Economy
 
Rising food prices continue to hurt poor nations
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March 25, 2011
The rising trend of food prices world wide is not likely to stop in near future and would continue to hurt poor economies. Technological advances and increased acreage devoted to food production may help ease pressures on food markets, but that will take time. In the meantime, the world may have to adjust to higher food prices, say economists of IMF.

Steady rises in the price of food since 2000 seem to be a trend and not just the result of temporary conditions, while factors like bad weather are temporary. The main causes underlying the structural change in global food markets will not be reversed, according to IMF economists, Thomas Helbling and Shaun Roache.

The IMF’s food price index which tracks the spot prices of 22 most internationally traded agricultural food items is now close to the spike previously reached in June 2008.

Many countries are struggling with the implications of high food prices, which exacerbate poverty, inflation, and for importing countries balance of payments. The implications are far reaching. The recent social unrest in the Middle East and North Africa, some say, is in response to high bread prices.

When food prices go up, it touches everyone, but the poor are hit especially hard because food makes up a much larger share of their total expenditures. They have little room to buy cheaper food items or to spend less on other purchases. World Bank research shows that 1.1 billion people were living on less than $1 a day and 923 million were undernourished, even before the food, fuel and financial crises.

Floods, droughts, and wildfires around the world have reduced harvests and pushed prices up. But it’s not just bad news that’s causing the increase. As people get richer, they eat more high-protein foods like meat, dairy products, edible oils, fruits and vegetables, and seafood, and less staple grains. This increases demand for land and for crops that are used to feed animals, and that pushes up the price of staple grains as well.

Another factor leading to food price increases has been the recent boom in biofuels. High oil prices, combined with government support for the production of biofuels, have boosted demand for agricultural crops from which biofuels are produced, such as corn, sugar, palm kernels, and rapeseed. Prices have risen as a result, the IMF economists observed, adding that high oil prices also have a direct impact on the cost of producing food. Fuel, including natural gas, is used to produce fertilizers, and also in all stages of agricultural production, from sowing to harvesting to distribution.

The increased demand for agricultural commodities is not likely to be matched by an increase in production, at least not any time soon. Growth in the yield of a hectare of land has stagnated, and it’s hard to find more land to devote to food production.

The surge in international food prices has already caused consumer price inflation in many economies in early 2011. Such direct “first-round” effects are part of the normal pass through of prices, and will fade with time. But if people expect food prices to continue to go up, they begin to demand higher wages, and this leads to “second-round” effects, an increase in core inflation, say Helbling and Roache, adding that the risk of core inflation rising is slim for advanced economies, but significant for emerging and developing countries. In the latter group, food is more important a budget item and confidence in monetary policy is lower, which means higher wage demands and expectations of further inflation.

On the other hand, World Bank also noted that the food prices remain volatile. Local food prices in many countries haven’t come down, although international food prices have fallen. In third world countries such as Pakistan, the issue of mismanagement dominates the food business chain. Because of lack of saner planning, the prices of essential commodities are continuously rising, pushing more people below poverty line.



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