Autumn 2008 Forum Sofitel Metropole Hanoi November 13-15, 2008

FOOD Briefing Briefing: Agflation in Asia

Contents Executive Summary...... 1 Introduction...... 2 Demand Pressures in Asia...... 4 Supply Pressures in Asia...... 6 Agflation Consequences...... 9 Government Policies in Asia...... 11 The Way Forward...... 13 Conclusion...... 17 Endnotes...... 18 About the Asia Business Council The Asia Business Council is an independent organization of top executives who share an in the -friendly policies needed to ensure the region’s contin- ued economic development and competitiveness. The Council conducts research on issues that are important to Asia’s future and, where appropriate, takes action. The Council, which was founded in 2002 and is headquartered in Hong Kong, is funded by its members and has no government affiliation. The statements in this report are the sole responsibility of the author and should not be regarded as reflecting an official Council viewpoint.

This briefing was written by Asia Business Council Program Director Janet Pau and edited by Sheridan Prasso.

Design by George Skarpelos, Media Arts International

Copyright © 2008 the Asia Business Council All rights reserved Executive Summary

This briefing examines the and logistical costs put immense pres- portunities exist for governments, the major causes of surging food sure on all of the region’s agricultural private sector, and non-governmental in Asia and concludes sectors. If unresolved, a combination of organizations to improve the function- that agricultural , these structural factors will mark the ing of agricultural markets. They in- or agflation, is not simply a end of food abundance for populations clude measures to reduce cyclical problem but reflects in developed and emerging markets, between biofuel and food resources, deep-seated and potentially as well as reduce countries’ abilities the effective use of biotechnology to dangerous structural to feed their poorest populations. improve productivity and reduce envi- changes. Government policies that have been ronmental impact, practices to increase implemented so far have leaned toward sustainability of farming, improvements n emerging Asia, increased caloric protecting food supply in individual in agricultural research and expertise intake, changing dietary preferences countries in the short term but may to raise farmers’ incomes, and a growing demand for biofuels distort agricultural and regional in transportation and storage infra- are primary drivers of food demand. markets, thus further aggravating structure to reduce waste, conservation IAt the same time, urbanization and agflation. While more fully opening efforts to combat , and climate change, degradation of existing up agricultural markets faces huge targeted relief and rural development farmland, as well as increases in input challenges, a number of immediate op- policies to help the most vulnerable. 2 | 2008 Autumn Forum: Food Briefing Introduction

The era of cheap food is This briefing argues that recent gains of recent years and stunt fu- ending, and populations agflation patterns do not appear to be ture . The average around the world and in Asia simply a cyclical problem reflecting headline inflation for the region in are feeling the pain. general inflation. Rather, increased 2008, pushed up by food and fuel caloric intake, changing dietary prices, is estimated to be more than hile global attention preferences, the growing biofuel 6%, double the average rate the past has long been focused industry, urbanization and climate ten years.3 Rising commodity prices on how to feed the change, shrinking and increasingly have led to deteriorating terms of trade, poorest populations in degraded farmland, and skyrocketing especially for the food importers Wthe least����������������������������������� developed countries, particu- input and logistical costs, along with in the region, hurting consumption, larly in Africa, skyrocketing short-term and nationally focused , and labor markets. Many have hit the pockets of not just the policies, are coming together at the Asians already spend a third or even a poorest, but also broader populations same time, threatening food availability half of their income on food. A proxy in Asia. With food and fuel protests and access for populations around Asia. for this is the weighting of food in the in many countries in Asia earlier this Consumer (CPI), as shown year and marked increases in prices Why this is an important in the graph on page 3.�� B�roadly������������� speak- of day-to-day food products at local problem for Asia ing, poorer countries and poorer people food markets, what seemed like remote For rapidly growing Asian economies spend more of their income on food problems affecting the poorest and like China and many Southeast Asian and are hit harder by price increases. most remote populations of the world countries, continued price infla- In Asia, the absolute number of are hitting closer to home for many tion threatens to erode the economic people who are hard hit is large and Asians. Since the end of 2006 alone, food prices have almost doubled for , , coarse grains,1 and oilseeds, ac- cording to the International Monetary Fund (IMF). From the mid-1970s until 2002, food prices declined as food pro- duction growth surpassed global popu- lation growth. Since 2002, however, the three-decade-long decline in food prices has reversed. The Food Price Index2 compiled by the United Nations Food and Agriculture Organization (FAO) peaked in June 2008, with a growth of more than two-thirds overall since 2006. Price indices for oils and fats, cereals, and dairy have accelerated the most rapidly. Despite falling prices in recent months, the overall index is still 50% above its in 2006. 3 | 2008 Autumn Forum: Food Briefing

growing. Asia is home to two-thirds of the world’s poor, or almost 2 billion people living on less than $2 a day, who 300 are most vulnerable to food insecurity. The number of food-insecure people in Dairy 250 Asia, i.e. those consuming fewer than 2,100 calories a day, a nutritional target Oils & Fats Cereals set by the FAO, is projected to increase 200 through 2017. According to the U.S. All

Department of Agriculture (USDA), 150 more than 20% of Asia’s population Sugar 4 will be food-insecure. For higher- Meat income consumers in Singapore, South 100 Korea, and even China, the impact may be no more severe than cutting back 50 on non-essentials. But for middle-class and lower-income consumers, hunger 0 and nutritional deficiency may become 2000 2001 2002 2003 2004 2005 2006 2007 2008 average more urgent issues. Jan-Oct A number of underlying trends suggest that the agflation problem Historical global food price Indices is influenced primarily by structural Source: United Nations Food and Agriculture Organization rather than cyclical factors.

57% India 47% Philippines 46% Pakistan 43% 42% Indonesia 33% China 33% 30% Malaysia 27% Hong Kong 26% Japan 25% Taiwan 23% Singapore 14% Korea

0 10 20 30 40 50 60

Food weightings in Consumer Price Index (CPI) basket by country Sources: ; Intelligence Unit; FAO; USDA 4 | 2008 Autumn Forum: Food Briefing Demand Pressures in Asia

Increasing caloric intake Per-capita calorie consumption per and demand for higher-quality , rowing populations in Asia day across Asia has increased from an organic foods, and ethically sourced or are consuming more calories average of 2,269 calories in 1978-80, to fair-trade foods. Last year, the out- than before. Asia accounts 2,710 in 1998-2000.7 Increased caloric break of the Porcine Reproductive and for almost 60% of the global intake means higher food demand. Respiratory Disease (PRSS) in China Gpopulation. As the world population and Vietnam, which led to massive is forecast to grow by 36% from 6.8 Changing dietary culling of infected animals, led not only billion in 2008, to 9.2 billion by 2050, Preferences to reduced production but also to rising Asia alone will add more than 1 billion Growing incomes also mean evolving fears about food safety. India and South people, almost the size of the current dietary preferences. First, the composi- Korea have also culled poultry in re- population of China.5 However, popula- tion of calories is changing. Demand sponse to recent outbreaks of the H5N1 tion growth alone is only part of the for meat, dairy, oil, and vegetables bird influenza virus. The recent scandal picture. In fact, Asia is seeing falling is growing, while cereals make up a over Chinese milk products contami- fertility rates, even in the fastest-grow- proportionally smaller part of diets nated with melamine will likely further ing countries such as India, Indonesia, as incomes rise. Given the resource- increase consumer scrutiny of food Pakistan, and the Philippines. The intensive nature of growing livestock (8 quality. Previously, these sorts of wor- number of people below 40 years of age lbs. of grain is required to produce 1 lb. ries have been confined to wealthier in Asia from 2007 to 2020 will increase of meat), meeting this demand will be a consumers, but the melamine scandal by about 120 million, a relatively small challenge. Soaring prices of grain feed shows that food safety concerns can cut proportion.6 will put more upward pressure on meat across all income levels. More importantly, as incomes rise in prices, which so far have not grown as Asian countries, these young������������� popula- rapidly as those of other food types. Demand for biofuels tions are consuming an increasing Although meat farmers in Asia have Increased demand for biofuels, number of calories. ������������������The����������������� emerging mid- been improving the feed-to-meat ratio including grains and oilseeds, fueled by dle class in developing Asia is one of the (meat produced per unit of grain feed) subsidies in developed markets such as fastest-growing demographic groups by increasing the scale of breeding and the United States and European Union, in the world. The Brookings Institu- improving technology, the extent to accounted for at least a third of the tion estimates that by 2020, the middle which improved “meat competitive- total increase in real prices of cereals class (as measured by real income) will ness” can catch up with projected in 2007, by various estimates. The FAO comprise more than half of the world’s demand remains to be seen. estimates that about 100 million metric population, compared to a������������ third���������� cur- Furthermore, growing incomes have tons of cereals are being diverted to rently. The middle class in China alone increased consumer demand for qual- biofuels globally each year, pushing will be at least several hundred million ity foods. Increasing concerns over up food prices and putting stress on strong within a decade, by various health and consumer rights triggered natural resources including energy estimates. As incomes rise, dietary������������ pat- by disease outbreaks and food safety and water. In the United States, 20% of terns evolve beyond subsistence needs. scandals have further raised awareness the arable land for corn and soybeans 5 | 2008 Autumn Forum: Food Briefing

has been diverted from food and feed is used for biofuels. Two-thirds of Eu- used to produce palm oil. Over 80% production to biofuel crop production. rope’s canola is produced for biodiesel of the world’s palm oil is produced in Price inflation resulting from this shift but that production accounts for only Indonesia and Malaysia. Much of it is in land use is affecting major import- 2% of global oilseed demand.8 How- used as edible oil, but the fact that palm ers of corn in Asia, such as Japan and ever, the fear is that increased future oil is the cheapest biofuel has led to South Korea, and those of soybeans, requirements for cheap and abundant huge demand, especially in Europe. An such as India and China. biofuel will compete with the need for increase in palm oil production has also Biofuels currently account for a rela- food. Certainly, the growing hunger contributed to a crowding out of other tively small proportion of crop produc- for biofuels affects Asian food crops, agricultural crops as well as clearing of tion. In Europe, only 1% of arable land most notably oil palm, whose fruit is forest land in . 6 | 2008 Autumn Forum: Food Briefing Supply Pressures in Asia

With declining fertility brought down food surpluses and there (through higher per capita energy use) rates and technological is little prospect of a turnaround. The and decreased farm acreage. The most advancement, the perennial World Food Programme (WFP) warns prominent international body studying Malthusian worries that that there are no food surpluses in the this issue, the Intergovernmental Panel geometric population growth world. Data from the IMF show that for Climate Change (IPCC), contends would outstrip linear food inventories of major food crops are in that human activities do in fact contrib- supply growth have not been decline. ute to sea level and temperature rises. realized thus far. Long-term climate change aggravat- Urbanization and climate ed by urbanization will cause serious echnological advances have change damage to agriculture. These effects vastly increased productiv- Over the next decade, Asia will be the could be devastating for Asian farm- ity, bringing about the Green major driver in urbanization growth. ers. The United Nations estimates that Revolution. However, there is For emerging economies, this is gener- climate change could exacerbate water Ta growing danger that, absent sensible ally an indication of rising incomes. and rising temperatures, re- polices, Malthus may yet have his day. However, urban development poses ducing crop yields in Central and South A combination of technological limits grave threats to food supply, chiefly Asia by 30% by 2050. Climate change and strains on arable farmland have by contributing to climate change could halve the produce of farmers in some parts of Africa in 2020 and nega- tively affect 1 billion people in Asia.9 The loss of biodiversity due to the 240 growth of cities and industrialization, coupled with growing demand for for- 200 est products abroad (timber, rubber, oil Price Index palm), further worsens the problem, as (2005=100) countries such as Indonesia, , 160 Inventory Cover (Days of Global Consumption) and are already discovering. Extreme weather patterns are

120 becoming more frequent, posing great damage to farm output. Reinsurers are finding a pattern of extreme weather 80 events. According to reinsurer Mu- nich Re, overall economic losses from weather-related natural hazard events 40 between 1980 and 2004 came to around $1 trillion, and the number of natural

0 catastrophes has shown an increasing 1970 1973 1976 1979 1982 1985 1991 1994 1997 2000 2003 2006 2009 trend from around 615 in 1995 to 950 in 2007.10 The likely increase in frequency Prices and Inventory of Major Food Crops and severity of cyclones, droughts, and Source: International Monetary Fund floods means that countries heavily dependent on rain-fed agriculture, such 7 | 2008 Autumn Forum: Food Briefing

Rice Wheat corn/Maize Oilseed Pork Chicken Beef P C X M P C X M P C X M P C X M P C X M P C X M P C X M China 1 1 8 1 1 7 2 1 3 5 1 2 2 8 1 1 2 2 9 4 3 2 Japan 10 8 5 1 6 7 10 6 5 Korea 2 3 6 India 2 2 3 2 2 6 4 2 3 4 4 5 8 9 4 Pakistan 4 6 5 3 Hong Kong 6 7 2 Taiwan Singapore Indonesia 3 3 8 8 3 1 5 8 Malaysia 10 7 5 Philippines 8 7 1 Thailand 7 9 1 8 9 Vietnam 5 5 2 6

Asian Countries: Among the World’s Top Food Producers, Consumers, Exporters, and Importers C=major consumer P=Major Producer X=major exporter M=major importer (top 10 in the world by quantity) Sources: FAOSTAT; UNCTAD/WTO Intracen; USDA Foreign Agricultural

WORLD SHARE (%) 81 Asia Production Rice 84 Asia Consumption

25 Coarse grains 22

39 Wheat 33

31 Oilseed 15

58 Pork 56

32 Poultry 30

26 Beef 24

0 100,000 200,000 300,000 400,000

Asia’s consumption and production by food type, 2008 (kilotons) Sources: FAO; Asia Business Council calculations 8 | 2008 Autumn Forum: Food Briefing

as India, Pakistan, and the Philippines, saw fertilizer prices more than double pected yields of rice farmers who have are potentially subject to greater crop in 2007. Fertilizers account for over a cut back on fertilizer use as a result of and economic losses. third of agricultural costs for farmers on cost pressures. The Taiwan Fertilizer average. The rising price of natural gas, Co., Taiwan’s largest fertilizer manu- Degradation of farmland used to produce fertilizers, is aggravat- facturer and supplier, agreed this year Asia is seeing a dwindling supply of ing the problem as fertilizer production to absorb 15% of the rise in fertilizer arable land, both in terms of actual area accounts for about half of the fossil fuel prices, while the government agreed to and topsoil quality. Currently, less than usage in agriculture. subsidize 70%. The world’s largest fer- half of the world’s Land area is suitable Those affected have appealed at tilizer cooperative, the Indian Farmers for agriculture, and most of this land home and abroad for help. In the Phil- Fertilizer Cooperative Ltd., is appealing is already being farmed. Bangladesh, ippines, for instance, the government to the United Nations for help in curb- for example, is losing 2% of farmland has promised to provide subsidies to ing what it says is price manipulation annually to river erosion. In addition, offset the losses from lower-than-ex- by traders and suppliers.12 dwindling water supply and quality are becoming acute problems in China and India, as sources for irrigation are polluted with algae, excrement, and industrial chemicals. These challenges become more serious when coupled with rising demand for food requir- ing a larger water footprint, such as beef. According to the FAO, the water requirement equivalent for beef is 15 m3 per kilogram, 6 m3 per kilogram for poultry, and just 1.5 m3 per kilogram for cereal. A meat-heavy diet therefore means much greater water use than a vegetarian one.11 Farmland that remains suitable for cultivation faces serious problems, as increased livestock production leads to overgrazing, deforestation, deser- tification, and increased emissions (a cow produces several hundred liters of methane per day), while at the same time reducing crop production.

Rising costs along the agricultural supply chain Beyond the supply of arable farmland and water for irrigation, an important problem affecting Asia is the increasing prices of agricultural inputs. Asia uses fertilizers more intensively than other regions, such as Latin America and Africa.������������������������������� The common overuse of fertil- izers isn’t only expensive but often envi- ronmentally damaging. Asian farmers 9 | 2008 Autumn Forum: Food Briefing Agflation Consequences

The upward spiral in prices Zoellick, president of the , for broader populations. It will also has led to fears of a global worries that food inflation could push affect investment and credit availability food crisis. The key concern about 100 million people back into pov- for food producers. Amid uncertainties is that there may be a erty, wiping out recent global economic over future economic growth in Asia, global food , one gains. governments may face a worsening that includes food access The current global financial crisis fiscal crunch, which in turn will force and problems has depressed food prices in recent public spending cuts. Not only will they disproportionately affecting months, but the adjustment may just find it even harder to pull populations the poor. be a temporary one, as it reflects a out of poverty, they will also struggle to slowdown in speculation of food com- improve living standards for middle- modity futures rather than structural income populations, even as demand The end of abundance changes in demand and supply factors. for food and other public services of he WFP calls the concern A global economic will de- these growing populations continues that food supply cannot keep press real and incomes in urban to rise. Citizen activism may turn into up with demand “the silent , restraining food spending larger unrest. tsunami” and points out that Tfood reserves are at their lowest levels in 30 years.13 To feed the world’s grow- ing population, especially younger populations in developing countries who are consuming more calories, food production needs to grow 15-20% per year in the next few years. The economist Jeffrey Sachs of Columbia University attributes this crisis to the inability of farmers in poor countries to pay for inputs such as seeds, fertilizers, and water for irrigation, which in turn leads to low agricultural productiv- ity. The limited supply simply cannot meet the rising demand for food and biofuels. Author Paul Roberts, in his book The End of Food, declared the end of the “golden age” in which food was cheap and available.

Food injustice and insecurity According to the USDA, 982 million people in 70 developing countries currently are food-insecure. Robert 10 | 2008 Autumn Forum: Food Briefing tions y ontrols sh tr a ns f er a mps/ f oo d r se supply using reserves se supply se imports se export d uties R e d u c import uties I n c re a c kpiles sto Buil d reserves/ I n c re a I n c re a c tions export restri I mpose su b si d ies/ pri c e I mpose minimum support pri c es I mpose minimum export pri c es I mpose rm su b si d ies d e fa P rovi sel f -su ff i c ien P romote I mplement ca f oo d st I ssue

China l l l l l l l l l

Japan l l l

Korea l l l l

India l l l l l l l

Pakistan l l l l l

Hong Kong

Taiwan l

Singapore l l

Indonesia l l l l l l

Malaysia l l l l l

Philippines l l l l l l l

Thailand l l l l l

Vietnam l l l l

Food Policies by country Sources: Asian Development Bank; World Bank; various news reports 11 | 2008 Autumn Forum: Food Briefing

tions Government y ontrols Policies in Asia sh tr a ns f er a mps/ f oo d r

se supply using reserves se supply se imports se export d uties s economies continue In a worrying sign, once-reliable to upgrade their indus- exporters have imposed export taxes trial structures to focus and even outright bans on some crops R e d u c import uties I n c re a c kpiles sto Buil d reserves/ I n c re a I n c re a c tions export restri I mpose su b si d ies/ pri c e I mpose minimum support pri c es I mpose minimum export pri c es I mpose rm su b si d ies d e fa P rovi sel f -su ff i c ien P romote I mplement ca f oo d st I ssue on higher value-added as a result of price rises. Export bans China l l l l l l l l l Amanufacturing and services industries, and price floors have been imposed by public spending on agriculture in Asian grain exporters including China, Paki- countries has shown a declining trend. stan, Vietnam, Cambodia, and India Japan l l l From 1980 to 2002, public spending this year. These actions sent shudders on agriculture as a proportion of total through international agricultural Korea l l l l government spending fell from 15% to markets, even though only 7% of the about 9%. Public spending on agri- world’s rice is traded internation- India l l l l l l l culture as a proportion of agricultural ally.15 Countries such as Japan and GDP has increased, but only marginally China reserve their stocks for domestic 14 Pakistan l l l l l from 9.5% to 10.5%. consumption, in turn pushing up rice During the years of declining food prices. Export restrictions provide a commodity prices, the agricultural disincentive for farmers because they Hong Kong sector yielded relatively low returns on discourage production, distort supply, investment to governments, which in and end up worsening the shortage for Taiwan l turn deterred investments in the sector. those most in need. The lack of investment in turn led to These sorts of restrictions are not Singapore l l lower productivity growth of impor- new, but it would be bad news if they tant staples such as rice and wheat. But are getting worse. Indeed, a conserva- Indonesia l l l l l l as public outcry over agflation begins tive estimate by the International Food to shed light on the underlying struc- Policy Research Institute (IFPRI) cal- tural issues, governments are paying culates that getting rid of trade restric- Malaysia l l l l l attention. tions such as taxes, quotas, and export Government policies that have been bans would reduce world cereals prices Philippines l l l l l l l implemented so far have focused on en- by an average of 30% and stabilize price suring food supply in individual coun- fluctuations.16 Thailand l l l l l tries and stabilizing prices for their Food subsidies and price controls populations. If this focus continues, it are becoming more common. Last Vietnam l l l l could usher in a dangerous era in which year, Malaysia’s government placed relatively free trade in agriculture gives price caps on a range of food products way to the tendency to hoard resources including cooking oil, rice, and wheat Food Policies by country Sources: Asian Development Bank; World Bank; various news reports out of a fear that food simply will not be flour. This year, the Indonesian govern- available on the open market. ment increased spending on food sub- 12 | 2008 Autumn Forum: Food Briefing

VietNam sidies by 2.7 trillion rupiah, or about borders. For instance, the China’s Key statistics $290 million. While these measures Chongqing municipal government may provide immediate relief to con- has leased farmland in to grow Trade sumers, they aggravate price increases rice and the Xinjiang government has A net importer of rice 20 years ago, by limiting supply on world markets leased farmland in Cuba. This trend Vietnam has become the world’s and thus do not alleviate the supply will likely become more prevalent second-largest rice exporter. crisis. They also add to the fiscal bur- as Asian countries attempt to secure den but do not yield targeted benefits food supplies in the wake of dwin- Population for those who are the most affected as dling cultivable soil and water supply, Over 70% of the population lives in rural areas. the lower prices discourage production as well as to protect against volatile and investment in food products. prices and natural conditions. How- Food Prices Price distortions prompted by ever, some critics are concerned that Food prices jumped 74.3% from government policies seemingly contrib- this trend might usher in a new era June 2007 to June 2008. Food uted to China’s melamine scandal. of agricultural “neo-colonialism.”18 has a big weighting in Vietnam’s consumer price index (43%). Milk prices were capped but feed It may encourage countries to bypass prices were not, squeezing farmers and international trade rules and may also Climate leading to low-quality milk that was create problems for the Climate change will likely lead to adulterated with melamine to boost its host countries. a rise in seawater level—a scenario apparent protein quality.17 of sea level rise of 30 cm in 2050 Thailand, the world’s largest rice would increase the salinity of the Mekong River as far as 10 km inland. exporter, proposed earlier this year Increased minimum temperatures to form a rice cartel with Vietnam, could lead to decreasing rice yields Cambodia, Laos, and Myanmar. The of up to 17% by 2070 and decreas- Organization of Rice Exporting Coun- ing corn yields of up to 9% (com- tries (OREC) was proposed to prevent pared to the average yield in the price wars and help farmers in these 1960 to 1998 period) in worst-case scenarios. countries. However, the creation of an would have harmed con- Natural disaster concerns have led sumers and caused additional supply to diversification into non-farm cot- distortions. The proposal has since tage industries such as handicrafts. been dropped. Governments are also holding re- Government Actions In November 2007, the Vietnamese serves and continuing to promote self- government approved a biofuel sufficiency. The Chinese government development project aiming to produces more than 90% of the grain its produce 250,000 tons of ethanol people consume, and has grain reserves and vegetable oil to meet 1% of the of 30% to 40% of annual production. In country’s petroleum demand by the case of rice, China holds about 40 to 2015. 50 million metric tons, which is about Vietnam in July 2008 announced half of the world’s rice stocks. While the introduction of a tax on grain such stocks ensure security of domestic shipments and fertilizers. supply and stabilize prices at home, they distort global prices by limiting The government blocked the signing of new rice export contracts supplies available for trade. in early 2008 to combat inflation In a sign of just how worrying the and then waived a rice export tax in food situation is becoming to policy August 2008 to boost sales due to makers, some governments are leas- higher-than-expected yields. ing farmland beyond their national 13 | 2008 Autumn Forum: Food Briefing The Way Forward

hile national policies small- to medium-sized farmers with World Bank estimates that free trade aiming to lower prices inadequate capital and scale may not would ultimately raise prices by more for consumers and se- achieve much progress on their own, than 5% for primary farm products and cure national supplies governments, businesses, and non-gov- 1% for processed products.19 Food and Wmay provide temporary relief domesti- ernmental organizations are uniquely agricultural tariff cuts in rich and devel- cally, they distort agricultural markets positioned to provide coordination, ex- oping countries would be beneficial in internationally, which in turn aggravate pertise, and investments. The effective reducing poverty as they would boost agflation as they reduce supply on use of biotechnology improves produc- farm incomes, which would also help world markets. tivity by reducing damage to crops and increase demand for rural labor and in- Agriculture is the most protected the environment; a move from agricul- crease wages for non-farm populations, part of international trade, and disputes tural practices focused on merely get- according to a much cited World Bank over farm products led to the collapse ting more out of the land to solutions study.20 Among the developing countries of the Doha Round of WTO negotia- that rely on smarter and more creative modeled, Indonesia, the Philippines, tions earlier this year. On a global level, uses of natural resources boosts attain- and Thailand would all see significant opening up agricultural markets will be able yields and preserves the longevity reductions in populations living on $1 a a key step forward, although any such of farmland; improvements in agricul- day, while Vietnam would see significant measures are likely to face political tural research and expertise contribute reductions in a scenario of developing- opposition, especially given popular to raising income for farmers; and in- country agricultural tariff cuts. pressures on governments amid the vestments in infrastructure and storage Despite more than six years spent by deteriorating global economic climate. facilities reduce waste and help farmers WTO negotiators to put together a pol- Apart from trade liberalization, capture more value from their crops. icy package that would cut agricultural another policy area requiring interna- To help the most vulnerable pro- export subsidies, lower duties on farm tional vision and political will is biofu- ducers and consumers, governments, products, and encourage foreign direct els. Most urgently, governments should and non-governmental organizations investment (FDI), Doha Round negotia- discourage the competition between can and should focus on conserva- tions in July 2008 failed. They ended food and biofuels by reducing subsidies tion programs that help farmers build in deadlock over a clause in the special and other financial incentives for bio- resiliency against the long-term threats safeguard mechanism, which allows fuel production. Governments should of climate change, and food programs developing countries to raise tariffs heed warning calls from international that provide targeted relief to vulner- temporarily above prior commitments, organizations such as the FAO, OECD, able populations. In the longer term, to deal with import surges and price environmental groups, and countries should also focus on policies falls.21 Many developing Asian coun- and reduce their commitments to to stimulate rural development, which tries support these special tariff rises, cheap biofuels directly derived from will in turn generate higher and sus- arguing that subsidies in developed food crops, instead developing other al- tained incomes. China and South Korea countries depress agricultural prices. ternative energy sources and importing have seen dramatic poverty reduction The failure to reach an agreement more biofuels that cause less damage, such as as a result of their policies that aim to broadly reflects the dissatisfaction in second-generation cellulosic products achieve this goal. developing countries toward domestic and other non-food crops. policies in the United States and the A number of immediate measures Changes in trade policy European Union that subsidize farm- can help improve the competitiveness What would be the effects of more ers producing food crops and biofuels, of the agricultural sector. Whereas agricultural trade liberalization? The which address domestic political con- 14 | 2008 Autumn Forum: Food Briefing

cerns but have questionable economic The promise of words, although a single GM plant may and environmental benefits. The dete- biotechnology not be more productive than its natural riorating global economic climate does Biotechnology in the form of geneti- counterpart, the overall impact on not bode well, as governments may be cally modified (GM) crops has been a productivity can be dramatic. even less likely to give up policy options hotly debated political issue, given the China is already spending more than that protect domestic . Despite lack of robust safety and nutritional $100 million a year on biotechnology cyclical problems, however, freer trade data and testing. However, GM crops research and has developed GM rice, is needed to promote agricultural have gained public acceptance in the tomatoes, corn, and sweet peppers. efficiency and welfare in developing wake of skyrocketing food prices. Lim- Indian universities are conducting countries, as well as more stable prices. its on higher crop yields among existing biotech research. Japan and South Ko- A breakthrough will require political plants may make GM food even more rea expect to spend over $300 million will and leadership that look substan- attractive. According to the Earth Pol- a year on biotech research. Malaysia, tially beyond national interest. icy Institute, the physiology of plants Vietnam, and Singapore are looking may be reaching productivity limits, to develop portfolios of GM crops for Changes in biofuel policies given that major improvements in this industrial purposes. While food safety Governments should target their poli- area have been thoroughly researched remains a concern, particularly in more cies to hedge against the pressures that and implemented. The WFP estimates developed nations like Japan, Asia in growing biofuel demand puts on food that single-digit increases in supply can general has been more open to GM prices, chiefly by reducing incentives be expected under the most optimistic crops than the West. for biofuel production when food scenarios of good weather and harvests. The private sector has taken creative prices are high. For instance, China an- In other words, productivity increases steps to tap into the potential of bio- nounced a moratorium in 2007 on the of conventional plants are limited. technology also. Monsanto is adding production of ethanol from corn and What are the key contributions of genes to improve the efficiency of other food crops.22 To reduce competi- biotechnology? The evidence that GM nitrogen fertilizer use. More efficient tion between food and fuel, biofuels crops help to increase actual crop pro- nitrogen use will potentially cut nitrous derived from second-generation cel- duction is inconclusive. For instance, oxide emissions.24 IBM’s World Com- lulosic products using non-food crops studies in the United States conducted munity Grid supercomputer is helping or waste biomass, rather than directly by Kansas State University and the Uni- to speed up development of more nu- from food crops such as corn, rapeseed, versity of Nebraska found that GM soy tritious strains of rice. The technology and oil palm, should be encouraged. produces 6-10% less food than its con- harnesses the collective spare process- Other biofuel crops that can grow in ventional equivalent. The main reasons ing power of over 1 million PCs to run a more arid soil and marginal land hold are that while the genetic modification computational model at the University promise. For instance, India is targeting process takes place, conventional plants of Washington to map the structure 20% of its diesel consumption by 2017 are being improved every year as high- and functions of rice proteins, in order to come from jatropha, which yields yielding plants are used to produce the to identify proteins responsible for four times as much fuel per hectare as following year’s seed. The modification productivity, pest resistance, and nu- soybean and ten times as much as corn. process may also suppress yields.23 tritional value that can be selected for Second, governments should slow the However, biotechnology has been cross-breeding.25 introduction of biofuels that compete proven to help increase herbicide with food as a major energy source and pest resistance, thereby reducing Promotion of sustainable and develop a diverse set of alternative the damage by pests and weeds. The agricultural practices energy sources. The European Union’s biotechnology journal AgBioForum es- A “greener” Green Revolution is need- agricultural commission has set low timates that farmers around the world ed. Technological innovations are part targets for biofuel use in the hopes of save almost $7 billion by using genetic of the solution, but the ultimate goal reducing the competition for arable modification, which helps productivity should be to achieve high agricultural land. Britain is considering reducing and reduces the use of insecticide, in productivity while sustaining land, wa- its target of having 5% of all petrol and turn contributing to a 15% reduction ter and other natural resources used in diesel made from biofuels by 2010. in greenhouse gas emissions. In other farming. This requires no less than an 15 | 2008 Autumn Forum: Food Briefing

overhaul in conventional agricultural ity and boost harvests by cutting water agro-biotechnology, increased financing practices and management. and seed costs as well as preventing for postgraduate training for research Combating the threat of water short- flooding. The method has been ex- staff, and established joint technological age will require investments in tech- tended to other crops including sugar cooperation and training initiatives with nologies like sprinkler and drip systems, cane, finger millet, and wheat. agricultural organizations in Australia, as well as the management of irriga- China, other ASEAN countries, and tion and drainage systems, in order to Improvements in Iran (which is self-sufficient in essential improve efficiency and reduce waste. Agricultural Research and agricultural products).29 Another need is to conserve water in Expertise In addition, businesses should iden- anticipation of droughts and heat waves, In the past, farm incomes have been tify opportunities for private-public by collecting water for emergency ir- suppressed so that food prices would partnerships where they are able to rigation, growing cover crops to slow be low enough for consumers. The per- contribute resources and expertise to down water flow, and recycling water. verse effect of low prices has been to meet common goals for public interest. Smarter fertilizer investments and limit agricultural investment and out- An example of a government partner- usage have the potential of increasing put, thus driving up prices. Given the ing with the private sector is the Philip- the attainable yield by as much as three outlook for sustained high prices, gov- pines. According to the Philippines times in extreme cases, according to ernments should now help to improve government, Shangri-La Hotel group the WFP. As fertilizer use will likely agricultural research and expertise so and the San Miguel Corporation have increase in the future, teaching farmers that farmers are able to generate more agreed to join efforts with the govern- to economize on its use will be crucial. value from their production, and to ment in a program called Feeding the And while organic farming has not been ensure that farmers capture the value Future, to develop 1 million hectares widely embraced in Asia beyond Japan from these higher prices. of land for food production. Farmers’ and South Korea, studies have found In Asia, spending on agricultural produce would then be bought at com- that increased use of organic materials research is low and still predominantly petitive rates as part of an assistance such as livestock manure and crop resi- funded by the public sector. While program for farmers.30 due can be used in combination with agricultural R&D intensity ratios, i.e. ag- inorganic fertilizers to help improve ricultural R&D spending as a percentage Infrastructure and long-term crop and soil performance. of agricultural GDP, are increasing, the storage improvements Investing in the promotion of organic ratios for much of developing Asia (ex- Transportation improvements could farming is a key area of opportunity that cept Malaysia) remain well below the vastly reduce economic losses from private sector companies can become 2.5% level prevailing in the developed wasted and rotting food that does not involved in as corporate citizens. One world and even the 0.5-0.8% average for get from farms to markets. Inefficient example is Citigroup, which supports Sub-Saharan Africa.27 Typically, agricul- transportation reduces final food supply a joint program in China between the tural research intensity ratios in Asia are and increases costs. In developing coun- World Resources Institute (WRI) and 0.5% or below.28 Governments should tries, up to half the food produced is Fuping Development Institute to pro- focus investment on boosting research lost, according to the WFP, because farm vide partnership and technical support, as well as knowledge and technology produce does not get to the markets on as well as funding for social enterprises dissemination across countries in the time. Farmers suffer direct income loss in organic foods, fibers, and fertilizers.26 region. Malaysia has been able to attain as a result. In addition, high fuel prices Modifications in conventional high research intensity partly because are pushing up freight rates, and rising agricultural practices may also hold it has agricultural commodity boards transportation costs account for up to promise. For example, the System of for the major export crops—cocoa, two-thirds of final food prices.31 Further, Rice Intensification (SRI), invented in palm oil, and rubber. The research by a lack of sophisticated storage and Madagascar in the 1980s and adapted these boards accounts for a large share preservation practices in less-developed by governments in rice-producing of the total government spending on markets leads to wastage of perishable countries such as China, India, and agricultural research. The government foods and increases costs to farmers. By Indonesia, advocates early planting of has also expanded public grants to help some estimates, upgrading drying and rice. Doing so may increase productiv- university research on halal food and storage facilities to prevent spoilage 16 | 2008 Autumn Forum: Food Briefing

has the potential to reduce post-harvest Investments in building tions for safety nets in the face of rising loss by one-third. Storage also prevents resiliency to climate food prices.35 Following the announce- farmers from having to sell right away at change ment, in September 2008 it approved times of price volatility. As extreme weather events become a $500 million loan for Pakistan in the In India, where modern transpor- more frequent, an urgent need is to face of food and fuel price inflation, and tation networks are lacking, Indian help preserve arable land and stabilize in October, a $35 million in emergency farmers on average receive less than yields. Governments should design and food aid and grants to Cambodia. one-fifth of the price consumers pay.32 implement integrated policies for soil Though food aid provides temporary India also produces 60% of the world’s conservation, reforestation, wetland relief, these programs are also vulner- mangoes, but accounts for less than 1% conservation, and programs to slow able to being scaled back at times of of mango exports. One key reason is the water and soil loss in order to reduce high food prices. Programs should thus lack of infrastructure and cold stor- the impact of climate change. The be designed to provide better-targeted age facilities to ensure produce gets to Chinese government is implementing help and improve participation of poor markets. Yet political opposition forced these sorts of programs in the North- populations in the economy. Targeted Reliance Retail to delay plans to build east and Northern China Plain. food aid could come in the form of a large network of hypermarkets that temporary subsidies of essential foods, would buy agricultural products direct- Targeted assistance and conditional cash-transfer programs, ly from farmers, bypassing middlemen, capacity building for and food programs at schools and and that would improve cold storage the most vulnerable workplaces, to provide targeted relief and distribution for produce. Neverthe- populations for the most vulnerable. The WFP less, benefits of improving agricultural Last but not least, well-targeted safety has been providing free breakfast at supply chain infrastructure in the face nets should be scaled up to safeguard schools in Cambodia, which has made of elevated food and fuel prices, includ- the most vulnerable populations, both in children visibly healthier and helped ing better rates of return on investment terms of food suppliers and consumers. improve reading ability.36 The Inter- and higher income for farmers, should The Bill & Melinda Gates Foundation national Fund for Agricultural Devel- make such investments more attractive. and Howard Buffett, the son of Warren opment, a specialized agency of the Other short-term opportunities Buffett, have provided $76 million in United Nations, focuses on introduc- would be to decrease energy-intensity grants to fund a WFP program called ing microfinance to rural public work in farming and produce products Purchase for Progress, which buys programs, increasing asset holding to closer to the end consumer, in order to the food for food assistance programs the rural poor, distributing water to decrease transportation and logisti- from developing-world farmers rather increase farm output, and increasing cal costs. Hong Kong, Shenzhen, and than shipping it in from abroad, so that linkages between rural non-farm and Mumbai are three examples where farmers can sell their surplus crops farm sectors, all of which are measures urban agriculture is practiced. Urban at competitive prices. The measure is to build capacity rather than directly farms are located around the cities to intended to help small-scale farmers providing temporary relief. China and grow fruits, vegetables, and livestock become net producers rather than net South Korea have seen rapid increases for urban populations. In 2007, local consumers of food.34 in rural incomes through their poverty- production accounted for 46% of the The Asian Development Bank an- alleviation policies in the past decade fresh chickens and 18% of the freshly nounced in May 2008 that it would that help build infrastructure and gain slaughtered pigs consumed in Hong provide $500 million in immediate skills and employment for the poorest Kong.33 budgetary assistance to member na- populations.37 17 | 2008 Autumn Forum: Food Briefing Conclusion

ood prices are unlikely to goals will not ensure longer-term ben- yields.38 The net effectis that food prices return to historically low efits for food producers and consumers. will remain considerably higher than levels. In the short term, price Future projections do not predict a historical trends. Rather than hoping volatility may lead to forced continued acceleration of price rises, that these price increases are temporary, Fcuts in food consumption, potentially but rather sustained levels of high food countries should view these sustained triggering political difficulties, and per- prices. These projections are based high prices as the true cost of feeding haps even instability, in Asia’s poorer on assumptions of moderate income the world. Policy goals should not nec- countries. Absent concerted long-term growth in key emerging markets includ�������- essarily be focused on depressing prices, measures, structural factors driving up ing China and India, continued demand but rather on incentivizing efforts to food demand and threats to continued for biofuels, sustained high fuel prices, resolve demand and supply imbalances, growth in supply will continue to play a progressively stronger U.S. dollar, and raising income for rural households, and out, and policies aimed at short-term conservative increases in food crop feeding vulnerable populations.

1,500

1,200 Vegetable Oils

900

600

Rice

300 Beef & Veal Poultry

Pork Coarse Grains

0 2002-07 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (avg) (est)

World prices by food type ($/ton) Source: OECD-United Nations Food and Agriculture Organization 18 | 2008 Autumn Forum: Food Briefing Endnotes

1 Coarse grains refer to cereals other than 15 FAOSTAT database, Food and Agriculture See http://www.asti.cgiar.org/pdf/Malay- rice and wheat, including barley, oats, corn, Organization, 2008. See http://faostat.fao.org sia_CB30.pdf rye, and sorghum. 16 “High Food Prices: The What, Who, and 30 “Kuok group, SMC to develop one million 2 Average of six commodity group price How of Proposed Policy Actions,” Interna- hectares for agricultural production,” The indices (cereals, oils, fats, meat, dairy, and tional Food Policy Research Institute, May official website of the Republic of the Philip- sugar). 2008. pines, 3 July 2008. See http://www.gov.ph/ 3 “Emerging East Asia’s growth to moderate 17 “China’s farmers say they’re victims in news/default.asp?i=21390 as inflation threat looms,” Asian Develop- milk scandal,” David Barboza, International 31 Economic and Social Commission for Asia ment Bank, 22 July 2008. Herald Tribune, 4 October 2008. and the Pacific, Committee on Transport, 4 “Food Security Assessment 2007,” United 18 “UN warns of food ‘neo-colonialism,’” First Session 29-31 October 2008 Provi- States Department of Agriculture, July Financial Times, 20 August 2008. sional Annotated Agenda,” United Nations 2008. 19 “The Doha dilemma: Does freer farm trade Economic and Social Council, 8 September 5 “World Population Prospects: The 2006 Re- help poor people?” The Economist, 29 May 2008. vision,” United Nations Population Division. 2008. 32 “As India Struggles to feed itself, Green 6 Calculations based on International Labour 20 “Distributional effects of WTO agricultural Revolution falls short,” International Herald Organization LABORSTA database, October reforms in rich and poor countries,” Thomas Tribune, 19 June 2008. 2008. Hertel, Roman Keeney, Maros Ivanic and 33 “Agriculture in Hong Kong: Overview,” 7 “Trade Reforms and Food Security: Alan Winters. Policy Research Working Agriculture, Fisheries and Conservation Conceptualizing the Linkages,” United Paper, The World Bank, November 2006. Department, The Government of the Hong Nations Food and Agriculture Organization 21 news, July 2008. Kong Special Administrative Region, 2008. Commodity Policy and Projections Service See http://www.wto.org/english/news_e/ See http://www.afcd.gov.hk/english/agri- Commodities and Trade Division, 2003. news08_e/meet08_summary_30july_e.htm culture/agr_hk/agr_hk.html 8 “EU defends support for biofuels, says 22 “Food price rises force a cut in biofuels,” 34 “Purchase for Progress initiative launched the crops unfairly blamed for soaring food The Times, 12 June 2007. See http://www. in New York,” World Food Programme, 24 prices,” International Herald Tribune, 6 May timesonline.co.uk/tol/news/world/asia/ September 2008. See http://www.wfp.org/ 2008. china/article1917927.ece english/?ModuleID=137&Key=2942 9 “Wealthy nations’ failure to mitigate 23 “Glyphosate-resistant soybean cultivar 35 “ADB Announces Massive Financial Sup- climate change violates rights in develop- yields compared with sister lines,” Elmore et port for Food Crisis,” Asian Development ing countries,” Purple Romero, News- al., Agronomy Journal, vol. 93, March-April Bank, May 2008. See http://www.adb.org/ break, abs-cbnNEWS.com, 15 September 2001. Media/Articles/2008/12483-asian-food- 2008. See http://www.abs-cbnnews. 24 “A time to sow? GM food could help keep a crisis/default.asp com/special-report/09/15/08/wealthy- lid on the cost of staples,” Financial Times, 11 36 “Food aid programs in Asia, Africa cut nations%E2%80%99-failure-mitigate- July 2008. because of rising food prices,” CNN, 26 May climate-change-violates-rights-developing- 25 “IBM World Community Grid ‘Supercom- 2008. See http://edition.cnn.com/2008/ 10 NatCatSERVICE, Geo Risks Research, puter’ to Tackle Rice Crisis,” IBM, 15 May WORLD/asiapcf/05/26/eco.food.ap/index. Munich Re Group, December 2007. See 2008. See http://www-03.ibm.com/press/ html http://www.munichre.com/en/ts/geo_risks/ us/en/pressrelease/24202.wss 37 “Rural poverty reduction in South Asia,” natcatservice/default.aspx 26 “Asia Pacific Corporate Citizenship Report Asian Development Bank Institute Execu- 11 FAO data published in “World Water Devel- 2007,” Citigroup. See http://www.citigroup. tive Summary Series No. S57/02, 2001. opment Report,” UNESCO, 2003. com/citi/citizen/asia/environment.htm 38 OECD-United Nations Food and Agricul- 12 “Lofty prices for fertilizer put farmers in a 27 “Investing in Sub-Saharan African Agricul- ture Organization Agricultural Outlook squeeze,” Wall Street Journal, 27 May 2008. tural Research: Recent Trends,” Interna- 2008-2017. See http://www.fao.org/es/ESC/ 13 “Seven Questions: The Silent Tsunami,” tional Food Policy Research Institute, 2004. en/2/3/highlight_550.html Foreign Policy, April 2008. See http://www. 28 “Agricultural R&D capacity and invest- foreignpolicy.com/story/cms.php?story_ ments in the Asia-Pacific region,” Interna- id=4296 tional Food Policy Research Institute, 2008. 14 “The decline in public spending to 29 “Malaysia: Agricultural Science and agriculture—does it matter?” Oxford Policy Technology Indicators,” International Food Management, February 2007. Policy Research Institute, November 2005. ASIA BUSINESS COUNCIL Unit A-B, 22/F On Hing Building 1 On Hing Terrace Central, Hong Kong

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