Global Biz

Record high food prices stoke fears for economy

(Agencies)
Updated: 2011-01-07 16:41

Asian policy dilemma

But most experts expect upwards price pressure to continue, particularly if countries slap on export bans and further squeeze supply, and short-term investors again buy into agricultural commodities as they did in 2008.

Last year, wheat futures prices rose 47 percent, buoyed by a series of weather events including drought in Russia and its Black Sea neighbours. US corn rose more than 50 percent and US soybeans jumped 34 percent.

Alongside bad weather in Australia, Europe, North America and Argentina, rising Asian demand is at the heart of the spike. China, for example, is expected to buy 60 percent of globally traded soybeans in 2011/12, double its purchase of four years ago.

Dry, hot weather has hit soy and corn crops in Argentina, a leading exporter, fueling a rally in US grains futures in recent weeks on supply fears. After an uneasy start, climate conditions have improved in neighboring Brazil, the world's No. 2 soy provider.

Higher interest rates do little to ease pressure on food prices. Demand is inelastic because people have to eat, but current price pressures are largely supply-led, so tighter monetary policy would not directly help.

The danger, however, is that food inflation spreads to the wider economy.

"I think there's an urgent need to be more pre-emptive in tightening monetary policy to prevent some of these inflation pressures from erupting," said Frederic Neumann, regional economist at HSBC in Hong Kong.

Some central banks had taken some action but more needed to be done.

South Korea, like other Asian countries that run trade and current account surpluses, could give more room to its currency to rise to offset rising import costs on food.

But higher interest rates or the likelihood of a rising currency would just encourage a flood of portfolio capital from investors spurning sluggish growth in developed economies. And rising currency could hurt exports, the major pillar of many economies.