Apr 19, 2008

The Current Food "Crisis" or "Opportunity"

The Economist has a very good chart explaining the causes of the current crisis. While the food prices started rising, the market has started responding with in creasing yield in the last year. The other notable thing to note is how the yield growth has stagnated over the last 45 years.

I guess that the rise in food prices is following the natural rise of commodity prices in the last decade or so following increasing demand from India China etc, and thus food prices thus following commodities like Oil, Metals etc (While you may argue Metal prices are cyclic, i do believe the current upturn is more secular in nature. So, if we agree with the given analysis and assume that the increased food prices are here to stay, we shall come to the important question - What will be the impact on India, and thus How should the Indian policymakers respond.

Regarding the impact, i think there is a clear dichotomy exist(as it should), between the demand side and supply side. While the Indian consumers will suffer, there is tremendous scope for gains to the Indian primary sector. Let us focus on the structural changes due to higher prices which will improve the primary sector*

Government - Government will be unencumbered by the minimum support price (MSP) mechanism and then can fully focus on the market enabling measures to ensure that the gains in trade are diffused enough to prevent backlash of higher prices among general populace. Here the basic logic is that while the MSP does create a floor of prices, the given inefficiencies in the buffer system, means that the gains form trade are not passed on to the farmers in times of high prices. With the high prices, the burden of procurement will be on government and thus will have a fiscal impact, but anyway i don't expect the government to be fiscally efficient in near term.

Market - Higher floor prices means that enough incentives exist for the middlemen and traders to take advantage of India's improving road and rail connectivity to reach the hinterland leading to better price discovery across locations

Farmers- Incentives to improve productivity, and increasing disposable income.

Frankly, rising food prices can be an unmitigated blessing for a country like India with the worlds highest gross acreage and largest population in agriculture. Just imagine Oil Prices doubling for Saudi Arabia and Saudi Arabia on the cusp of finding more oil wells. Well for us, the oil prices have just doubled and the infrastructure and communications improvement are our new oil wells.

* Of course the glaring omission in this analysis is the effect of high prices on inflation thus leading to loss in real income for many of the populace. I still feel that the government should take a fiscal hit rather than limit the upside of the price rise for million of farmers by commodity price targeting which seems to be the current mode of thinking in the current political/bureaucrat regime.

Picture Courtesy The Economist