High Food, Energy Prices Here to Stay

By Ernst Zulliger

ACCORDING to the latest World Bank Report, global grain stocks are at their lowest level in 30 years, putting pressure on prices.

For example, just over the 36 months leading to February this year, wheat prices increased by 181 per cent.

According to the UN Food and Agriculture Organisation, last year alone dairy prices rose nearly 80 per cent and grain 42 per cent. Oil is now hovering above US$110 (RM345) a barrel. This may not even be the end of it. According to an internal study by a leading oil company, by the year 2050, the daily requirement of oil is foreseen to be one-third higher than the available supply.

This dramatic rise in the worldwide cost of food and energy has triggered riots in poor countries, where millions of the world’s most vulnerable people are facing starvation, as food shortages grow and food prices soar. Many of the poorest nations will not be able to handle the present food crisis without substantial help from the international community.

There were riots and demonstrations in Mexico because of the price increase of their staple food, tortillas.

In Haiti, after demonstrations and riots, the prime minister was dismissed. There were food and energy-related incidents of civil unrest in Indonesia, Ivory Coast, Mauritania, Mozambique, Morocco, Yemen, Bolivia, Senegal, Uzbekistan, the Philippines and other countries.

FAO attributes rising food prices to a combination of factors, such as reduced production due to drought, floods and climate change, historically low levels of food stocks, higher consumption of cereals, cooking oil, meat, dairy products and other foodstuffs in emerging economies like China, increased usage for bio-fuel and higher costs of energy and transportation.

Population growth is also contributing to the food woes. The world’s population is set to hit nine billion by 2050, most of it in the developing world. And, of course, whenever something is in short supply, hoarding and financial speculation adds to the problem.

There has been a run of bad weather in key growing areas. Australia, which normally is the world’s second-largest wheat exporter, has been suffering an epic drought, which has also affected meat, milk and dairy exports and prices.

Drought in China has affected some 19.2 million hectares of arable land, causing food prices to increase by 23 per cent within a year. Floods in the US and eastern Europe have further aggravated the situation.

Rice, the staple food for half of the world, has doubled in price in the past year and has seen a five-fold price increase since 2001. From Cairo to New Delhi to Shanghai, the run on rice is threatening to disrupt worldwide food supplies.

China, Egypt, Vietnam and India, representing more than a third of global rice exports, curbed sales this year and other exporting countries say they may do the same, in order to guarantee enough supply for their own population.

What really raises big questions is the wisdom behind government policies in some countries that are encouraging increased conversion of food crops – particularly corn, wheat, sugar and soya – into bio- fuels. It is estimated that one in four bushels of corn from this year’s US crop will be diverted to make fuel ethanol.

Is turning food into fuel for cars at a time when world food prices are skyrocketing and millions of people are facing starvation the right approach? Will the attractive financial returns the planters are enjoying because of the new demand for food crops for bio-fuel not also stimulate more land-clearing? Should there not be a more determined push to promote alternative energy sources that humans don’t eat, such as solar, clean coal, wind, hydro, fuel cells, natural gas or even nuclear, instead of food crops?

The bad news is that it looks like high food and energy prices are here to stay.

What we are witnessing is not the fault of any government. Nor does it help to blame the manufacturers or the shop or restaurant owners who are confronted with the impact of the higher costs. It is simply because of a new phenomenon of imbalance in the global supply and demand situation, attributed to a combination of various factors, as mentioned earlier, affecting not only Malaysia but also countries all over the world.

Experience has proven that price controls are not the answer. They backfire, create shortages and misdirect resources. Government subsidies have a limited effect in keeping prices low, because depleting the Treasury’s coffers for subsidies is detrimental to investment in infrastructure, education, health, security, etc.

In Malaysia, at 2008 prices and assuming the subsidies will remain the same, the government may have to budget substantially more than the RM44 billion absorbed last year to subsidise petrol, diesel, gas and staple foods such as sugar, flour and cooking oil.

Compare this with the RM48 billion of the budget for development expenditure for 2008.

The challenge the world now faces is to minimise greenhouse emissions, deforestation and global warming, promote investments in agriculture, and maximise the use of agro-science and technology, with the aim of reducing the costs of production and substantially increasing the productivity and output of every hectare of arable land.

* Tan Sri Ernst Zulliger retired as managing director of Nestle Malaysia Bhd and remains a director of the company

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