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Emerging Markets, IMF Editions, October 2015

The worst El Nino on record may provoke a dangerous period of food price inflation which could worsen the pressure on weak emerging markets, according to a leading economist in Asia.

Most food prices, like all commodities, have declined in value over the last year alongside the oil price and sluggish global growth. But according to Rob Subbaraman, chief economist for ex-Japan Asia at Nomura, “of all the various commodity classes, it is the soft ones that have the greatest potential for a surge.”

The El Nino weather system, which forecasters believe may prove to have its strongest year since records began in 1950, will be the major prompt for an increase in food prices, and the trend may already be in evidence. Yesterday Taiwan, which has been in a period of deflation for several months, announced an unexpected inflationary number caused by increased food prices driven up by typhoons. “It is early days,” said Subbaraman, “but this El Nino is expected to be very severe.”

In addition, Subbaraman believes there are a number of structural drivers to food price increases on the supply and the demand side. On demand, many expect weak Chinese growth to keep food prices down, but Subbaraman disagrees. “China’s growth slowdown is very concentrated in investments. Consumption is holding up pretty well,” he said. “I don’t think the China growth slowdown is negative for food prices; if anything, it’s positive.”


He also pointed out that, although emerging market growth is slowing, people are continuing to increase household incomes, which when rising from a poor level tends to be reflected in food demand – not just more food, but more high-protein food like meat and milk, which in turn requires steadily more grain and water to produce. Additionally, he believes that income inequality skews statistics: that groups like the World Bank model their global aggregate food demand projections using per capita GDP, without factoring in this skew. “In Asia, for example, the average GDP per capita is around US$3,000 among three billion people,” he said. “With normal distribution, that’s about 1.5 billion people below that level, the sweet spot where incomes go up and create big demand for food. If you allow for income distribution, you find that 73% of people are below that income level. That’s 700 million more people than with even distribution.”


On the supply side, Subbaraman said that productivity gains in agriculture have lagged since the green revolution of the 1960s to the 1980s. “Essentially there hasn’t been that much investment in agriculture,” partly because prices have been low. Other factors are ageing populations, and the fact that young people in emerging markets tend to gravitate towards cities.


Nomura calculates that emerging markets are by far the most vulnerable to food price inflation, led by Bangladesh, Algeria, Sudan, Syria and Angola. No advanced economy appears on the list until Hong Kong, in 17th. “This is the bigger picture: the warning,” Subbaraman said. “We know emerging markets are in a funk right now, and the last thing they want is a surge in food prices.”


However, in an interview with Emerging Markets, Bangladesh central bank governor Atiur Rahman said his country’s situation had improved considerably. We are now running a surplus in food production,” he said. “We have exported some rice to Sri Lanka and are sending some to northeast India.” He said food price inflation has dropped from 17% to 5% in recent years. [LINK TO HIS INTERVIEW FOR CB GOV OF THE YEAR?]

Chris Wright
Chris Wright
Chris is a journalist specialising in business and financial journalism across Asia, Australia and the Middle East. He is Asia editor for Euromoney magazine and has written for publications including the Financial Times, Institutional Investor, Forbes, Asiamoney, the Australian Financial Review, Discovery Channel Magazine, Qantas: The Australian Way and BRW. He is the author of No More Worlds to Conquer, published by HarperCollins.

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