Tuesday, 8 February 2011

Food inflation is not the important issue

Business Mirror

The topic of the month for February appears to be food prices and “food inflation.” Expect to see countless “gloom-and-doom” articles about this subject.

There is no question that global food prices are out of control, particularly in certain countries. India is in a crisis, with food-cost increases averaging an annual upsurge of 15 percent for the last two years. Note something, though. Food prices in India have been going up at this phenomenal rate for the past two years. This is not a current event.

The United Nations Food and Agriculture Organization says its Food Price Index averaged 231 points, the highest level since they began measuring prices in 1990. Further, wheat prices rose 47 percent last year, corn more than 50 percent and US soybeans 34 percent. The CRB (Commodity Research Bureau) food index is up an incredible 36 percent over last year. The price of sugar is at a 37-year high. I was a bit shocked to see local red onions selling at nearly P200 a kilo this past weekend at Shopwise.

There are two basic reasons for this current global spike in food costs —bad weather and bad government policy. Poor weather is in the hands of God, but bad policy is a man-made disaster.

From the American Thinker: “In 2010, the United States produced 13.1 billion bushels of corn. Of that amount, 4.2 billion bushels went into ethanol [33 percent of total production]. That represents for 2011, a year in which global stocks are down nearly 8 percent, over 14 percent of all corn grown in the world being used in the most inefficient manner possible—being put into American gas tanks.” In other words, the global corn shortage of 8 percent could be more than wiped out if the wacko environmentalists had not pushed to turn 14 percent of global corn production into fuel for American cars. Without the implementation of this stupid policy, corn prices would not be up 50 percent.

However, (and there is always a “however”), in spite of all the worried prognostications, the current situation is not as serious as in 2008. Again from the American Thinker: “Jonathan Anderson, who covers emerging markets for UBS, said global-food price indexes would have to rise another 50 percent to deliver the same inflation impact as three years ago.”

That is why even with P200-a-kilo onions, the recent Philippine inflation numbers are still within estimates and manageable. Further, weather-induced supply shortages are not systemic and, therefore, not serious in the longer term. “While weather shocks are disrupting food supplies, there has been no repeat of the leap in energy and fertilizer prices or of the accompanying hoarding seen in 2008, Anderson said.”

When you look behind the press- release inflation numbers, what you find is that it is fuel costs that pull all other prices higher. The government lumps fuel, lights and water in a single index component. But fuel costs are a substantial factor in the cost of electricity and water. Fuel may not be the largest element in the pricing of food. But it is the most important, as it effects most critically the cost of transportation of fertilizer, etc., to grow the crops and the cost to bring foodstuffs to the market.

Lower the cost of fuel, and you will lower the cost of food. It is a simple equation.

Food self-sufficiency is an altogether other issue. The fact is that the Philippines is not going to be able to reach this objective in the foreseeable future. It is an unrealistic goal.

What needs to be done is to maximize the agricultural resources we have. By that, I mean to capitalize on where we can get the greatest financial return in order to be able to afford to fill the gaps in the Philippine food production. From Radio Australia news: “Cyclone Yasi in Australia’s tropical north has made things worse. With much of the sugar and banana crops destroyed, prices for both commodities—domestically and for any exports—are set to soar. ‘A box of 12 kilo, we were paying $28 on Wednesday, yesterday we pay $65,’ he said on Friday. But it is good news for some. Philippines banana growers are hoping to cash in with renewed efforts to export their fruit to Australia. Yet despite the severe shortage, Australian Banana Growers Association president Cameron Mackay does not welcome that prospect. He says quarantine restrictions should continue to apply. Them coming in would jeopardize our industry completely, you know. They’ve got pests and diseases over there we don’t have that would absolutely annihilate our industry, make a cyclone look like nothing.”

The Philippines produces 7.5 million tons of bananas each year, mostly in Mindanao. Australia grows 270,000 tons and the Australian market could be worth $50 million to the Philippines. The Philippine government should be making this a top agricultural priority. It is not. Recently I spoke to a large banana exporter in Davao who has thousands of hectares under production. Ecuador can ship bananas more cheaply to Japan than the Philippines. Crop yields are about the same, but production costs are higher here.

The Philippine government has never been able to formulate a viable, creative and practical agricultural policy meant to increase efficiency and increased production. The so-called “agrarian reform” is a political/social policy not an agricultural policy. And it has not worked even to meet its political agenda.

Food-cost inflation is not a critical issue to the Philippines. A stagnant, regressive and politicized agricultural policy is the only issue that is important.

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