Spectre of food inflation

| Updated on March 09, 2018 Published on June 10, 2011

New Delhi must stay glued to developments around the world even while striving to enhance kharif crop production over the next four months.

It is no coincidence that at a time when the Food and Agriculture Organisation of the United Nations has, in its latest Food Outlook, cautioned that world food prices are set to remain high and volatile into the next year, comes an Unctad report calling for stricter regulation of commodity market financialisation and suggesting a tax that slows financial market activities. There is growing concern that unfettered speculative capital has fuelled the commodity boom-led inflation in recent years, but has not advanced the real objective — ‘price discovery'. If anything, inflation is not only eroding the economic gains made post-2008, but also threatening to derail sustained economic recovery.

The prices of energy products, industrial metals, base metals and agricultural commodities are all ruling at elevated levels — driven not by the market fundamentals of demand, supply and inventory but by extraneous factors such as flow of speculative funds, currency gyrations, geopolitical developments and easy money. Clearly, too much money is seen chasing investment assets; and commodities have emerged as an attractive asset class because of their price performance. Worse, while consumers of commodities end up paying high prices, the benefits do not flow in full measure to the primary producers. In other words, there is transfer of wealth from the consumer, not to the producer but to the middlemen, who take speculative positions in the derivatives market without any genuine exposure to the underlying commodity. Of course, it is no one's case that derivatives trading by itself creates shortages or inflation; but such trading does exaggerate the price action. As herd behaviour drives up prices, the UN has called upon governments to deflate the commodity bubble, and recommended international oversight, more transparency and effective intervention.

While inflation, in general, is corrosive, food inflation hits the poor the hardest. Globally, high crude oil prices have raised the cost of food production and distribution. Additionally, a sharp rundown on inventories and only a modest overall production increase for the majority of crops has exacerbated the situation. This has raised food inflation to levels where many governments are reacting in a knee-jerk fashion. In addition to trade and tariff measures to fight food inflation, bank credit is being tightened from time to time, but with limited success.The prospect of food prices doubling is very real in the coming decades. The world needs short-term and medium-term plans to fight the emerging food price crisis. With the planting season on in the northern hemisphere, the next few months will be critical in determining how the major crops will fare. New Delhi must stay glued to developments around the world even while striving to enhance kharif crop production over the next four months.

Published on June 10, 2011
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