Food Price Transmission in South Asia*
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 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.
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 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.
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.
* This article was originally published in The Business Line on 14 June, 2011