Global Policy Forum

Emerging Nations Tackle Food Costs

Developing countries are taking action against rising food prices, including price caps and export bans. Many governments are concerned that speculation on food prices will cause another political crisis, similar to the violent riots in 2008. Indonesia is removing import tariffs on over 50 items including wheat, soybeans, fertilizer and animal feed. India is extending the ban on the export of lentils and cooking oil. The UN and World Bank advise governments to invest more in new production and agricultural infrastructure to match the rising demand for food.

By Eric Bellman and Alex Frangos

Wall Street Journal
January 25, 2011


Fast-growing emerging nations are taking increasingly aggressive actions to beat back rising food prices as they grow more worried of threats to stability if prices don't start to retreat.


Developing-market governments have unveiled a laundry list of measures-including price caps, export bans and rules to counter commodity speculation-to keep food costs from disrupting their economies as price spikes that some had hoped were temporary have stretched into the new year. Some economists worry that any further supply shocks could push prices even higher, triggering a food-price crisis like the one the world witnessed in 2008, when higher food costs led to violent unrest across the developing world.


In the latest indication of concern, Indonesia said Thursday it will remove import tariffs on more than 50 items including wheat, soybeans, fertilizer and animal feed in an effort to slow the rise in food prices. Indonesia is also planning to raise taxes on palm-oil exports to 25% from 20% next month, according to a government official familiar with the matter.


Bad weather, more-affluent populations and underinvestment in agriculture have pushed up prices of everything from wheat, rice and onions in India, chilies in Indonesia and water spinach in China. Some point to low interest rates in the U.S., Japan and Europe, as investors use cheap financing to invest in globally traded commodities such as rice, sugar, cotton and oil, driving their prices higher. Soy bean prices in the past six months have risen 46% to more than $14 a bushel at the Chicago Board of Trade. Sugar, while lower than in November, is still up 34% over six months ago to around 31 cents a pound in IntercontinentalExchange trading.


In response to the price pressures, India earlier this month extended bans on exporting lentils and cooking oil. It also struck a deal with archrival Pakistan to import 1,000 tons of onions, a key cooking ingredient whose price has skyrocketed after floods.


China and several countries in the Middle East have instituted or strengthened ongoing price controls. South Korea has lowered import tariffs on some foods. Indonesia has been encouraging its citizens to plant chilies to boost supply.






In addition to removing tariffs, Indonesia plans to spend up to 3 trillion rupiah, about 331 million, to help residents hurt by price fluctuations and is also calling on other developing countries to avoid hoarding rice or restricting rice exports, measures which contributed to the 2008 panic, said Mari Pangestu, Indonesia's trade minister.


"We don't think that is the right thing to do," she said in an interview last week. "At the end of the day it hits back at you," she said, though she added, "In some cases, it's unavoidable."


It's unclear whether the latest steps will be enough to curb the price increases or whether they are a precursor to more drastic-and potentially destabilizing-actions later, such as trade barriers and government-sanctioned hoarding. Economists have long argued steps such as price controls don't work because they distort markets and discourage farmers from planting more crops.


Instead, groups such as the World Bank and the United Nations have pressed governments to more aggressively boost investment in new production and new agricultural infrastructure including irrigation, storage facilities and farm-to-market roads. Investment has indeed increased in many countries, but it hasn't been enough to match rising demand.


Interest-rate increases, which are often used to contain inflation, tend to have a limited effect on food prices in the short term since prices are often dictated by supply, and it's often hard to increase production quickly. But doing nothing leaves the chance that food-price increases will leak into other parts of the economy, as consumers and businesses generally perceive inflation going higher.


The actions targeted at food so far are considered mild compared to the frenzy that helped exacerbate the food-price scare in 2007 and 2008. Then, countries including India, China and Egypt restricted rice exports to protect their populations from the global surge in prices. The hoarding only worsened the situation as rice prices soared globally.


"We are very concerned about a rerun of 2008," said Frederic Neumann, co-head of Asian economics global research at HSBC in Hong Kong. "We can't rule out that rice could start to move again if governments start to panic."


Lower-income economies are more sensitive to food inflation because the poor spend a higher percentage of their incomes on food. Any jump in the price of basic ingredients for villagers or slum dwellers can trigger widespread distress and even rioting. France, which holds the presidency of the Group of 20, has pledged to put food prices at the top of the agenda at multilateral talks in coming months.


Food prices helped spark riots in Algeria earlier this month, forcing the government to cut import duties and taxes on sugar and cooking oil. Jordan cut fuel taxes and imposed price caps on sugar and rice to preempt unrest. Russia banned wheat exports last year after a poor harvest.


Some analysts say this time is different from 2008, and governments are better prepared by keeping bigger stockpiles of the most sensitive staples, such as rice and wheat.


In South Korea, the government unveiled a package of inflation-fighting tools Jan. 13, including a rate hike, increased housing supply and a drop in tariffs on imported milk powder and coffee beans. The Mexican government said in December it executed futures contracts to lock in the price of corn used to make tortillas.


The Chinese government directed local governments in November to institute price controls and other measures where needed.


India, for example, has enough wheat stored away to supply the country for more than 80 days if needed. Back in 2008, its wheat stock level had fallen to less than 30 days, according to a recent report by Credit Suisse. Prices for rice, the world's most important and politically sensitive grain, have risen in the past six months, but remain well below 2008 highs.


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