ANALYSIS OF RISING GLOBAL FOOD PRICES

Food prices have a larger impact on domestic inflation than do energy prices, as food accounts
for a larger share of household consumption. This is especially true for developing countries
where a large share of the poor’s consumption basket consist of food products.

Wheat and rice, the staple food diet of much of the developing world, have been the biggest
contributors to the rise in food prices. Since the beginning of 2006, the average world price for
rice has risen by 214% and wheat by 81%. In the second quarter of 2008, the price of rice nearly
doubled in comparison to its price in the first quarter of the same year.
Food Inflation in Pakistan:
 Food inflation would touch 43 per cent and maybe more in the upcoming months besides
soaring international oil prices amid domestic and worldwide food shortage

 Disruption in supply chain of food items caused the month-on-month (Mom) food
inflation to rise to 5.1 percent in August 2010, pushing the Mom CPI inflation to 2.5
percent.

 It may take two to three months for food inflation to return to normal levels. Slowdown
in private demand later in the year will at best have a moderating effect on CPI inflation,
as it is likely to be neutralized by an expected increase in government spending in general
and on reconstruction in the flood-hit areas in particular.

 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.

 Even without the flood-related inflation in food prices, 50 per cent Pakistanis were
assessed food insecure by the World Food Programmed in 2008. The triple convergence
of floods, Ramadan, 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.
Food Price Index (1999-2004):

Percentage change Inflation (2006-2008):

The problem of inflation has compounded in severity since the beginning of this year from just
above 10% to over 20% in recent months. Inflation reached levels of 24.3% during the month of
July 2008. The following chart depicts the month-on-month overall CPI inflation in Pakistan and
the food and non food inflation since Aug 2006 to July 2008.

Trend in Inflation 2000-2008:

Trend Analysis of Food Inflation (2007 -2008):
Prices for key food items have seen a drastic increase, with rice leading the charge with an
increase of 108% in August 2008 compared to August 2007. The following chart depicts the
price rise of key food items in Pakistan.

Food can be further divided into perishable and non-perishable food items. The rise in the price
of perishable food items stood at 8.7% whereas non-perishable food items stood at 13.6%. Wheat
flour, rice, fresh milk, and vegetable ghee, four essential food items, have together contributed
42.5% to the overall increase in general price level. International food prices to some degree
have also contributed to the rise in food prices in the domestic market. Also, domestic demand is
on the rise due to the rising per capita income and the growing economy. Per capita income has
grown at an average rate of over 13% per annum during the last five years, rising from USD 586
in 2002-03 to USD 926 in 2006-07 and further to USD 1085 in 2007-08.

Contribution of Food in Inflation:

As seen in the graph below, food inflation contributes a significant amount to Headline Inflation,
approximately 62.04% in 2007-08 compared to 52.4% in the comparable period last year. Thus
any impact on food prices has a substantial impact on inflation levels in the country.
Increase in Price Of Key Food :
Prices for key food items have seen a drastic increase, with rice leading the charge with an
increase of 108% in August 2008 compared to August 2007. The following chart depicts the
price rise of key food items in Pakistan.

Food can be further divided into perishable and non-perishable food items. The rise in the price
of perishable food items stood at 8.7% whereas non-perishable food items stood at 13.6%. Wheat
flour, rice, fresh milk, and vegetable ghee, four essential food items, have together contributed
42.5% to the overall increase in general price level. International food prices to some degree
have also contributed to the rise in food prices in the domestic market. Also, domestic demand is
on the rise due to the rising per capita income and the growing economy. Per capita income has
grown at an average rate of over 13% per annum during the last five years, rising from USD 586
in 2002-03 to USD 926 in 2006-07 and further to USD 1085 in 2007-08.
Policy Of Central Bank:
 The central bank has maintained a tight monetary policy and raised the key interest rate
to 13.5 percent from 13 percent last week, its second consecutive hike, in a bid to curb
the country’s deepening fiscal deficit and combat rising inflation.

 According to SBP’s assessment, this temporary spike in prices is largely due to floods as
it is over and above the average M-o-M growth in food inflation (1.6 percent) and CPI
inflation (1.1 percent) during Ramadan in the previous five years.

Flood Disaster:
 In the aftermath of the floods, bringing inflation down to single digits would require a
supportive and sustained financial and fiscal effort over the next couple of years. Better
management of financial resources including more transparency and timely availability of
fiscal figures, broadening of the tax base, controlling discretionary current expenditures
and re-prioritizing development expenditures would be imperative for fiscal
consolidation.

 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.

 Compounding the devastating impact of floods are two additional factors; the start of
Ramadan 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.
IMF Projection:
 The International Monetary Fund (IMF) has projected that Pakistanis inflation will
accelerate to 13.5 percent this fiscal year. Analysts said the main reason for the rise
would be an increase in food prices and that inflation is likely to rise further.

Consumer Price Index:

 Pakistanis consumer price index (CPI) could reach a 17-month high because of an
increase in food prices following the country’s massive floods.

 September consumer prices rose by 14.95 percent from last year, according to a survey of
12 analysts and economists.
 It is estimated that average CPI inflation for FY11 may fall between 13.5 and 14.5
percent. Furthermore, likely increases in electricity prices, induction of the Reformed
GST and continued reliance of the government on borrowings from the SBP only add to
the uncertainty surrounding inflation expectations.

Triple Convergence of food Inflation:

 The triple convergence of floods, Ramadan, 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 centers 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.
Wheat and Rice Crises
Since July 2001, prices have more than doubled in Pakistan, as is evidenced by 128 per cent
increase in prices in July 2010. When we tracked wheat and rice prices across various urban
centers 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 Baluchistan,
did not experience excessive inflation during Ramazan 2009.
Reasons:

 Pakistan is basically an agricultural country. Near about 30% of national income is had by
agriculture sector. But unfortunately there is an acute shortage of food grain in Pakistan and so
is the case with other developing and under developed countries of the world. The prices of
other commodities are influenced by the continuous rise food grain prices and thus inflation
occurs.

 Natural climate play an important role in the economy of any country. Pakistan is basically an
agricultural country we earn near about 30% of national from agriculture sector. Agricultural
products wholly depend upon natural climate. Due to unfavorable natural climatic conditions
when agricultural cross are destroyed or decreased as a result of this supply decrease and prices
increase and inflation occur.

 The increase in food and fuel prices has been an international phenomenon for last few years.
As apparent from the table, the food inflation rate has remained higher than overall inflation
rate in the country; the poor spend about half of their income on food.

 The consistent and rapid increase in prices of food items has been directly hurting the poor in
developing countries including Pakistan.

 The sudden rise in food prices can be attributed to various factors but primarily due to increase
in production of bio-fuels from food grains and oil seeds by USA and EU.

 The prices of both food grains (wheat, rice, maize, soybeans) and oil seeds (soy beans, rapeseed,
sunflower, and cotton seed) started increasing in 2002. Prior to that year, food prices have
largely been stable.

 This rise in demand for wheat and rice pulled their prices upward around the world.

 In certain cases cost of production increases due to rise in the prices of factors of production,
producer rises price level and due to excessive expenditure inflation occur.

 Nearly 17 million acres of cultivated cropland has been lost to floods while the loss of livestock
could also be in millions.