THE ECONOMICS OF FOOD PRICES
It’s little to do with GST, economists say; global shifts key factor
THE Indian mackerel (Rastrelliger kanagurta) is a species of mackerel in the scombrid family (family Scombridae) of the order Perciformes.
Commonly found in the Indian and West Pacific oceans, and their surrounding seas, it is an important food fish and is widely used in South and Southeast Asian cuisine.
It is known by various names, such as ‘kembung’ in Indonesia and ‘kembong’ in Malaysia.
Arguably, kembong — once known as the “poor man’s fish” — is now the unlikely bellwether for Malaysia’s cost of living, or at least the perception that things are getting expensive these days.
Retail prices of the humble fish had fluctuated wildly between RM16 and RM22 per kg earlier this year before stabilising at around RM17 and RM19 currently, depending on the size. This is still sharply up from around RM8 in 2015.
The ikan kembong issue is a good case study on both sides of the debate on rising food costs (and the larger bread-and-butter issues), what are the factors driving them and how policymakers should respond.
Malaysia’s food price inflation, measured as the year-on-year change in the Food & Beverage Index, is higher than overall inflation. Between 2011 and 2015, food price inflation was 3.6 per cent on average, whereas overall inflation was 2.4 per cent over the same period.
It is cheaper to feed a family in Kota Baru than in Kuching, according to one think tank.
But can Malaysians in general afford nutritious food?
The answer, for many with low incomes, appears to be NO, according to Khazanah Research Institute.
Needless to say, the spike in food prices requires prompt action through various interventions. Higher prices mean problems for poor and low-income households struggling to cope with the higher costs of food.
This also means that the government will face higher food import bills.
Agriculture and Agro-based Industry Minister Datuk Seri Ahmad Shabery Cheek has put Malaysia’s food import bill at a staggering RM45.4 billion in 2015. Animal feed, poultry and meat imports alone amount to RM5 billion a year on average.
The stronger US dollar against the ringgit means the amount could rise even further.
Since the early 2000s, food prices have been rising on world markets, and since 2006 have climbed strongly.
The price of a tonne of wheat, for example, that cost just US$106 in January 2000, reached US$196 in January 2007, and US$440 in March 2008.
Forecasts for the next 10 years are for higher food prices than seen in the recent past owing to structural changes in supply and demand.
The same applies to the prices of fish and other marine resources. UN experts and private economists say it boils down simply to the supply and demand factors.
World fish supply has stagnated, while demand has increased due to global population growth and higher consumption per capita.
As such, any price increases are inevitable, one economist said, He said it had little to do with the implementation of the Goods and Services Tax (GST), as some consumers would argue.
Seafood prices have been increasing globally. It is not unique to Malaysia.
It is also pointless to include
ikan kembong on the list of controlled food items. Retailers would simply avoid stocking the fish.
What are the ways to alleviate the distress caused by the price spikes? Direct cash transfers such as BR1M to the poor and the needy need to be enhanced.
According to Khazanah Research Institute’s State of Households II report, in 2014, 94.6 per cent of all households spent more on food than on any other expenditure items.
Among these households, those who earned less than RM2,000 per month spent 38.5 per cent of their monthly expenditure on food. The report notes that the increase in the cost of food has a large effect on the cost of living in these households.
Food price increases may reduce income available for other purposes, or reduce food consumption, or both.
Stagnant or slow growth in real wages and disposable income among ordinary Malaysians is causing more families to struggle to put food on the table.
The government, on the other hand, may find it difficult to control food and agriculture prices as this may reduce incentives for farmers to produce more.
Other policy options include easing or eliminating Import Licences and/or Approved Permits on food and agriculture imports.
There is a general view, though inconclusive, that phasing out import controls such as APs could help to bring down the cost of goods by up to 20 per cent.
For example, a food manufacturer can save between 10 and 20 per cent if he can import dairy products from anywhere rather than being forced to source from AP holders.
In another instance, the AP for the import of frozen beef from India is monopolised by a cartel of just six to eight importers. The Agriculture and Agro-based Industry Ministry is now trying to open up the business to more importers.
The ‘ikan kembong’ issue is a good case study on both sides of the debate on rising food costs (and the larger bread-and-butter issues), what are the factors driving them and how policymakers should respond.