In The News

Soaring World Food Prices Exacerbate Challenges Across Asia…Especially in the Philippines

March 26, 2008

Across the globe, food prices have soared. Between 2006 and 2007, the price of rice doubled in Bangladesh. In Mexico, corn meal prices are up 60 percent since 2006. At the Minneapolis Grain Exchange, wheat hit $24 per bushel in early 2008, in contrast to just $3 to $7 in 2003. On Monday, March 24th, the United Nation’s World Food Program issued an emergency appeal for additional funds to cope with the “aggressive rise in grains prices” which now constrain their relief and anti-hunger operations. UN Food and Agricultural Organization statistics show that across the globe the price of rice has more than doubled over the last six years.

Unusual World Food Price Trends

These trends are unusual. Between the late 1970s and up to the late 1990s food prices generally, and cereal prices particularly, were stable or even going down.

In the last few years, however, a confluence of factors has driven food prices rapidly upward, including: (a) production shortfalls in major producing countries such as Australia and China, (b) major increases in demand arising from growing populations with improved spending power particularly in India, China and Vietnam, (c) the production-dampening impacts of natural disasters and changing weather patterns, and (d) major shifts in agricultural production toward biofuels such as corn for use in ethanol production, encouraged by the high and rising world oil prices.

The rapid rise in food commodity prices is encouraging production, but due to natural constraints and cycles in agriculture, production responses tend to lag well behind the current price increases. The International Food Policy Research Institute (IFPRI) estimates that between 2000 and 2006, world demand for cereals increased by eight percent, while cereal prices increased by about 50 percent.

Food price increases impact the poor most heavily, because the poor devote a much greater proportion of their income to food. Asian farmers have benefited somewhat from the increases in food prices, although the benefits have been muted by increases in production costs such as fertilizers and farm wage labor ” both of which have been impacted by rising oil prices. Higher food prices have already contributed to substantial increases in living costs across developing Asia, exacerbating recent restiveness among urban populations. This has major implications on governance, particularly in countries currently undergoing political transitions or rapid socio-economic change such as Bangladesh, China, India, Nepal, Pakistan, the Philippines, Timor Leste and Vietnam.

The Case in the Philippines

Let’s take the example of the Philippines. The surge in food prices, particularly rice, has important implications for the Philippines. The world price of rice has increased dramatically. Lower quality rice averaged US$167 per ton in 2003, but by early 2008, it fetched more than double at US$393 per ton. High quality rice was exported at US$284 in 2003, but brought US$558 in February 2008.

Alone among developing Asian countries, the Philippines retains a state monopoly on the international trade of rice. Since the 1970s low world rice prices have allowed successive administrations to avoid freeing up international trade in rice, reserving trade rights to the state-owned and managed corporation, the National Food Authority (NFA).

Due to long-term neglect of productivity-enhancing public investments originating from the waning years (the late 1970s to the mid-1980s) of martial rule, domestic rice production has not kept pace with domestic demand. Thus the NFA has imported ever-growing supplies of rice at previously low world prices and distributed the imports at relatively high domestic prices which on average have been at least double world rice prices.

The recent trends in rice prices have severely eroded the margins heretofore enjoyed by the NFA. Domestic rice prices have also begun to rise rapidly, and the NFA has been unable to moderate the increases due to its inability to secure greater import volumes from its traditional suppliers, Vietnam and Thailand, who have now restricted their exports due to their own domestic rice pressures. Recent news reports have indicated that President Gloria Macapagal Arroyo has directly appealed to Vietnamese Prime Minister Nguyen Tan Dung to increase Vietnam’s exports to the Philippines from a million metric tons to 1.5 million, out of a total expected import volume in excess of 2.0 million MT.

But even if the NFA can import additional rice it will come at a much higher price ” with recent quotes exceeding US$500 per MT. The NFA is already one of the largest drains on the fiscal resources of the country, since it borrows commercially to finance its imports. Furthermore, the NFA’s borrowings have traditionally carried the sovereign guarantee of the Philippine government. Can the vulnerable fiscal status of the economy bear this additional burden, or will the fiscal strain finally lead the government to abandon the NFA’s monopoly?

In 2007 the government almost reached a balanced budget, but there remain doubts about the sustainability of its fiscal performance since the increase in revenues was based partly on the privatization of state assets as tax collections fell below target. As it strives to stay on the path of fiscal consolidation, the government clearly does not welcome an additional challenge. Yet the dramatic spike in food prices, combined with long-running neglect in productivity-enhancing public investments, and exacerbated by the state’s monopoly policy on rice trade, are challenges that won’t be resolved using short-term measures. The best analysis indicates that the Philippines’ food supply challenges can only be satisfactorily and sustainably met through determined, long-term effort to rebuild domestic agricultural productivity, coupled with market-based trade policies.

Bruce Tolentino is The Asia Foundation’s Director for Economic Reform and Development Programs; Thupten Norbu is an Economic Reform and Development Program Assistant for the Foundation. Bruce Tolentino can be reached at btolentino@asiafound.org.

View all posts by Thupten Norbu

View all posts by V. Bruce J. Tolentino

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