage in last 5 yrs. In which case, food prices in Gujarat should have lower rate of inflation compared to rest of India. Is it because Gujarat farmers produce more cash crops than food crops? Or because integrated market place makes the prices uniform across country?

Like (2)
Equitymaster requests your view! Post a comment on "The real cause of food price inflation". Click here!

Recent Articles:
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Will They Haul Off Trump's Statue, Too?
August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...
Farm Loan Waivers: Why Bad Economics Makes for Good Politics
August 14, 2017
It is because the negative effects of the waivers aren't clearly visible.