1.

Introduction

The continuous rising in food prices leading experts to worry that the increasing food prices could cause to widespread shortage. Since the early 2000s, food prices have been rising on world markets, and since 2006 have climbed strongly. It is forecasted that there would be rising in food prices for the next ten years that can be seen in the structural changes in supply and demand. (Wiggins and Levy, 2008) There was a dramatic increase in the global food prices in the years 2007 to 2008 which created a global crisis and causing political and economical instability and social unrest in both poor and developed nations. (Wikipedia, 2007, 2008)

The phenomenon of rising food price can be seen from Figure 1 which shows that the food price index is increasing dramatically. According to the World Bank, global food prices have climbed by 83% over the last three years.

Figure 1: Average food price index

The World Bank reports that global food prices rose 83% over the last three years and the FAO cites a 45% increase in their world food price index during just the past nine months. The Economists comparable index stands at its highest point since it was originally formulated in 1845. As of March 2008, average world wheat prices were 130% above their level a year earlier, soy prices were 87% higher, rice had climbed 74%, and maize was up 31%.This can be seen in Figure 2. (Holt-Gimnez and Peabody, 2008; cited by Shah, 2008)

Figure 2: Price rises in percentage for corn, rice, soya and wheat

A survey showed that the price for the main local rice, Super G15 has increased by RM 3 to RM 4 per kilogram in all urban areas in Malaysia, including the Klang Valley. In Kedah, Malaysias largest rice producing state, the consumer association reported an increase of between RM 1 and RM 2. In Penang, panic buying last month caused stocks to rapidly decline. The Flour Millers Association of Malaysia increased the price for both high and medium protein flour, starting from March 20. This was followed increase in the price for various types of noodles from 20 to 70 cents. The price of ground rice also rose by RM 22 for a 50 kilogram bag, while the price of other items like corn flour, sago flour, tapioca flour and high carbohydrate wheat flour has been fluctuating. (Wan Ali, 2008)
2

Ministry of Domestic Trade and Consumer Affairs, Malaysia has done a study on the difference of Consumer Price Index (CPI) between August 2008 and August 2009 for rice, bread, cereals, meat, fishes and seafood, milk, cheese, egg, fresh fruits, vegetables and sugar. The result shows that all the food prices have increased from minimum 1.0% to 14.3%. The table below shows the changes of CPI in Malaysia. Food Rice, Bread and Cereals Meat Fishes and Seafood Milk, Cheese and Egg Fresh fruits Vegetables Sugar (Source: Ministry of Trade and Consumer Affairs, Malaysia) Table 1: Food and percentage change of CPI between August 2008 and August 2009 in Malaysia August 2009 to August 2010 (% change) 1.0 4.3 1.6 1.6 2.3 13.3 14.3

2.0 2.1

Demand Factors Population Growth

The major effect on the rising food price in the demand side is the growing population. As the global population increases, demand for food will increase proportionally. According to the UN population Division, there are 200,000 more people added to the world food demand for each day. The worlds human population has increased near fourfold in the past 100 years and it is projected to increase from 6.7 billion (2006) to 9.2 billion by 2050. Therefore, the demand of food is rising due to the population growth. (UNEP and GRID-Arendal, 2008)

For example, demand for a cereal (for food and animal feed) is projected to reach 3 billion tonnes by 2050. Annual cereal production will have to grow by almost a billion tonnes (2.1 billion tonnes today), and meat production by over 200 million tonnes to reach a total of 470 million tonnes in 2050, 72 percent of which will be consumed in developing countries, up from the 58 percent today. (FAO Media Centre, 2009)

The table below shows the population of Malaysia from 2000-2009.

Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Population 44000000 44819000 45245000 45801000 46347000 46892000 47391000 47850000 48687000 49052000

% change

1.86 0.95 1.23 1.19 1.18 1.06 0.97 1.75 0.75

(Source: Department of Statistics, Malaysia) Table 2: Population in Malaysia

There is a slightly increase in the population of Malaysia as shown in the table. This increase has raised the demand of food in Malaysia. This major demand factor leads to rising in food price.

2.2

Changes in Taste and Preference

In this few years, consumers have started to change their consumption behavior by consuming more meat than other foods. This has caused an increase in the demand of meat and food for the livestock.

There has been an increase pressure on the livestock sector to meet the growing demand for high-value animal protein. Annual meat production is projected to increase from 218 million tonnes in 1997-1999 to 376 million tonnes by 2030. In 2007, it was estimated to be 284 million tons. Per capita consumption has more than doubled over that period. (In the developing world, it rose twice as fast, doubling in the last 20 years.) World meat consumption is expected to double again by 2050, which one expert, Henning Steinfeld of the United Nations, says is resulting in a relentless growth in livestock production.(Bittman, 2008)

In china, the consumers have changed their taste and preference to meat consumption. Meat consumption since 1995 has increased by 112 percent to 53 kilograms per person per year and for the next decades further increases in per capita meat consumption are projected. On the other hand, livestock grain demand to supply Chinese meat consumption increased by 199 million tonnes between 1995 and 2007.Red meat and poultry (broiler and turkey) imports are forecast to rise 1 percent to 21.0 million tons in 2009. Both beef and poultry imports are expected to expand by nearly 2 percent. (USDA, 2008) The figure below shows the increasing demand of meat in China. As the demand for meat rises, the demand for grain and protein feeds used to produce the meat grows proportionally more quickly.

Million Tonnes Dairy

Pork Beef Poultry Eggs

(Source: Brilliant Pioneer Consultant) Figure 3: Chinas Meat Consumption

The figure shows that the consumption for meat is increasing every year due to change in the taste and preference of the consumers in China. Therefore, this has increased the demand of meat and resulted in rising of their prices.

2.3

Effect on Food Prices due to Demand Factors

The changes in population and taste and references of consumers can affect the demand curve and the price of the food. The diagram below shows the effects of both the demand factors to the price and food quantity. Initially, the equilibrium for food is achieved at E0 with equilibrium price at P0 and equilibrium quantity supply and demand at Q0. When the population growth and the taste and preference of food changes, the demand for food increases and the demand curve shifts to right from D0 to D1. At P0, the quantity demanded is at Q1 and the quantity of supply is at Q0. Therefore, there is a shortage in the supply.

Since quantity demand is more than quantity supply, consumers would compete by offering to purchase at a higher price. Therefore, the price of the food increases. As the price increases, unaffordable consumers would withdraw from the market, causing the quantity demand to decrease from Q1 to Q2. On the other hand, the suppliers will increase the output to earn more profits due to rise in the food price and this has caused the quantity supply moves from Q0 towards Q2. A new equilibrium point is achieved at E1 which shows that the equilibrium price has increased from P0 to P1 and the equilibrium output has also increased from Q0 to Q2. Both the demand factors have caused the food price to rise.

Price SS0

P1 E0 Po

E1

D1 D0 0 Q0 Q2 Q1 Qty

Diagram 1: Shifting in the demand curve

3.0 3.1

Supply Factors Climate Change

In recent years climate change is seen as the major contributor to the food security threat. While food prices have been rising, farmers have been seeing their crop yield dwindling as the climate change unleashed floods, drought and erratic weather in general. In Asia, rising temperatures are already lowering rice yield, where it is the staple food, according to a recent study by a team of international scientists. Rising temperatures during the past 25 years have already cut the yield growth rate by 10 to 20 percent in several locations, according to the findings of the research published in the Proceedings of the National Academy of Sciences (PNAS), a peer-reviewed scientific journal in the United States. (Bernama, 2010)

According to Banjong Tungjitwattanakun, vice president of the Thai Rice Mills Association, the rice production may fall by about 15 to 20 percent from year 2009 to less than 20 million tons. Output from year 2009 main crop was 23.3 metric million tons, according to the Agricultural Economics Office. Crop damage in Thailand comes amid production losses caused by storms and flooding in Pakistan and the Philippines, cutting global supplies. The supply losses could drive Thai rice up by around $20 to $30 a ton, rising up global prices. Prices may peak in early November, when buyers return to the market as harvests start. (Supunnabul, 2010)

In Africa, the projections showed that the mean aggregate production changes for maize, sorghum, millet, groundnut and cassava were 22%, 17%, 17%, 18% and 8% respectively. Countries that currently produce the most crops are projected to have the largest losses due to climate changes. (Schlenker and Lobell, 2010)

Four countries in South Asia- Afghanistan, Bangladesh, India and Nepal- are particularly facing falling in crop yields caused by floods, droughts, erratic rainfall and other climate change impacts. Crops yield for maize, wheat and rice have decreased by 17%, 12% and 10% respectively in South Asia because of climate change. The fall in productivity will lead to higher prices and reduce calorie intake across the region. (Bidur, 2010)

In brief, the supply factor that can lead to rising in food prices is the changes in climate which can cause a fall in the crop or agricultural productivity.

3.2

Cost of Production

The costs of input for crops production is interrelated with the price of crops. One of the major needs of agricultural products is the fertilizer. An agricultural economist, Gary Schnitkey has conducted the annual survey of input costs and he found that the fertilizer prices expected to surge 82 percent for corn and 117 percent for soybeans

Fertilizer is the biggest non-land expense for corn and soybean farmers. Therefore, when the price of the fertilizer increases, it will directly affect the prices of the crops. Continued increases in production costs, especially in energy-related costs, will restrain the worlds production response. Higher costs for fertilizer, fuel, and seeds could cause the rising in the food prices for agricultural products. (Ronald, 2008) Fertilizer prices shot up in early 2008. Crop prices surged and retreated, and with uncertainty in global financial markets its hard to predict where they are going.

Moreover, the Seed prices in Iowa are increasing about $1.30 per acre per year as shown in Figure 4. The increase in seed costs is accelerating also with the average increase since 2000 at $1.50 per acre. The seed costs are predicted to continue increase in the following years. ( Lowa State University, 2005)

Figure 4: Corn costs per acre by input class

3.3

Effect on Food Prices due to Supply Factors

The changes in the weather or climate and cost of production can affect the supply curve and the price of the food. The diagram below shows the effects of both the supply factors to the price and food quantity. Initially, the equilibrium for food is achieved at E0 with equilibrium price at P0 and equilibrium quantity supply and demand at Q0. When the climate changes and the cost of production changes, the supply for food decreases and the supply curve shifts to left from SS0 to SS1. At P0, the quantity demanded is at Q0 and the quantity of supply is at Q1. Therefore, there is a shortage in the supply.

10

Since quantity demand is more than quantity supply, consumers would compete by offering to purchase at a higher price. Therefore, the price of the food increases. As the price increases, unaffordable consumers would withdraw from the market, causing the quantity demand to decrease from Q0 to Q2. On the other hand, the suppliers will increase the output due to rise in the food price and this has caused the quantity supply moves from Q1 towards Q2. A new equilibrium point is achieved at E1 which shows that the equilibrium price has increased from P0 to P1 and the equilibrium output has decreased from Q0 to Q2. Both the supply factors have caused the food price to rise.

Price

SS1 SS0

P1

E1 E0

P0

D0 0 Q1 Q2 Q0 Qty

Diagram 2: Shifting of Supply Curve

4.0

How Subsidies Work

Malaysia government has provided subsidies to manufacturer of sugar, flour and bread, started from Jan 2009 to Dec 2009. The amount subsidized to sugar is RM 719,999,620.40, while subsidy for flour is RM 136,144,703.40 and subsidy for bread is RM 74,873,504.95. The total amount of subsidies for these three food manufacturer is RM 931,017,828.80.

11

According to Tradewinds (M) Bhd Chief Executive Officer, Sugar Division, Tuan Ngah Tuan Baru, the sugar has never been subsidized before by the government, it just started last year because of the sudden surge in price of raw sugar. Malaysians paid RM1.45 per kg for sugar last year but if it was not subsidized, the retail price could have been about RM2.05 per kg in 2009 and could shoot to RM2.45 per kg this year. The government has been providing subsidies because of the price increase in raw sugar, otherwise the manufacturers will be out of the money. (Bernama, 2010)

Price SS0 (no subsidy) SS1 (with subsidy)

RM 300

E0 Consumer E1

RM240 50000 RM 200

Producer

Q0

Q1

Quantity

Diagram 3: Subsidy The diagram above shows how the subsidies help in lowering the food prices. Initially, the equilibrium point is at E0 with price of RM 300 and Quantity Q0. When the government offers a subsidy of RM 100 to a particular food, the cost of production has reduced. Therefore, producer would like to supply more, causing the supply curve to shift from SS0 to SS1. A new equilibrium is achieved at E1 with price of RM240 and quantity increase from Q0 to Q1. With the subsidy, the price of a particular food has decreased from RM300 to Rm240. Hence, we can conclude that the subsidies help to lower down the price of food.
12

4.1

Effectiveness and Ineffectiveness of Subsidies

4.1.1 Effectiveness
Agriculture subsidies are government programs providing benefits to farmers for the purpose of stabilizing food prices, ensuring plentiful food production, and guaranteeing farmers' basic incomes. Some experts agree that the subsidies provided for agricultural goods can help to overcome the problem of rising food prices. During boom times, there would be abnormally high inflation in the absence of subsidies. However, this is not the case, as subsidies act to buffer sudden price spikes and dampen erratic price fluctuations.( MIER, 2009)

Without subsidies farmers would lose money because the prices paid for farm products are too low. Subsidies help the supply of food to be abundant therefore lowering the cost of food for the general public. U.S. Agriculture Secretary Tom Vilsack vigorously defended federal farm subsidies, saying they have enabled Americans to have relatively cheap food. Even though prices for most subsidized crops are soaring, Vilsack said farmers still need a subsidy program to protect them from future drops in prices. During a meeting with Des Moines Register editors and reporters, Vilsack said that it's not the 250,000 to 270,000 farmers who benefit from this structure but the rest of us that benefit. (Brasher, 2010)

The availability of less-expensive raw ingredients decreases production costs of food processors and manufacturers, leading to lower food prices. Therefore, removal of farm subsidies would lead to higher food prices. (Bruce, 2006)

13

4.1.2 Ineffectiveness
Many believe that subsidies do more harm than good. Some people state that the subsidies are exceedingly expensive and do not achieve the desired market stability. Subsidy programs create less efficient planting, induce excess borrowing by farmers, cause insufficient attention to cost control, and result in less market innovation. Subsidies act against the functioning of an efficient market and raise the important issue of inequity and regression. This is the problem faced by any government wishing to help its poorest citizens to have affordable goods and services. Subsidies also masks the true cost of scarcity, as industries tend to overproduce to meet the artificial demand that they create. (MIER, 2009)

Moreover, farms subsidies in developed countries also drive prices down and especially hurt smaller farmers in developing countries who have to compete on the global market and do not have the same assistance from their governments. It is rewarding of bad economic behavior, where farmers are guaranteed an income no matter how good or bad their effort is. (Faith O, 2010)

Furthermore, President Obama zeroed in on about $5 billion in farm subsidies as an example of the federal government's "wasteful spending". In 2006, a team of Post reporters, Dan Morgan, Gilbert M. Gaul and Sarah Cohen found that between 2001 and 2006, at least $1.3 billion was paid to landowners who had planted nothing since 2000. Among the beneficiaries were homeowners in new developments whose backyards used to be rice fields.(Kravitz, 2009)

14

The implementation of farm aid also results in "improper" recipients. For instance, in America, almost three quarters of farm subsidies go to the richest 10% of American farmers, and that the cost to the average American family was over $400 a year. In underdeveloped countries, heavily-subsidized American imports are often cheaper than locally-grown goods. Therefore, poor farmers are thus unable to compete, since these countries lack the capital and stability to compete in the manufacturing sector, farmers have little choice but to turn to the government for employment, or crime for survival. (Wilton and Molyneux, 2007)

15

5.0

Reference

MIER (2009) Inflated Food Prices has the bubble burst?. Available from URL:www.mier.org.my/newsarticles/archives/.../samirul05_01_2009.pdf Brasher, P. (2010) Farm subsidies help keep food prices lower, Vilsack says. Available from URL: http://www.desmoinesregister.com/article/20101015/NEWS/10150370/Farm-subsidieshelp-keep-food-prices-lower-Vilsack-says Bruce, A. B. (2006) Cheap Food and Farm Subsidies: Policy Impacts of a Mythical Connection, Spring 2006, Vol. 12 No. 2. Available from URL:http://www.card.iastate.edu/iowa_ag_review/spring_06/ Wiggins, S. and Levy, S. (2008) Rising food prices: Cause for concern. Available from URL:http://www.odi.org.uk/resources/download/1896.pdf Holt-Gimnez, E. and Peabody, L. (2008) Global Food Crisis 2008 (cited 2008) Available from URL: http://www.globalissues.org/article/758/global-food-crisis-2008 Wan Ali (2008) Rising prices hit Malaysia Available from URL:http://www.wsws.org/articles/2008/jun2008/mala-j17.shtml Mohamed, S. (2010) Climate Change And The Farmers' Fate Available from URL:http://www.bernama.com/bernama/v5/newsfeatures.php?id=534567 Suwannakij, S. (2010) Rice Prices May Extend Rally as Floods Cut Harvest 20% in Biggest Exporter Available from URL:http://www.bloomberg.com/news/2010-10-20/rice-prices-mayextend-rally-as-floods-cut-harvest-20-in-biggest-exporter.html Schlenker, W. and Lobell, D. (2010) Climate change set to reduce crop yield in Africa Available from URL:http://environmentalresearchweb.org/cws/article/news/41670

16

Bidur, U. (2010) Climate change: Impact on agriculture and food supply, The Himalayan Times, Available from URL:http://www.thehimalayantimes.com/fullNews.php?headline=Climate+change:+Impact+on +agriculture+and+food+supply&NewsID=245946 FAO Media Centre (2009) 2050: A third more mouths to feed Available from URL:http://www.fao.org/news/story/0/item/35571/icode/en/ China Global Advisory (2009) Rising Income, Better Food Available from URL:http://www.cgadvisory.com/ourviews_income.html Faith, O. (2010) How Does a Farm Subsidy Work? Available from URL:http://www.ehow.com/how-does_4616758_farm-subsidy-work_.html Kravitz, D. (2009) Obama Targets Farm Subsidies As 'Wasteful' Available from URL:http://voices.washingtonpost.com/washingtonpostinvestigations/2009/02/obama_targets_fa rm_subsidies_a.html Wilton, D. A. and Molyneux, S. (2007) Why Does Anybody Get Federal Farm Aid? Available from URL: http://www.lewrockwell.com/alston/alston30.html Bernama (2010) Sugar importer says government foresight kept prices low Available from URL: http://www.themalaysianinsider.com/malaysia/article/sugar-importer-says-governmentforesight-kept-prices-low/ USDA (2008) Global Import Demand for Meat and Poultry Forecast Higher in 2009 Available from URL:http://www.fas.usda.gov/dlp/circular/2008/livestock_poultry_10-2008.pdf 2008

17