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Food crisis: Growing worries

Apr 2, 2008

Not only a global slowdown, but also rising prices of food is a cause for worry. Across the globe, the food prices are rising due to a combination of soaring oil and energy prices, the effects of climate change, supply shocks from food producers, growing demand from countries such as India and China, depletion in stocks and use of crops to produce biofuels. The world is facing food led inflation. According to the UN, record high food prices and resulting inflation are set to continue until at least 2010, fuelling a "new hunger" across the globe and anarchy on the streets of poorer nations. The United Nations Food and Agriculture Organisation estimates the global prices to continue rising, and could be 20% higher in 2010. World carryover stocks at the end of this crop year are projected to drop to 57 days of consumption, the shortest buffer since a 56-day-low in 1972 triggered doubling of grain prices.

Global view...
As per World Bank, between August 2007 and February 2008, a 28% increase in weighted price of all agricultural products was witnessed in low and middle-income countries. To add on, a 38% jump and 49% rise was witnessed in prices of food and fats and oils respectively.

At the global level, a poor harvest coupled with rising demand has led to an overall increase in food prices. To add to the fury, unfavorable weather conditions in parts of Europe and North Africa, along with a severe drought in Australia resulted in the production of major food crops to a record low. These factors led to lower supply, thereby pushing the prices (especially wheat) to new heights. Global warming and the rising prices of crude oil are also to be blamed. A number of crops, meant for consumption, are now being used for bio-fuel production, further worsening the global food situation. Brazil (the world's largest sugar producer and exporter) is converting half its sugar harvest into fuel ethanol, leading to higher sugar prices. In the US, the percentage of corn used for fuel has doubled since 2003. Higher prices of cash crops has led to farmers shifting towards them, thereby creating shortage of the major food grains. This has aggravated food inflation. The globally high food prices affect the domestic prices, consequently impacting the economic stability of the countries. For instance, China's inflation in recent times accelerated to the fastest pace in 11 years. Consumer prices climbed 8.7% in February from a year earlier after gaining 7.1% in January, thereby pressuring the central bank to raise interest rates. Even in Europe, the food-price inflation accelerated to 5.8% in February 2008, while in the US during the 12-month period through February, consumer prices rose 4% YoY.

Worries in India...
India is not way behind its global peers. The latest Inflation (WPI) figure stood at 6.68% caused by rising food prices. The current inflation level is above the Reserve Bank of India (RBI's) target band of 5% to 5.5%, thereby causing uneasiness to the bankers. India, which once boasted of food surplus, now has to import basic food grains to meet the increasing demand of its ever-increasing population. It imported 45% of its oil seeds last year. Wheat prices were up nearly 200% over the last one year. Rising demand, falling land acreage and yields and crop failures have been the culprits. On a worrying note, the per capita net availability of pulses today is almost half of what it was five decades ago - 32.5 grams per day in 2006 compared with 60.7 grams per day in 1951. The rate of growth of food grain production has actually decelerated to 1.2% between 1990 and 2007, lower than the annual average population growth of 1.9%. Though the government has taken precautionary measures like reducing import duties, banning exports and providing food subsidies, the pressure still prevails.

What are the implications?
The rising inflation would lead the RBI to keep the interest rates firm. This would increase the cost of borrowing thereby slowing down capex plans of companies. This would lead to a slowdown. On the consumer front, immediate effect of inflation would be the decreased purchasing power causing consumers to change their spending habits. FMCG companies have already taken price hikes across its product portfolio. Further hikes would lead to a decline in volumes leading to pressure on margins. On a sectoral basis, those dependent on the movement of interest rates like auto and real estate would also be affected. A lower than expected monsoon would further add fuel to the fire.

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