FOOD INFLATION

AROOJ ASGHAR
(feedback@pgeconomist.com)

May 7 - 20, 20
12

Agricultural prices rose sharply in the past four years in Pakistan. They are forecast to remain high in the medium term. Higher food prices are of significant concern for the policymakers as they affect common person.

Food inflation and related crisis in Pakistan is slightly different from food crisis in other countries of the world that are facing shortage of supply of food grains. In case of Pakistan, it is not a supply pushed crisis, but the case is that poor people are unable to get access to food. The Asian Development Bank (ADB) said food inflation has averaged 18 per cent a year for the past three years (much higher than overall inflation), ensuring that a larger share of income, particularly for the lower quintiles, is required to meet this essential need.

In a report, ADB calculates that a 20 per cent rise in food prices has increased the number of the poor by 4.5 per cent thus pushing an additional seven million people below the $ 1.25-a-day poverty line in Pakistan.

This is because of the ineffective and inefficient marketing strategies, lack of adequate storage facilities and hoardings.

There is no doubt that Pakistan is facing the food crisis in a sense that prices of food items are continuously increasing and marginal cost of food items for common person is increasing.

We have also witnessed a sudden and almost a runaway type of food inflation in recent past. The way the price of vegetables and other food items soared, it created doubts in the minds of the common people and the economists alike.

People are buying bananas, grapes, and tomatoes being imported from India, China, and Bangladesh. This is happening in a county, which claims to have agro-based economy.

Food inflation remained below 10 per cent during 1997-98 to 2003-04. It started to accelerate after 2003-04 and went up to 12.5 per cent in 2004-05 and was 17.5 per cent and 26.6 per cent in 2007-08 and 2008-09 respectively.

As per the Economic Survey of Pakistan, food inflation in 2010-11 was persistently rising and recorded at 18.4 per cent as against 12 per cent in the comparable period of last year. This sudden rise in food inflation was because of shortages of wheat, increase in the support price of wheat, increase in prices of some food items such as rice, edible oil, meat, pulses, tea, milk, fresh vegetables and fruit and a rise in international prices of food items along with the oil prices.

As per the statistical department of Pakistan, food inflation has entered a double-digit growth of 10.7 per cent in April this year from a year ago. As a result, prices of non-perishable food items witnessed a surge of 10.04 per cent and that of perishable items 14.63 per cent. The price of food items, which increased included tomatoes (62.31 per cent), pulse gram (35.54 per cent), gram whole (32.55 per cent), besan (30.78 per cent), condiments (25.56 per cent), chicken (22.58 per cent), milk powder (18.69 per cent), milk products (18.18 per cent), spices (17.99 per cent), and onion (17.96 per cent).

It is a matter of surprise and concern that while Pakistan is expecting to harvest record production of wheat and rice, prices of commodities continue to be volatile in nature and character.

Rise in food prices is completely a domestic issue. Winter is generally the time when fruits and vegetables are at the lowest prices. This was not so this year. The prices were way above the expected normal. This happened in spite of the normal monsoon and average inflation in other sectors.

Inflation in the food sector has also spilled to other sectors causing the rise in overall inflation. Grain production has been almost stagnant for more than 10 years and now there is a growing gap between supply and demand of food grains.

Food inflation has pushed up the living cost of households especially in developing countries like Pakistan. Food inflation is more a manmade phenomenon because of poor marketing network, storage, and infrastructure. Prevention is better than cure. Pakistan has to meet its needs itself and the current market prices make imports unviable. Future looks uncertain if the country continues to neglect agriculture as has been the case for decades.

As a matter of fact, massive investment is needed in handling, storage, and transportation infrastructures. Financial resources will have to be mobilized from both the public and private sectors. Hence, Pakistan must build a strong marketing network for its agricultural produce.

The food inflation is half attributable to mismanagement and remaining to real food crisis. The food crisis is mainly attributed to a variety of causes including expansion of bio-fuel production, high oil prices, exogenous supply shocks (e.g. bad weather and floods), government policies (e.g. export bans), high transportation costs, increasing prices for agricultural inputs, and exchange rate fluctuations.

There is a huge difference between the cost of production and the price the final consumer pays. The farmer gets a very, very small amount of this profit/difference of cost and final price. Then there is always the problem of black marketing and illegal stocking of goods by hoarders to churn up profits. So, we actually need checks on the middlemen and the retailers. Secondly, the system of direct farm to shops has to be developed so that the farmers are the real beneficiaries. This will also motivate the farmers to increase production.

Other problems leading to food inflation are:

* Illegal trading activities like hoarding and black marketing by intermediaries in the distribution system;

* As compared to developed countries, Pakistan's crop yields are comparatively low and in some cases, it is less than the world average. Reluctance of farmers in adopting new technologies in farming;

* Increase in the prices of fuel which is a key input for transportation of agri commodities to processing or consumption centers, thus oil prices affect the input cost and lead to inflation to a great extent;

* Even though many universities research labs and other corporate entities are developing good high productive seeds having good resistance to diseases, they are not easily available to small farmers at a low cost.

There is a need to bring improvement in yields from the available land. Urgent focus is needed to enhance farm productivity by way of technology transfer in seeds, advanced agricultural practices including farm mechanization and drip irrigation and other agri-inputs. Government should also take immediate measures on reducing the cost of inputs. Inefficient and insufficient post harvest storage infrastructure results in a loss of over 10 per cent of food grains and fruits and vegetables produced. Improvement in post harvest processing and storage utilities can also significantly contribute to reduction in losses and longer shelf life for perishable.

As the current situation and trends indicate that there is no alternative to self-sufficiency in agriculture, thereby every person in the country must get access to food.

Tackling food inflation should be the key priority of the government and policymakers as it affects the weaker sections of the society. The issue should be tackled by addressing supply side risks through economic and policy-oriented actions and by mitigating risks due to natural calamities. Only an integrated approach would ensure food security on long-term basis.