Agflation - The Our Next Tsunami

The unsettled ruling government in Malaysia would be the sole group to take responsibility in the current agflation (agricultural inflation). The signs have been there since the second quarter of last year with the crude price rising to over US$80 per barrel. Petroleum price are generally the main indicator and contributor to all general hikes in consumer products. There were various rumours of basic consumer goods shortages which led to hoarding like sugar and cooking oil.

Neighbouring countries also were feeling the crunch on some basic necessities. In Malaysia there we fresh ceiling prices announced especially during the festive periods between October and February this year. Special task forces were said to have been established with the recruitment of fresh graduates to monitor the retails prices by the Domestic Trade Department. Nothing could stop this hike and is expected to continue for another year with new highs in crude petroleum at US$118 per barrel.

The previous Malaysian ruling coalition were preoccupied with the 12th general election rather than tackle the agflation. There was more time spent in launching corridors and development regions rather than focus on the food price situation. There was more focus to shore up more support for UMNO and BN than to address the rising prices. On the other hand the opposition were focused on what the man on the street wanted. Bread and butter was what meant to him rather than the corridors which were eventually going to only benefit the UMNO and BN cronies.

The UMNO general assembly held during Deepavali celebration did not even address the issues surrounding the food price hike. They were more interested in the keris and the ketuanan UMNO issues. The only key announcement on the peripheral of the assembly was there would not be any petrol price hike for now. Another election gimmick!!

Basic micro economics relates that prices are set by supply and demand and in macro economics interest rates can control inflation. Bank Negara has maintained the over interest rate on an almost constant rate at around 3.49-3.51 over last year despite the clear increase in inflation. Inflation can be seen even on the daily basis at our neighbourhood mamak shop with teh tarik, roti canai and all general food consumed by Malaysians.

The government especially the finance ministry led by Pak Lah again did not listen to the so called grassroots. They painted a beautiful picture of a strong economy and that consumer product prices and especially food price would not change much. They blamed the increase on the rise in petroleum prices and gave false hope that as they were not going to further increase the retail price for now the prices would stabilise. I do not blame the former and the current Pak Lah government entirely for this as this has been the practise for over two decades. The trick is to paint a beautiful picture and sweep all else under the carpet. "We will cross the bridge when we come to it" attitude.

Rise in crude price alone cannot be blamed for this agflation it is a combination of situation over the years. Firstly, many governments have ignored the importance of agriculture for food security locally. They have promoted heavy industries and other non agri industries. Malaysia included over the last 20 years although Pak Lah had tried to increase focus on agricultural industries since 2004 but for the moment it was too late.

The other reason is the shift to biofuel to contra the rising petroleum prices. Much incentives were given for the conversion of crop and farm lands to grow high yielding biofuel produce like sugar cane and corn. This shifted the quality of the crop from a final nutritious edible product to a highly commercial one that is cheaper to produce.

And finally of course the global warming and climate change which has rendered reduced output of agri produce as well as drought and floods that has destroyed billions of dollars of crops.

Now coming back to our government misscue on food prices. If they had studied the prices on the ground or rather listened and payed attention to it then If Bank Negara would have increased the interest rates on a regular basis to control the inflation and agflation. But they did not course the government has to look good. Their argument would be that is interest rates are raised than the ringgit will strengthen against other currencies hence export will become more expensive. My argument is import will become cheaper that includes food that are import. We imported 22 billion ringgit worth of foodstuff last year.

The strengthening of the ringgit against mainly the dollar has nothing to do with our strong economy but rather the weak economy of USA following the sub prime mortgage crisis. The dollar weakened and not the ringgit strengthened. If Bank Negara had listened and raised the interest rate as would most countries the ringgit will be 2.80-2.90 to the dollar now. Assuming we imported the foodstuff for 2007 at an average of 3.5 ringgit per dollar and we import the same amount in 2008 at 2.80 for the dollar we could safe up to 20 percent or about 2.2 billion ringgit. Meaning the government could have saved 2.2 billion in subsidies of various kind. Where were the experts when we needed them? They were there but they did just what the government them to say and do and not listen to the the voice on the ground or rather the prices.

Of course the government could have a massive interest rate increase over the next few months but this will do more harm than good. It would have been perfect for a gradual increase from the middle of last year. But no one listens. So the damage has been done how can we recover. We cannot but there are something that we can do.

Malaysians are spending more on processed, ready-to-cook and ready-to-eat foods and meals away from home, increasingly supplied by high-volume agribusiness firms and food retailers. Instead consume products at the "fork" end of food value chains where costs of handling, transportation, processing, packaging and distribution, and are less affected by price changes of basic agricultural commodities.

With the rising prices the general misconception is that the farmers will be making more money but this is not true as most exporters are large organisation which are also UMNO cronies. The government has to integrate domestic production, especially by small producers, into international vertical food supply chains largely controlled by multinational agribusiness companies. Small farmers need assistance to take advantage of the higher-income opportunities and meet safety and quality standards and volume requirements of food processors and retailers. Farmers and countries that are net sellers of food benefit from higher prices but those that are net buyers like Malaysia, and with poor non farm households, of which there are many, lose.

The government must keeping agricultural and food issues high on the climate change policy agenda is crucial for protecting the well-being of the poorest in the country. It too must slow down the promotion and reduce incentives for biofuel production for the next few years. It must aggressively discourage conversion of the current agri land to biofuel land.

Just like they did not listen to the rumbling on the ground for the 12th General Election which caused the Political Tsunami now all Malaysians are going to feel the Food Price Tsunami.