Asia Is One Supply Shock Away from Another Food Price Spike, Says ADB

HONG KONG, CHINA – Developing Asian countries must implement structural reforms that support the agricultural sector or else face another dramatic rise in food prices, the Asian Development Bank (ADB) warns in a new major report.

The Asian Development Outlook 2008 Update (ADO Update), released today, says that even though the price of food staples, like rice, have fallen to more sustainable levels in recent months, the crisis is not yet over.

“Demand for food continues to outstrip supply,” says ADB Chief Economist Ifzal Ali. “Asia is just one supply shock away from another grain price spike.”

The report explains that the drivers of this year’s global food crisis – where the price of rice rose from below $400 a ton at the start of the year to $1200 a ton in May, before falling to $730 a ton last week – are many and far between, but that chronic supply issues remain the most significant force pushing prices higher.

Over the past decade, the report says, population and income growth have far outpaced productivity growth as measured by rice yields per hectare.

The ADO Update acknowledges that this is a direct result of declining public investment in the infrastructure, institutions, and innovations that underpin agricultural productivity growth.

“Governments have to invest in public goods that support agricultural productivity growth and allow clear market price signals to pass through to producers and consumers alike. Only a robust supply response by Asia’s farmers can bring down prices to comfortable levels again,” says Mr. Ali.

The report explains that the 2008 food crisis was created by a perfect storm of events:

* rapid economic growth in emerging economies, particularly the People’s Republic of China and India, placing upward pressure on prices of a range of commodities, including food.
* a weak US dollar placing upward price pressure on dollar-denominated commodities, particularly crude oil.
* a combination of high oil prices and legislative mandates to raise production of biofuel substitutes for gasoline and diesel fuel established a price link between feedstocks, such as corn and vegetable oils, and fuel prices.
* low interest rates fuelling financial speculation in the commodities market.

The report also notes that the decision by some Asian countries to slap export bans on their rice to secure domestic stocks in the face of rising prices served only to push prices higher.

“The price spike in 2008 was in part triggered by export bans in India, Viet Nam (the world’s second- and third-largest rice exporters), and elsewhere that led to panic among buyers, consumers, traders, and farmers alike. This sudden withdrawal of supplies of rice in the thin international market drove prices spectacularly high,” says Mr. Ali.

Looking forward, the report predicts that food prices will not return to the levels seen prior to 2008, at least for the foreseeable future. Even if governments begin to invest in the agricultural sector, the report says, it will still take several years of good harvests to rebuild dwindling global grain stocks.

“To do this, the prices that farmers receive for their produce must stay high, particularly since input costs have risen with oil prices. Fertilizer prices, for example, have soared and transport and other fuel-related costs for farm machinery are also up,” says Mr. Ali. “The world has seen a reversal of patterns, with declines in real food prices over the last three decades and the prospect of high food prices over the next decade or more. Asia must undertake structural reforms to adjust to this new environment of resource scarcity.”