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5 reasons why food prices will keep rising, and rising

Discussion in 'World Economy' started by StingRay, Jun 19, 2011.

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  1. StingRay

    StingRay 2nd Lieutant FULL MEMBER

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    5 reasons why food prices will keep rising, and rising

    Recent months have seen some abatement in the incessant rise in food prices, with food inflation remaining below the 10% mark for the past three months. However, we believe that food prices will probably remain sticky on the downside — they will not come down in a hurry. In absolute terms, they will keep rising.

    Five reasons why.

    One, there is an increasing demand-supply gap for agricultural products. Two, minimum support prices have been increased. Three, as Firstpost has been arguing, India is getting caught in a classic wage-price spiral. Four, increased ‘financialisation’ of the commodity markets has taken place (ie., there is speculation in commodity prices). Five, there is a diversion of agricultural land for biofuels, leading to a potential shrinkage in land available for agriculture.

    Domestic factors:

    #1. Demand-supply gap: India’s per-capita foodgrain produce is at its lowest decadal figure since 1961, going by production in the domestic market. At 180 kg per person, foodgrain production has seen its second consecutive decade of decline. The reason: population growth has far outstripped foodgrain production. For the decade ending 2010, population grew by almost 18% over the previous decade while foodgrain output grew by under 11%.

    #2. Rising minimum support prices (MSP): Recently, the Cabinet Committee on Economic Affairs increased the MSP of major food crops like rice, jowar, bajra, maize, and pulses, among others, by anywhere between Rs 80-400 a quintal. With all other factors remaining the same, just this move has resulted in an 8-14% increase in the prices of these products.

    The price impact of this move will not be immediate, since it is for the kharif crop of 2011-12, so we should start seeing an increase in food prices on this count from the third quarter of 2011-12 onwards when the kharif crop begins to get harvested. If the Food Security Act is legislated, it will need huge grain procurement. This will call for even higher MSPs.

    #3. Wage-price spiral: Firstpost has already argued that the Indian economy is caught in a wage-price spiral. Salaries are expected to rise by 10-13% on an average this year, according to reports, among the highest in Asia. This further puts pressure on overall inflation. Rising incomes also lead to higher consumption per head of food up to a point. In rural areas, NREGA wages are pegged to inflation, which depend again on food prices.

    International factors:

    #4. Speculation in commodity markets: A recent report by the United Nations Conference on Trade and Development (Unctad) points to a high degree of co-movement between commodity price increases and proxy indicators for speculation in the commodity markets like economic data releases. The report also argues that an increasing amount of money is deployed in the commodity markets, and real business cycle factors no longer hold an adequate explanation for increased commodity prices.

    #5. Diversion of agricultural lands: The OECD, the rich countries’ club, in its outlook for food prices over 2007-16, argues that the rise of the biofuel industry could lead to a higher plateau for food prices over the period. With crude prices on the rise, and fresh geo-political issues in the Middle East, the biofuel industry is only likely to get more impetus.
     
  2. StingRay

    StingRay 2nd Lieutant FULL MEMBER

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    Rising food prices push 10mn more Indians below poverty line

    For a country that has been reeling under the impact of higher food prices, here are some chilling numbers. They really hit hard. Food prices single-handedly seem to have considerable power to reverse our progress as an economy. The price rise in food staples between June and December 2010 could have pushed as many as 10 million more Indians into poverty.

    In its recent report “Estimating the short-run poverty impacts of the 2010-11 surge in food prices”, the World Bank estimates that the price increases in the second half of 2010 have increased the poverty head count in India by 0.8 percentage points. We infer the increase in the number of poor from their data measure on total population (1.19 billion) and the poverty rate used for their analysis (43.8%). Typically, given that poor households spend a majority of their income on food, rising food prices hit them the hardest.

    The World Bank looks at the impact of rising food prices across developing countries and provides a commodity-wise impact on poverty. So, for India, an increase in prices of ‘Oils and fats’ has led to an almost 0.5 percentage points increase in poverty alone, as global prices of various oils rose between 30-65% in the second half of 2010.

    Sugar, rice and wheat price increases have also resulted in a rise in the poverty headcount in India. And this is despite the fact that price hikes in India are nowhere near global levels. However rising import prices of food will compound the inflation situation further.

    The prices of sugar, rice and wheat globally have increased between 20-75%, but in India price increases for all three are at sub-10% levels.

    This is an alarming wake-up call for a country that has not seen an abatement in food price increases even now. Food inflation jumped to a two-month high of 9% in terms of annual growth recently.

    Of course, in India the question of what is the subsistence amount required per day has been a subject of debate (in this report, the World Bank uses US $1.25 per day, or between Rs 55-60 as the poverty line), but that does not take away from the gravity of the issue at hand.

    The Mahatma Gandhi Rural Employment Guarantee Act (NREGA), the country’s biggest anti-poverty scheme, gives a minimum wage of Rs 100 for 100 days of work to those who want it. So the World Bank definition of the poverty line is not out of whack.

    Seems like anti-poverty schemes also increase the levels of poverty when they push prices up. The key number to look for is how much they reduce poverty and how much they increase it through wage-price inflation.
     
  3. Kronus

    Kronus Lieutenant SENIOR MEMBER

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    RBI says it has no magic wand to bring down inflation


    NEW DELHI: After having raised its key policy rates 10 times in a year-and-a-half to check inflation, which remains stubborn, the Reserve Bank of India on Friday said it has no magic wand to bring down the rate of price rise.

    "You all want that inflation should come down. Neither the ministry of finance nor the RBI has any magic wand to bring down inflation," RBI deputy governor K C Chakrabarty said at an Assocham meet here.

    Inflation, as measured by the Wholesale Price Index (WPI), was over 9 per cent in May.

    Despite RBI's monetary policy tightening regime and steps of the government, inflation continues to remain high.

    The central bank has projected inflation to be at around 6 per cent by March 2012.

    The deputy governor said the current inflation is because of constraints in the supply chain and only increase in agricultural productivity and use of modern technology could check the rate of price rise.

    "...instead of saying that RBI should bring down inflation, we must increase productivity and bring down the cost of services and that will only bring down inflation. Otherwise, it will not come down," he said.

    Earlier, at the same event, finance minister Pranab Mukherjee said in the short-term moderating aggregate demand is critical to check inflation, which is "our major challenge".

    He, however, admitted that anti-inflation monetary measures may impact growth.

    RBI has been increasing key policy rates since March 2010 and the latest was Thursday's 25 basis points hike in short-term lending and borrowing rates.
     
  4. simplystupid

    simplystupid Lieutenant FULL MEMBER

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    Unfortunately Still we have Farmer suicides -- Not sure the root cause of the problem... is it finance they borrow or lack management or money they make is not sufficient ? Not sure.. every seems talking about problem no one seems to scratch the problem with a solution. Recently one solution is Corporate farming for arresting food prices - I doubt that will work either because most of Indian are still employed farm sector.

    10% to 13% is top end hikes one gets in organization - other than Government sector - with inflation 9% that means only 1 to 4 % hike. :) . Again inflation does include food commodities. if you include those as well -- net hike can be lower -
    do we know that most of UK, France, Germany, some of the European nations pay subsidiary not cultivate - find encourage imports from Spain, Portugal etc Land that was taken out cultivation is much more than diverted to bio-fuels. Bio-fuels break evens when crude prices hovers above 100 USD or for that matter more indicate prices when retail gas prices in US around 4 USD per gallon. Problem is Crude cannot be chief source of enegry. World need cheap sources of enegry.
     
  5. Star Wars

    Star Wars Captain SENIOR MEMBER

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    And the "CONG ARE ASS" Govt. Can't take any steps to preserve the grains rotting without warehouses :butcher:
     
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