Rising food prices in Bangladesh: Causes, poverty impacts and policy actions

FOOD prices in both domestic and international markets have reached all-time high in recent times. The
surge in the prices of food grains, especially that of rice, has become a matter of serious concern not only in
Bangladesh, but also in Asia as well as around the globe. There has been considerable erosion of purchasing
power of the poor who spend more than 60 per cent of income on food. This has obviously put them at greater
risk of hunger and malnutrition, which has threatened to undermine the gains in poverty reduction that
Bangladesh has achieved in recent years. In fact, this may even reverse the trend of poverty reduction unless
effective and coherent actions to assist the vulnerable population to cope with the drastic hikes in their food
bills are implemented by the government on an urgent footing.

The combination of new and ongoing forces is driving the world food situation and the prices of food
products. One emerging factor contributing to rising food prices is the high and rising price of energy. Energy
and agricultural prices have become increasingly intertwined. With oil prices at an all-time high approaching
$150/barrel, the U.S. government is subsidizing farmers to grow crops for energy. The U.S. farmers have
massively shifted their cultivation towards bio-fuel feed stocks. High energy prices have also made
agricultural production more expensive by raising cost of mechanical cultivation and fertilizers, as well as
marketing including cost of transportation. At the same time, the growing world population is demanding
more and different kinds of food.

Rapid economic growth in many developing countries, especially China and India has pushed up consumers'
purchasing power, generating increased demand for food. This has shifted food demand away from
traditional staples and toward higher-value foods like meat and milk.

This dietary shift is leading to increased demand for grains used to feed livestock. It needs to be noted here
that although both cyclical and structural factors have contributed to recent surge in prices, the latter are
likely to dominate the former causing the higher prices to persist for the foreseeable future.

Bangladesh, a net importer of food grains, has been seriously affected by food shocks, driven by higher
international prices and domestic production shortfalls following the natural disasters. Although domestic
upward price pressures eased somewhat by early May, the prices of rice and wheat in the domestic market
are still much higher than those of the preceding year. Bottlenecks in the distribution and retail marketing
chain, hoarding and panic buying by consumers aggravated the domestic price situation. The administrative
action by the government was largely counter-productive and failed to arrest the upward trends in prices.
Despite a bumper boro harvest, there is fear of supply shortage, if the next aman is adversely affected by
natural disasters. In that case, the shortfall will have to be addressed by creating buffer stocks through higher
imports.

The boro procurement target of the current season is 1.2 to1.5 million tons, which is 50 to 80 per cent higher
than average boro procurement in the last five years. At the beginning of FY08, the public food distribution
system (PEDS) had a stock of 0.6 million ton of food grains compared to one million ton recommended by
National Food Policy. Despite higher imports compared to the previous year, food grain stocks of the PFDS
had depleted to 0.5 million ton at the end of March 2008 due to higher off-take for the targeted distribution
under the safety net programmes.

Net food importing countries such as Bangladesh are struggling to meet domestic food demand. Surging food
prices hit those most, who can afford it the least-the poor households. Households that are net buyers of food
represent the large majority of the poor households. They are adversely affected. Adjustments in the rural
economy, which can create new income-earning opportunities, would also take time to reach the poor. The
nutrition of the poor is also at risk when they are not insulated from price increase. Higher food prices lead
the poor to limit their food consumption and shift to even less balanced diets with harmful effects on their
health in the short - and long-terms.

High food inflation has two important implications. First, high food inflation increases the price of food-
related non-food items and since higher proportion of the consumption basket of the poor in Bangladesh is
allocated to food items, the poor have to buy some food items at higher prices.