Thursday, March 27, 2008

UN Report: Asia Faces Jump in Food Costs

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This is the 3rd story this week alone I've posted on this subject - still not on the radar of anyone but blog readers I guess (but it did hit Yahoo Finance at least). I've been talking about since this last summer - but it still does not appear to making a dent into public conscience. As an investor it's important because frankly it is a major headwind for emerging market investing - Americans spend less than 10% of their budget on food, but many in these sexy new emerging markets spend >50% of their income on food. Some of the thesis in emerging market investing is dependent on the newly formed middle class consuming like a Westerner - but this is going to put a crimp in things. However, some governments who have the huge trade surpluses (i.e. China) are subsidizing the cost - but the bill to do so is increasing by the week. So aside from being a social disaster, it is going to become a major strain on much of the world's newly minted middle class. Their lower class? Don't even want to think about it...

But this is just another step towards the acrimony that will grow not only within countries but between countries as priorities on how to use limited resources are debated. See the Indian Finance Minister's quote below. And just imagine the "mood on the street" in these countries - the inability to feed your family leads to desperate measures. If you think it's bad now, give it half a decade. "Food protectionism" will be a growing issue.
  • Asia faces a sharp rise in food costs, due partly to surging demand for crops used in biofuels, and governments should do more to shield the region's poor from economic shocks, a U.N. commission said Thursday.
  • Economic growth in the region will slow as the U.S. credit crisis hurts demand for exports, but a robust expansion in China and India should help Asia avoid a major slump, the U.N. Economic and Social Commission for Asia and the Pacific said in a report.
  • "Rapidly rising food prices will be the key challenge in the coming year," Shuvojit Banerjee, an economist for the commission, said at a Beijing news conference. "With the march towards biofuels apparently unstoppable, the region has to prepare for sustained inflation through higher food prices."
  • In China, food costs in February were up 23.3 percent from the same month last year, driven by a 63.4 percent jump in the price of pork and a 46 percent rise for vegetables. China has banned use of food crops for fuel and has imposed curbs on grain exports to increase domestic supplies and cool inflation.
  • Across the region, price rises are driven in part by surging demand for food crops to make biofuels, such as sugarcane used for ethanol, the commission said. "We do view biofuels as quite a worry for food production in the region," Banerjee said.
  • On Wednesday, Indian Finance Minister P. Chidambaram said the use of food crops for biofuels is hurting the poor and called it "a sign of lopsided priorities of certain countries." "It is outrageous and it must be condemned," he said in a lecture in Singapore.
  • The U.N. report said rising food costs hurt the poor much more than higher oil prices because they spend a much bigger share of their incomes to feed their families. In the Philippines, for example, 50 percent of consumer spending is for food versus 7 percent for energy.
  • "We find persistent poverty and widening economic inequalities due to the neglect of agriculture," Banerjee said. "Improving agricultural productivity would have a profound impact on poverty."

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