Is the country on the verge of a serious food crisis? The unfolding international food crisis is likely to result in skyrocketing food and commodity prices. The sharp decline in domestic food production and an increase in oil, fertilizer and other intermediate goods, are likely to bring about inflation in the country. It will strain the trade balance, cause a dent in the balance of payments, increase the rate of inflation and cause severe hardships, especially to the poorer sections of the population.
The concurrence of the international food crisis with the devastation of food crops in the most productive regions of the country implies a need to import higher quantities of food at soaring prices. The problem is further compounded by the trend of increasing prices of oil, fertilizer and other intermediate goods that constitute a high proportion of the country’s imports. The only silver lining is that export prices for tea and rubber are on an uptrend. Yet the gains in these export earnings are unlikely to offset the losses due to import prices and import costs.
The international food crisis
The world food equation that had been in balance for sometime after the Green Revolution of the 1960s changed imperceptibly at first and then sharply in the last few years owing to both supply factors outlined above and the demand for food. For some time now the international food equation was tilting towards a global shortage of food. A secular decline in food prices, especially grain prices, in the last two decades or so have been a disincentive for food production. Between 1974 and 2005 food prices fell by 75 per cent in real terms. In this context farmers had no incentive to increase production of food.
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The sharp increase in the price of oil compounded the problem in several ways. It increased fuel costs, costs of fertilizer, insecticides and chemicals. Consequently there was a shift away from growing food crops to other crops. For instance in Australia rice farmers sold their water rights for the growing of grapes (vine) for wine that was a flourishing industry. There were similar developments in Canada and the United States where farmers are given subsidies for taking lands out of wheat and barley for the purpose of not depressing prices. The increase in oil prices made it more profitable to grow crops for bio-fuels. In the US farmers were given subsidies to convert land to growing maize for conversion into ethanol. This too meant a reduction of food supplies.
Much like the current situation, weather conditions aggravated the food supply situation in 2007 and 2008. Global climatic change is blamed for this. Parts of China, Australia, Canada and New Zealand experienced droughts. Large areas of China, Myanmar, Bangladesh and Sri Lanka faced floods. Weather conditions reduced the wheat crop in Canada by 20 to 25 per cent. Milk production in New Zealand fell drastically owing to drought, and rice production in Australia fell significantly. The declining trend in food production was accentuated by climate changes in those years.
Similarly, bad weather conditions have reduced agricultural production in many parts of the world in recent months; in Australia, Canada, India, Brazil and Sri Lanka, among other countries. The exportable surplus in rice has diminished or is not available at all with the possible exception of Vietnam. Although the North American grain crop appears to be good, owing to the shortfall in the output of wheat and other grains in other countries declining, prices are likely to rise.
Increasing demand for food
While food supply diminished, the demand for food was increasing. China and India were increasing the demand for food due to both their increases in population and rises in per capita incomes owing to the rapid economic growth. Although both these countries had reduced their rates of population growth, (China more than India), the annual increase in population in each of these countries was huge; above one million more mouths to feed each year. With increases in their per capita incomes, the total increase in demand for food has risen sharply.
In the case of China, the increase in demand was not confined to staples. The increase in incomes led to a phenomenal increase in demand for meat and dairy products: per capita consumption of meat rose from 20 kilograms in 1998 to 50 kilograms by 2009. There were also increases in demand for food from oil exporting countries in the Middle East and from Russia and Eastern Europe. The recent trends in economic growth and high oil prices together with unfavourable climatic conditions have been fundamental reasons for the international food crisis.
Floods ruin Maha crop
It is in this backdrop of international food price escalation that the country experienced floods in the last two weeks, as a result of which food crops have been destroyed in the most fertile paddy growing areas of the country. Many varieties of vegetables have also been destroyed. The latter is perhaps a more temporary phenomenon, as they are short term seasonal crops. The loss of the Maha paddy crop has been estimated at about 30 per cent of the total crop. Such estimates may be premature as some paddy lands though inundated may yield a crop if the grains have not been spoilt. On the other hand, the damage to crops in the Eastern Province has been rather extensive and may even result in an almost total crop failure.
Countervailing factors
The increase in commodity prices benefits Sri Lanka’s tea and rubber exports. There is an exceptional demand for most teas, and prices of many teas have exceeded Rs. 400 per kg. With increases in production tea exports should climb above the peak earnings of last year. Similarly the demand for natural rubber is rising with the revival of industrial production and the higher prices for synthetic rubber due to the rising trend in petroleum prices. However the full benefits of the price rises can be realised only with an increase in production and larger exportable surpluses. While there are expectations of production gains in tea this year, the possibilities of increasing rubber output in the short run is limited. While tea and rubber export earnings are likely to increase, they are not likely to compensate for the increased costs of food imports.
Serious economic implications
The shortfall in the paddy crop has serious economic consequences. Even a 30 per cent crop loss implies the need to import a fair quantity of rice and wheat. This would involve quite a drain in foreign exchange as rice prices, as well as wheat prices, have risen sharply. This is due to the declining trend in production coupled with the increasing demand for grains, as well as the devastation of crops in several grain producing countries.
The Sri Lankan economy as a trade dependent small economy has always been vulnerable to external shocks. When the external shock coincides with an internal disruption, it is of serious concern. In such a situation the countervailing policy measures to cope with the situation must be based on sound economic principles that cope with the immediate problem without jeopardizing the long term economic interests of the country. Far too often the responses have been ideological and political rather than pragmatic economic responses. Policy responses should be in the long term interests of the country.
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