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Food-related inflation

Updated Aug 05, 2013 04:29pm

The devastating floods in Pakistan, which have killed around 1,500 and displaced nearly 20 million, have also adversely impacted the food supply chains. Nearly 17 million acres of cultivated cropland has been lost to floods while the loss of livestock could also be in millions.

The loss of crops from floods alone can cause huge spikes in the price of necessary food items because of uncertainty in the supply of grains, livestock, etc.  At the same time, almost 75 per cent of those affected by floods are the ones who relied on agriculture for sustenance. Even after the flood waters recede, it will take months, if not more, to resettle the internally displaced farm workers on the land they once tilled, thus causing further delays in domestic food production.

Compounding the devastating impact of floods are two additional factors; the start of Ramazan in Pakistan, which has always been accompanied with unexplained inflation, and the global wheat shortage that has caused the price of wheat to increase by 90 per cent since June 2010.

The triple convergence of floods, Ramazan, and global wheat crisis suggests that low- and mid-income households in Pakistan may face huge increases in the price of food staples. Already, markets in urban centres are reporting a 100 to 200 per cent increase in the price of food items over the pre-flood levels. Onions are selling for Rs 80 per kg and tomatoes are averaging around Rs 120 per kg even in Islamabad, which was spared by the flood waters. The pre- and post-flood prices of food items in Rawalpindi-Islamabad, as shown in the table below, reveal huge inflationary pressures.

Item Price after floods (Rupees) Price in week preceding floods (Rupees)
Tomatoes (kg) 120 40
Shimla Mirch (kg) 80 40
Lady finger (kg) 70 35
Green chilli (kg) 80 40
Lemon (kg) 80 40
Tori (kg) 80 40
Aubergine (kg) 60 30
Arvi (kg) 70 40
Bitter gourd (kg) 70 40
Even without the flood-related inflation in food prices, 50 per cent Pakistanis were assessed food insecure by the World Food Programme in 2008. The triple convergence of floods, Ramazan, and global wheat crisis may cause further price hikes and render a much larger proportion of Pakistanis unable to secure basic food items at affordable prices.

While the floods of such magnitude may be a new phenomenon in Pakistan, price hikes during Ramazan have been the norm not just in Pakistan, but in most Muslim majority countries such as Indonesia and Egypt. In the past few years, flour, sugar, and other staple foods initially disappeared from markets and later emerged at inflated prices during Ramazan. This happens even after the governments' explicit promises to check illegal hoarding and price inflation.

Consider the graph below that highlights the increase in consumer prices in Pakistan since 2001. The graph is derived from the Consumer Price Index maintained by the Federal Bureau of Statistics.  The index is based on a basket of goods and services consumed by an average household in Pakistan. This includes food spending; shelter, fuel, and transportation costs; and recreation, education, and healthcare expenses.

Since July 2001, prices have more than doubled in Pakistan, as is evidenced by 128 per cent increase in prices in July 2010. Since the graph represents national average prices, certain urban centres would have experienced even a greater level of price hikes. When we tracked wheat and rice prices across various urban centres in Pakistan, the spatial disparities became obvious that show certain cities in Pakistan are more expensive than others.

Consider the graphs below that show that highest rice prices have been recorded in Islamabad, whereas the lowest rice prices were recorded in Sargodha. Wheat, on the other hand, was found to be most expensive in Karachi and Hyderabad and much cheaper in central Punjab. Also note that the graphs offer data for July 2010, September 2009, and July 2009 for both wheat and rice. Wheat prices are shown the highest across Pakistan in September 2009, which coincided with Ramazan, whereas rice, with the exception of prices in Balochistan, did not experience excessive inflation during Ramazan 2009.

While the above graphs track only wheat and rice prices and thus offer a partial picture, one needs to see the change in consumer prices for a larger basket of goods and services to determine how prices change during Ramazan.

I have plotted an interactive graph below that shows the change in consumer prices from July 2002 to July 2010 over a 12-month period, which is also known as the annual inflation in prices. The obvious peak during August to October 2008 in the graph shows that consumer prices increased by almost 25 per cent on a year-by-year basis, which the worst consumer price inflation observed in Pakistan since 2002. This period coincided with Ramazan in 2008. However, 2008 is not an exception. Since 2002 the highest price inflation has mostly been observed during the months of October and November, which coincided with Ramazan.

If the previous trends of price hikes during Ramazan continue and are further exacerbated by the loss of livestock and crops due to floods, one may see sustained price inflation of over 25 per cent for the months to come in Pakistan. As noted above, and at least in the short run, the price of staples after the floods has already doubled.

The third force behind high food prices, especially wheat, is the global wheat crisis, which has caused the wheat prices to increase by 90 per cent since June 2010.

The drought in Russia has contributed to severe wheat shortages leading Russia to ban all wheat exports. While Russia accounts for only 11 per cent of the global wheat supply, the export ban has sent shockwaves through  the commodity prices. Compounding this even further is the loss of wheat crop in China and India due to monsoon rains. The shocking figures released earlier this month suggest that 17.8 million metric tons of inadequately stored wheat, which accounts for 30 per cent of India's wheat supply and can feed 210 million Indians for a year, is rotting because of exposure to rains. Experts argue that India needs to spend at least $1.7 billion to develop warehouses for adequate storage of grains.

While the price of wheat in the global market is much lower than $13 per bushel, observed at the height of global food price crisis in 2008, the short-run hike in wheat prices is certainly becoming a global source of concern even when bumper wheat crops in the United States, Canada, and Australia are being highlighted to calm the markets.

Pakistan has suddenly become even more food insecure while being armed with nuclear weapons. The excessive spending on defense over the past four decades to secure its borders has inadvertently left Pakistan food insecure. The food-starved, yet nuclear armed, North Korea should serve as an example for policymakers in Pakistan. If the spending priorities are not changed such that bread and not bombs take priority, there may not be much left within Pakistan to defend at its borders.

Murtaza Haider, Ph.D. is a professor of supply chain management at Ryerson University in Toronto, Canada. He can be reached at murtaza.haider@ryerson.ca.

The views expressed by this blogger and in the following reader comments do not necessarily reflect the views and policies of the Dawn Media Group.