Asian Development Bank - Global Food Price Inflation and Developing Asia

March 2011

Asian Development Bank

2011 Asian Development Bank

All rights reserved. Published 2011.

Printed in the Philippines.

ISBN 978-92-9092-282-7

Publication Stock No. RPT113155

Cataloging-In-Publication Data

Asian Development Bank.

Global food price inflation and developing Asia.

Mandaluyong City, Philippines: Asian Development Bank, 2011.

1. Food price. 2. Inflation. 3. Developing Asia. I. Asian Development Bank.

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This report was prepared by a team from the Economics and Research Department (ERD) and the Regional and Sustainable Development Department (RSDD), under the overall guidance of Xianbin Yao and Juzhong Zhuang. Authors include Shikha Jha, Hyun H. Son, and Lea Sumulong from ERD; and Lourdes Adriano, Michiko Katagami, and Katsuji Matsunami from RSDD. The authors are grateful to Maria Socorro Bautista, Indu Bhushan, Douglas H. Brooks, Changyong Rhee, Lei Lei Song, Guanghua Wan, and Joseph Ernest Zveglich, Jr. for comments and suggestions during the preparation of this paper; Emmanuel San Andres for excellent data assistance; and Anneli S. Lagman-Martin for editorial assistance.

Global food prices registered a new high in February 2011, rising by more than 30% year-on-year, underpinned by large increases in the prices of cereals, edible oils, and meat. While the recent price increases were triggered largely by production shortfalls due to bad weather, structural and cyclical factors that were at play during the 20072008 food crisis continue to be relevant, especially in light of the strong recovery of many emerging economies from the global economic crisis. In the short term, a continuing trend of high and volatile food prices is likely. This is because grain carryover stocks have been falling as production has been unable to meet utilization requirements. In addition, supply uncertainties are rising due to extreme weather disturbances. Hikes in the international prices of rice and wheatthe two key staples produced and consumed in developing Asiatogether with increases in other domestic food items, have translated to an average domestic food price inflation in January 2011 of about 10% in the region. Simulation results suggest that if a 30% increase in global food prices persists throughout 2011, gross domestic product (GDP) growth for some food-importing countries in the region could be choked off by up to 0.6 percentage points. If this is combined with a 30% increase in world oil prices, GDP growth could be reduced by up to 1.5 percentage points compared with the baseline scenario where food and oil price hikes do not occur. Higher food prices erode the purchasing power of households and undermine the recent gains from poverty reduction. A 10% rise in domestic food prices in developing Asia (home to 3.3 billion people) could push an additional 64.4 million into poverty, or lead to a 1.9 percentage point increase in poverty incidence based on the $1.25-a-day poverty line. The frequency with which food price spikes have occurred in recent years suggests that long-term solutionssuch as improvements in productivity, increases in agricultural investment, stronger market integration, targeting subsidies to the poor, and global and regional cooperationneed to be implemented to secure food supplies for the worlds growing population.

When commodity prices returned to historic trend levels in late 2008, it was believed that they will rise over the next decade but only gradually. Contrary to most expectations, however, the specter of high commodity prices has reemerged ( Nevertheless, crude oil prices have remained below the $145 per barrel documented in July 2008. In contrast, nonenergy prices have surpassed the peaks recorded in 2008, underpinned by record prices for agricultural commodities, metals and minerals, and raw materials.