Food Security - It's Time to Act!

When I wrote my first blog article in August 2009, I touched upon the topic "food-inflation" in India. And at that time, food-inflation was expected to arrive due to poor monsoons in India that year. And as expected, food-inflation kicked in. It went up all the way to around 20% (with some vegetables hitting triple digits), held steady around that rate for quite sometime and started coming down through the year-2010. But in the last month, due to enormous rise in onion prices (and many other food-prices such as those of vegetables, milk etc that never came down in reality), food-inflation started shooting up again and now stands at around 18% in India.

In South Korea and Thailand, food-inflation is felt. In Russia, due to heat-wave and drought that destroyed wheat crops last year, food-inflation is felt. In Pakistan, due to floods that damaged wheat crops, food-inflation is felt. In United States, even when everyone speaks about the fear of deflation, corn-prices have risen. In Australia, tomato prices are expected to go up due to the recent floods. The food of the poor - "rice" is in great shortage all over the world and its prices have risen.

And to beat this food-inflation, monetary policy is tightened in many countries for the fear that this food-inflation might slip into the broader inflation. But I should say that this is like taking cover under a tree when it's raining. These monetary policy solutions are very much temporary. To beat this food-inflation, a much broader thinking and a much greater investment model is needed.

What does a monetary tightening do? - Cool down a heated economy by slowing down the business activities in an economy. So, what happens when business activities slow down in an economy? People buy less and probably save more. As a result of this, a weakening in demand takes place that bring down the prices of many commodities. And with the general prices cooling down, it is expected, that a farmer or a retail food store would sell the food produce/products at a cheaper rate. But this kind of policy action will bode well for all goods except food. I don't understand what the governments are trying to do if they keep relying just on monetary policy tools to combat food-inflation. Do they expect people to consume less food through these monetary policy actions? Sigh..sick!

Policy makers need to understand (actually they do but are just dormant) that the food-inflation felt all over the world is not due to increased liquidity in the financial system but due to global shortages of food. And the weather has been increasingly non-supportive for food-production in the past two years in many key agricultural countries, though population and prosperity (and income inequality) keeps rising in the world. Let's assume (just assume) for our analysis sake, that an entire economy comes to a halt due to maximum monetary tightening (again, just for the sake of assumption). But food, being the most essential item, will still have to be bought even if that money has to come from a savings account. And food-inflation would still be felt if there are shortages in food-supply. It is as simple as that - this is a supply-side constraint and not a demand-side pull. And remember, it is the most basic food items such as rice, onions, wheat and tomatoes that are in shortage.

To combat food-inflation on a longer term, in a world of rising population, we need investments in food-production at a global level supported by global financial institutions like World Bank to increase productivity in food-production in poor and developing nations (Admission: I see this happening to a certain extent though the pace remains slow). It is also important that agricultural markets are opened more in developed countries to encourage investments and production in agriculture in poor and developing nations - for it is in that part of the world where there are a large number of farmers producing food at a cheaper rate. And to increase efficiency, countries like India must seriously study the benefits of opening retail trade (atleast in food and food-related items) to foreign investment. But I know I am touching on sensitive subjects when I speak about opening agricultural markets further in developed world or opening retail trade in India.

It is important that not just energy-security and financial-security, but also food-security becomes an important topic of discussion in the G-20 forum and beyond. As long as we see distorted patterns in agricultural investments (and subsidies) between the developed and developing world, and as long as monetary policy tools are used to combat food-inflation instead of fiscal policy tools, and as long as agrarian economies don't enact "better" and "efficient" farm-to-fork policies, it would seem, on one side, that we are pulling millions and millions of people out of poverty, but on the other side we will also be pushing millions and millions of people who already are in poverty, further down deeper.