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Food
Price Transmission in South Asia* |
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Jun
14th 2011, C.P. Chandrasekhar and Jayati Ghosh |
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The current food price surge is raising the spectre
of a renewed and possible even more ferocious global
food crisis, with significant increases in food insecurity
in the poorest countries. But this time, there are some
dissenting voices, including those who argue that possibly
the earlier recent bout of food price increases (which
occurred over 2006-08) did not have as bad an impact
on hunger and undernutrition as was earlier believed.
Indeed, it is being argued by some that in fact the
extent of hunger in the developing world may actually
have come down significantly even during that period
of dramatic food price increase.
Most estimates of increasing hunger are based on simulation
exercises that take note of global food price increases
and assume that these will lead to domestic increases
in food price which will in turn affect food consumption,
especially of poorer families. Against this, it is argued
that such exercises do not take account of increasing
money incomes and people's choices about what to consume.
A recent paper by Derek Headey (''Was the global food
crisis really a crisis? Simulations versus self-reporting'',
IFPRI Working Paper No 1087, 2011, available at http://www.ifpri.org/publication/was-global-food-crisis-really-crisis)
argues that global self-reported food insecurity fell
from 2005 to 2008, with the number ranging anywhere
between 60 million to 250 million. This is based on
calculations using a Gallup World Poll of self-reported
food insecurity. According to Headey, ''These results
are clearly driven by rapid economic growth and very
limited food price inflation in the world's most populous
countries, particularly China and India.'' This idea
has also been taken up by others such as Dani Rodrik.
Of course, there are significant problems with using
self-reporting of hunger at the best of times. The Gallup
Poll asks the question: ''Have you or your family had
any trouble affording sufficient food in the last 12
months?'' The percentage of respondents who answer yes
to this question is taken as a measure of national food
insecurity.
It
is worth looking carefully at the Gallup Poll methodology
before we decide to jump to hard conclusions, though.
The Gallup report on its food security survey notes
that it is based on telephone and face-to-face interviews
conducted throughout 2005, 2006, 2007, and 2008, with
randomly selected sample sizes (typically around 1,000
residents) in 134 countries - so a total of less than
140,000 people across the world, and only 1000 respondents
even in huge countries like India. The distribution
of the samples across urban and rural locations or by
income category is not clear at all, nor is the proportion
that was contacted by telephone. This is not exactly
a solid basis on which to draw major conclusions on
the extent of global hunger.
The Gallup Poll people themselves do not seem to think
they can make intertemporal comparisons based on these
data: their own conclusion is that ''even before the
crisis, affording food was a challenge for many''. Basing
a major conclusion on this rather weak ''self-perception''
data, as Headey does, is really not justifiable.
Of course, Headey is quite right to point out that there
may be differences in the impact of global food prices
upon consumers in developing countries, depending on
the extent to which such prices are transmitted to domestic
retail food prices, as well as the opportunities of
earning incomes that allow more expensive food to be
purchased. It is certainly also the case that the negative
effect of food prices can be mitigated by other factors
and policies such as employment schemes, subsidised
food distribution and so on.
Even so, it is indisputable that the main mechanism
through which higher global food prices affect people
remains domestic food prices. Here, the bad news is
that the international transmission of increases in
food prices has generally been rapid (and is getting
faster and more complete) while the downward movements
have not been transmitted so much.
What may be even more significant is that even in India,
which is taken (along with China) by Headey and others
to be a major part of the explanation of the supposedly
surprising result about reduced food insecurity, food
prices have risen sharply over the past few years. The
more disturbing feature is that domestic prices have
increased along with international prices, but there
has been little transmission of downward price trends,
indicating some kind of ratchet effect in domestic prices.
These tendencies are evident from a consideration of
South Asian countries. The accompanying charts are all
based on data from the FAO GIEWS (Global Information
and Early Warning System) online database. Chart 1 provides
information on wheat prices in global trade as well
as retail prices of wheat flour in domestic markets
of four South Asian countries, all in US $ per kg.
Chart
1 >> Click
to Enlarge
Chart 2 elaborates on the evidence in Chart 1 by noting
the extent of trough to peak and peak to trough changes
in wheat/wheat flour prices, both internationally
and in these domestic markets. The dramatic price
increase in global wheat prices, more than doubling,
was met by sharp price increases also in South Asian
countries. The increase in prices was indeed lowest
in India, which has a greater degree of self-sufficiency,
but even in India wheat flour prices rose by 40 per
cent over the first period of price rise between March
2006 and June 2008. This is a very significant increase
in a country where around 95 per cent of workers'
incomes are not indexed to inflation.
Further, when global wheat prices fell, domestic retail
wheat flour prices continued to increase in India
and Nepal, and fell only marginally in Pakistan and
Sri Lanka. So the force of downward international
price transmission is much weaker if not non-existent.
The implication comes out even more sharply from Chart
3, which show the change in price levels for wheat
compared to March 2006. By June 2010, wheat prices
in global trade were down to lower than the level
of March 2006, despite having increased so dramatically
in between. But in all the South Asian countries considered
here, prices in June 2010 were still significantly
higher than they had been in March 2006. And of course,
they continued to rise in the subsequent period, when
global prices also rose once again.
Chart
2 >> Click
to Enlarge
Chart
3 >> Click
to Enlarge
However, the recent very sharp rise in global wheat
prices, since June 2010, has clearly not yet filtered
into changes in retail prices in South Asia. To some
extent this may be because good rabi harvests in the
region have ensured that domestic supplies are adequate.
However, the impact of expectations - and the associated
role of financial players - is now growing even in
these markets, especially in India where wheat futures
markets have been allowed to function once again.
Therefore it is likely that the near future will once
again see some further international price transmission
even in these markets.
Similar patterns are evident in rice, even though
this is a grain which has a relatively small and shallow
global trade market (for example, India's annual rice
output is more than six times total world trade in
volume terms).
Chart
4 >> Click
to Enlarge
Chart 4 shows the monthly behaviour of rice export
prices as well as domestic retail prices of rice in
five South Asian countries. The transmission of rising
global rice prices appears to be especially acute
in Pakistan and Sri Lanka, both of which import rice
to the extent of around one-third of domestic consumption.
But in the case of these countries, as Chart 5 shows,
the downward transmission of falling prices also occurred
to some extent - although once again to a lesser extent.
It is worth noting that in India retail prices of
rice kept rising through all phases, and indeed in
the most recent phase have risen faster than global
prices.
Chart
5 >> Click
to Enlarge
As
a result, as evident from Chart 6, Indian rice prices
are now nearly three times higher than they were in
February 2006, even though global rice prices are now
only 69 per cent higher. In fact, other than Bangladesh,
the current level of rice prices is higher in all the
South Asian countries than in February 2006, in comparison
to world prices.
So domestic factors celarly do play a role in the international
transmission of food grain prices, especially at the
retail level. However, this analysis also shows that
global prices do put upward pressure on domestic prices
when they are rising, even though downward movements
are less rapidly or effectively transmitted and often
do not have any such impact.
This clearly calls for more detailed investigation into
the factors operating at different levels in various
countries, and particularly the policy mix that will
enable countries with large hungry populations to withstand
the current global volatility in food prices.
Chart
6 >> Click
to Enlarge
*
This article was originally published in The Business
Line on 14 June, 2011
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