Vol.7, No.3-4, 2011
trade, leading to higher food prices.For instance, Russia, the United States(US), China and Central Asia were battered by drought. India and Russiaimposed embargo on grain exports,the US and the European Union (EU)saw unfavourable weather conditionsand Pakistan and Australia had heavyrains and ﬂoods—all putting pressureon food supply and then food prices.The weakening of the US dollar, surgein oil prices, unfavourable weatherevents, commodity market ﬂuctua-tions, and restrictive trade policiesmight further exert upward pressureon global food supply and prices.The FAO predicts that high andvolatile prices are likely to persistthis year and in the coming years too,primarily because of the uncertain-ties surrounding output in majorfood-producing countries and a sharprun-down on inventories.
This comesabout even after forecast of an increasein food production this year and inthe future as well. For instance, cerealproduction this year is expected to be 3 percent higher than in 2010 butprice is not expected to come down.
Cereal price is expected to remain highparticularly in import-dependent de-veloping countries. However, the risein food prices is not homogenous in allcountries. Buoyed by high domesticproduction and market restrictions,some countries might see lower localprices while others might experienceever-rising prices. But food prices willremain high in food-deﬁcit low-in-come countries.After the decline in food pricesfollowing a spike in 2008, food priceshave been surging again in all SouthAsian countries since last year. Thisis not only impacting macroeconomicstability, particularly through increas-ing food import bill, widening tradedeﬁcit, and increasing general prices, but also pushing millions of people be-low the poverty line. Food prices have been rapidly increasing in most of thecountries following a convergence of food-price inﬂation rates in 2003. Inthe recent period, food price inﬂationin Pakistan, followed by Nepal, is thehighest in South Asia.
Food prices in South Asia are not im-mune to the changes in prices at theglobal level. The prices reﬂect bothglobal and domestic trends in output,supply-side constraints, and trade andexchange rate policies. The rapid risein food prices in South Asia is follow-ing the global rise in food prices. Someof the major factors that have beenpushing up food prices are discussed below.
In South Asia, the ﬂooding in Pakistanin 2010 submerged a large swath of land (almost one ﬁfth of total landarea) and destroyed crops. This yeartoo, Pakistan is seeing heavy ﬂoodingand has about 4.2 million acres of landsubmerged in water since late August.Similarly, Bangladesh was battered by cyclone and heavy rains, whichaffected food production. Afghanistanis facing long precipitation deﬁcit andlocalizedﬂoods. These events havetriggered negative supply shocks inSouth Asia. Globally, weather-relatedevents have affected output in Russia,Canada, the US, Australia, China,Argentina and Kazakhstan, amongother major food producers. All of these have ampliﬁed supply shocksand pushed up prices.
Though total production has increasedin most cases, it has not kept pacewith population growth, leading toexcess demand for food items. Theworld population is expected to reachnine billion in 2050. The South Asianpopulation is projected to reach 1.9 billion in 2025 and 2.3 billion in 2050.This will further increase prices if production does not match populationgrowth. Moreover, the added demandfor food from the emerging middleclass in developing countries will putmore pressure on food prices as theyconsume more meat and ﬁsh products,which require even more basic fooditems to produce.
The World Bankestimates that the demand for foodwill rise by 50 percent by 2030, thanksto rising population, rising afﬂuence,and a shift in dietary consumption bythe middle class.
Increased demand for biofuels
Biofuel demand was widely seen asone of the factors behind the soaringfood prices in 2007–2008 and it contin-ues to be seen as a major factor behindthe current high food price spree. In2010, the production of corn-basedethanol absorbed about 15 percent of global corn production.
The increasein biofuel demand in the US andthe EU created a demand shock andpushed up food prices, which werealso reﬂected in food prices in SouthAsia.
Export restrictions have heightenedanxiety among net food-importingcountries, leading to a situation whereeveryone is pre-emptively purchasingfood from the international marketand stocking it up. This led to a sud-den increase in demand, created hyste-ria, and pushed up food prices. More-over, depletion of inventory addedfuel to ﬁre and sent food prices up inthe interim period, i.e., until the inven-tories were replenished. Protectionisttrade policies were observed recentlywhen food prices skyrocketed. WorldBank economists have estimated thatrestrictions on rice exports explainedalmost 40 percent of the increase inglobal rice price in 2007–2008.
Though speculation of food commodi-ties itself is not a direct cause of highfood prices, excessive speculation mayhave magniﬁed the impact of real food
Rising food pricesare not only im-pacting macro-economic stabilitybut also pushingmillions of peoplebelow the povertyline.