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Does a country need to be a big food importer to be impacted by international prices?

Louis Kuijs's picture

High food prices on the international markets are getting a lot of attention and are leading to different types of policy action in different countries. Discussions on the impact of international commodity prices on domestic prices often look at how much food countries import. The reasoning is that if countries are significant importers of food, domestic food prices are affected a lot by international prices, and if they are not significant importers, the impact of international prices should be limited.

In recent months I have come across several of these discussions. The most recent one was yesterday, in the Lex column in the Financial Times. Writing about the appreciation of the China’s Renminbi, Lex discusses the view of many, including we at the World Bank, that inflation concerns have strengthened the case for appreciation of the RMB. “But this belief, predicated in large part on China’s resurgent inflation, misses a key point. Consumer prices rose nearly 9 per cent year on year in February, largely as a result of rising food prices. A stronger currency would, however, do little to make food cheaper. China is largely self-sufficient in food, which accounts for just above 1 per cent of imports.“

I don’t agree with Lex. In my view, as long as markets are fairly open, with relatively low tariffs or other barriers, and infrastructure and entrepreneurialism is decent, countries’ food prices are strongly influenced by international prices. Indeed, if we expect oil prices to affect all countries with open energy markets, why would we not expect the same for international food prices? As shown in the figure below, China’s food prices are influenced considerably by international food prices, particularly since the integration and opening up of China’s markets upon WTO entry:



In late 2007, a China specific basket of food on the international markets was over 30 % more expensive than a year ago in US dollar terms. Because of the strengthening of the RMB against the dollar, this international price rise was less at about 25 % in RMB terms. China’s domestic food prices—the CPI component—were increasing at around 20 % year on year at that time. I would argue there is strong enough evidence that the appreciation of the RMB against the dollar has helped containing food prices.

This is in China, a country with good infrastructure and enough enterpreneurial firms that want to arbitrage between local and foreign markets. At first sight, I see similar price developments in many other countries, but I don’t know enough about them. Are there countries with open agricultural markets that do not see domestic food prices picking up?

Comments

Submitted by Nad on
The answer is obvious once we consider the true nature of price--that it is interconnected among commodities in ways we cannot measure, that the only thing stable about it is its inherent instability, and that it is not neutral to the money used as the yardstick. It would take an absolute autarky to not be affected by international prices. Rising prices being said as a factor of inflation is a fallacy. Prices of these foodstuf hinge on mostly on the supply and demand, inter-commodity price-relationship, and the purchasing power of each currency. Question is: what is the new equilibrium like? It's a point of no return. While the shock due to supply-demand relationship will normalize itself, the one caused by government's monetary manouevering that results in lower purchasing power, cannot be cured; hence the ever growing costs of living throughout ages.

Submitted by Theo Litaay on
Your title is: Does a country need to be a big food importer to be impacted by international prices? I think for the country like Indonesia, the answer is yes it does. Indonesia had transformed from a food self-reliance country in 1984 to be one of big rice importer in Asia. The problem is worsen by the fact that staple-food consumption was shifted from traditional types of staple-food such as maze and sagoo in several areas outside the Java island to rice. This shifting was driven by state policy in order to use food as a means of political-control. Another handicap is that the centre of production and distribution are heavily centralised in Java, while other areas of production outside Java are too small even to support its sorrounding islands needs. With this climate problems nowadays it became more complicated because difficulties in distribution will lead to famine situation. At the other hand, the policy of the government to cut oil subsidy will impact the price of the rice consumed by the people.

Submitted by Stacy Austin-Li on
Excellent point. The rising prices in China also have to do with a spate of hog disease, rising prices of inputs like fertilizer and petroleum, and some weather-related issues, but the food supply is not insulated from rising international prices and hard-pressed farmers as well as suppliers in the middle will make money where they can.

Submitted by Guy de Jonquieres on
Dear Louis: In principle, it seems to me that you are right. However, much depends on how open "open" food markets actually are. As we all know, low tariffs are only the start. TEQs can substantially increase duties above a specified level of imports. NTBs, such as inspections, sanitary and phyto-sanitary rules, can be and often are used to block "sensitive" food imports. I came across a wonderful case in point when visiting Australia about 18 months ago and discovered that bananas in supermarkets were astronomically expensive. The reason was that almost the entire national crop had been destroyed by Hurricane Hugo. When I asked a senior trade official and old friend in DFat, why imported bananas were not being used to fill the gap, he said - only half-seriously - that it was common knowledge that foreign bananas were full of diseases. The real explanation, of course, was that Queensland banana producers are staunch National Party supporters. And Australia constantly berates other countries' agricultural protectionism! It should be relatively easy to determine how open China's agricultural market actually is. As I understand it, the price rises are due largely to reduced supplies of products such as pork, which are almost entirely domestically produced. What I don't know is whether Chinese pork prices are significantly higher than in other countries. If they are, have Chinese imports of pork risen strongly since prices began increasing there? If not, why not? Regards

From my tracking US, China, major commodities producer, consumers food ( corn, soybean, wheat) prices, they are related to local supply(crops), global demand(major importing consumers demand)and exporting country currency. Chinaa food price is related to local supply crop and international commodities price ( major exporting countries (say US, Brazil supply and currency . RMB 5 % appreciation contribute little to food price,Chinese government use its reserve to stabilize domestic food price. detail can be found on www.osawh.com/commody.html

Submitted by Louis on
Thanks much all for your comments. I agree that local conditions matter, somewhat or a lot, depending on links with the outside. Thus, indeed, China's problems with pork disease boosted food prices in 2007. Guy, pork imports rose a lot last year, but they were still small fry compared to domestic consumption. I am not fully certain, but I think that import of pork is indeed not completely free in China. I also take Guy's point that the impact of foreign prices can be dampened by trade barriers other than tariffs, incluiding the hygiene and safety standards creatively used by many countries. I also agree with Warren that the impact of foreign prices can be dampened by other government measures, such as China's usage of grain reserves. Of course a country cannot do this forever, but fair enough. I would still say that (i) most countries, including China, cannot sustainably shield domestic markets from the impact of higher international food rices; and (ii) at times of inflationary pressure fed by high prices of international commodities, a stronger exchange rate helps toning down these price pressures.

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