Escalating food prices require rapid market-friendly solutions

This article first appeared in The Edge Malaysia Weekly, on December 26, 2022 - January 08, 2023.
Escalating food prices require rapid market-friendly solutions
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ESCALATING food prices hit consumers’ pockets hard this year, prompting the government to impose a price ceiling on several essential food items and even ban the export of chicken.

Notwithstanding the move to make key items more affordable, some economists are of the view that such measures are counter-productive as these do not incentivise producers to produce more if they cannot make ends meet. Rather, Putrajaya should ensure that its agencies work harder to encourage and enable the production of essential food items such as vegetables and poultry, so that supply is plentiful and affordable. Food security should be placed much higher on the agenda, they stress, given Malaysia’s massive food import bill and vulnerabilities in that respect.

Already, the country is on the back foot with the shrinking ringgit and wild swings in commodity prices. Logistics costs owing to pent-up demand, made worse by a supply crunch after Russia invaded Ukraine in late February, have added to the pain of pricier goods, especially imported items.

“A weaker ringgit results in more expensive imports. Given the country’s high food bill, besides the rise in world food prices, the food price pressures faced by consumers will be exacerbated by a depreciating currency,” Sunway University professor of economics Dr Yeah Kim Leng tells The Edge. “Likewise, a stronger ringgit will ease the import price pressures,” he says of Malaysia’s food import bill, which grew to a staggering RM63 billion in 2021 from RM55.4 billion in 2020 and RM51.4 billion the year before.

To meet consumer demand, Malaysia has had to import staples such as onions, shallots, coffee, tea, dairy products, wheat flour, potatoes and cooking oil, which collectively make up about 14% of household consumption expenditure, according to the Department of Statistics Malaysia (DOSM).

Marimuthu: We need a 10- to 20-year food security plan that includes having at least 30% of staple foods produced in Malaysia

Bank Negara Malaysia’s 2021 annual report shows that B40 households spent more on food, which makes up about 35% of their monthly consumption expenditure. For the M40, it is 30% and the T20, 23%. Thus, when price pressures are driven by food items, cost of living pressures are disproportionately experienced by lower-income households.

To tackle the rising cost of living, the government imposed a price ceiling on chicken and eggs twice this year. The first was in February, when the price of chicken was set at RM8.90 per kg (effective until June 30). In addition, approved permit (AP) holders were allowed to import whole chickens, having previously been limited to chicken parts.

Four months later, Putrajaya banned the export of up to 3.6 million chickens from June 1 in an effort to tackle supply and pricing issues. The ban was lifted in October, but only selected farms were allowed to rear chickens for export to ensure the supply for domestic consumption was not disrupted.

In July, the price ceiling for chicken had to be raised to RM9.40 per kg, or 50 sen more. Eggs were also put on the list, with the maximum retail price of Grade A chicken eggs set at 45 sen each in Peninsular Malaysia. Both measures were recently extended until the end of the year.

However, someone needs to pay for keeping prices capped — in this case, Putrajaya. According to the Ministry of Agriculture and Food Security, the allocation for chicken and egg subsidies for the period from February to September amounted to RM1.23 billion.

Egg shortages are not unique to Malaysia. In the US, Grade A eggs have almost doubled in price from a year ago, due to an outbreak of avian flu there. In the UK, egg prices have risen almost 30% year on year.

The government subsidy may have helped the public, but price controls have hurt producers as a number of chicken breeders and egg producers have had to halt their operations given the yawning gap between rising input costs and the price ceilings.

Yeah: It is imperative that food security be prioritised given the rising uncertainties and risks associated with the impact of climate change, global warming and extreme weather on global food production

Yeah agrees that the situation is difficult for producers. He is not in favour of price controls as businesses can’t earn a decent profit. Such measures also encourage black market practices. “The current poultry and egg shortages can be attributed to a combination of policy mistakes, inadequate focus on food security and production cost shocks due to strong increases in imported feed prices, rise in labour costs and a weak ringgit,” he stresses.

According to a 2019 report by DOSM, the self-sufficiency ratio — or the percentage of food consumed and produced locally — for chicken eggs stood at 113.6% while that of poultry meat was 98.2%. This indicates that the egg supply was more than sufficient, whereas the chicken supply was slightly inadequate as the market was allowed to dictate supply and demand.

Federation of Malaysian Consumers Associations (Fomca) president Datuk Marimuthu Nadason says Malaysia needs to expedite its food security agenda and to do away with APs to ensure sustainability of supply.

“First, we need a 10- to 20-year food security plan that includes having at least 30% of staple foods produced in Malaysia. Second, we must encourage small and medium enterprises, especially those in the agriculture sector, by introducing grants and incentives to boost the sector,” he points out.

He adds that the role of the Federal Agricultural Marketing Authority (FAMA) needs to be reviewed.

“Malaysia has about 600,000ha to 700,000ha of idle agriculture land, which we can plan how to maximise the usage and output,” says Marimuthu, who suggests that the government tap data analytics in the short to medium term when dealing with food shortages, especially during festive seasons.

Yeah points out that so much more can be done to ensure food security. “The country’s relatively low food security is both a threat and an opportunity. Its heavy dependence on essential food imports increases the country’s vulnerability to global food shortages and price shocks.”

He notes that inadequate food supply over a prolonged period could derail the country’s development and threaten social and political stability.

“It is imperative that food security be prioritised given the rising uncertainties and risks associated with the impact of climate change, global warming and extreme weather on global food production. “Strengthening food security, on the other hand, provides opportunities to reduce import dependence but also to boost farmers’ income, increase food diversification and expand investment and employment opportunities,” he says.

Global food prices started to increase in mid-2021, but the war in Ukraine exacerbated the trend through its impact on commodity prices.

The Covid-19 outbreak, the halt in Ukrainian exports, pent-up global demand and high energy prices were major factors. Consequently, the Food and Agriculture Organization’s (FAO) food price index, which tracks international prices of the most traded food commodities, climbed to its highest point in March — a level not seen since 1990.

FAO’s recent figures revealed that food prices had dropped in July compared with June, but the agency was not confident the trend would last given the persistent global uncertainties. The agency also pointed out that food around the world cost 27% more in 2022 than the 2014-2016 average.

In Europe, food inflation has risen sharply in all of the continent’s largest economies while in the US, the food-at-home category soared to 13.1% year on year (y-o-y) in July, the largest increase since the period ended March 1979.

Malaysia recently reported its November inflation numbers, which showed food inflation expanded 7.3% y-o-y — the highest in 11 years.

Economists warn consumers to brace themselves for greater inflationary pressures in the coming months, mainly driven by higher raw material prices and extended weakness in the local currency.


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