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Probing the optimism of food inflation

Dec 12, 2010

Exorbitant rate of food prices are good news, at least for the farmers of poor nations. The inflation is working as a catalyst to invest and produce more for the farmers who generally are on the not so profitable side of food production, UN report proclaims.


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Any conversation on the streets of New Delhi turns easily to the cost of living, particularly that of eating. Stuck in an ocean of honking traffic in the city centre, Babu Lal complains about the exorbitant rent on his two-room flat, hard to afford on his earnings as a driver. But at least the rent does not vary from month to month. Food prices, on the other hand, have been climbing steadily. Mr Lal now has to fork out Rs110 ($2.40) for a kilo of dal, his main source of protein—a third more than he was paying only a few weeks ago.

Hundreds of millions of people, across India and the world, have similar worries. India’s central bank has raised interest rates six times since January in an attempt to tame double-digit inflation. In China politicians are worried that galloping food prices could cause another round of unrest among the country’s factory workers. The world is not yet in the midst of a food crisis comparable to that of the autumn of 2008. But since the middle of the year there has been a steep rise in the price of most agricultural commodities, including food crops (see chart). And the UN’s Food and Agriculture Organisation reckons that prices are unlikely to fall back to their pre-food-crisis levels in the next decade.

Yet a prolonged period of high prices may not be bad news for everyone. In a report to be released on December 6th, the International Fund for Agricultural Development (IFAD), another UN agency, says higher prices could give farmers, particularly in poor countries, a boost; earning more cash from their produce should spur farmers to lay out more capital on things like irrigation.

In the decade before the 2008 food crisis, when prices were generally low, such impetus was lacking. As a consequence, farmers in poor countries, where agricultural investment had been neglected, could not react quickly when prices shot up. Cereal production in those lands increased by only 1%, compared with 12% in rich countries. To feed a global population that is expected to reach 9 billion by 2050, food output will have to rise by 70%, IFAD says. Not all of that can come from rich countries.

But as things now stand, it is far from sure that farmers in poor countries will be able to take advantage of higher prices. The main problem, says IFAD, is that growers cannot cope with the high risk of producing extra crops. The upfront investment for seeds and fertilisers is high, whereas returns are uncertain. Changing weather and market fluctuations can quickly make an investment unprofitable.

To avoid all that, farmers often retreat into subsistence growing or look for alternative livelihoods. A recent World Bank study of poor-world farmers found that many of them engaged with markets only marginally. Yet such caution carries a cost; research has shown that risk-avoidance can depress farm incomes by as much as 20%. It also means that there is less food on world markets.

So governments should help farmers face up to risk, argues IFAD. One familiar instrument, successfully used in Indonesia and Vietnam, is minimum price floors. But other approaches, not usually associated with agriculture, may work better. In both Africa and India, for instance, text-message services provide farmers with price data from markets in their region, allowing them to offer their produce at the most profitable time and place. Index-based crop insurance, linked to the weather, can also reduce uncertainty. For a poor farmer, assuming risk can seem like courting disaster; but properly managed, it need not be a show-stopper.

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