Thailand
Malaysia: Insight – Soaring prices may hamper recovery
THE rising inflationary pressure both globally and domestically has certainly stolen the limelight in recent weeks.
Despite the implication on policy developments, large segments of the low and middle-class population are grappling with the increasing prices of goods and this has eventually threatened consumer spending and increased the cost of living.
Costlier raw materials, supply chain disruption led to surging food prices
Among all, food prices have been on a significant rise in the past few months.
According to the United Nation’s Food and Agriculture Organisation, the global food price index is now 75% above pre-pandemic levels and had continued to creep up for the fifth straight month to reach a 12-month high in May.
This is attributed to a slew of factors such as supply chain bottlenecks, soaring prices of raw materials and key commodities as well as the global energy crunch.
These driving factors are mainly stemming from the Russia-Ukraine conflict, which has now increased the risk of protectionism from various countries.
The price of many grains used as raw material like wheat has shot up since late last year.
Countries are taking serious steps to ensure food security.
The most notable one is the food export bans from key producers: India (wheat), Ukraine (wheat, oats, sugar and a few more), Indonesia (palm oil) and recently Malaysia (chicken).
There is little room for optimism about a return to a more stable market condition, given the ever-rising input costs and unresolved geopolitical conflicts.
Inflation in Malaysia has also been dominating the headlines in recent days.
The price of fresh produce has reportedly surged more than the pre-pandemic levels, while some staples, especially chicken, are also expensive.
With the pandemic-induced disruptions already in place, the spill-over effects from the international price transmission have further exacerbated the cost of inputs, and thereafter are causing a rise in food prices.
Despite several government-administered cost controls, food prices are still surging –reflected by the 5.2% year-on-year increase in May.
Food items which saw the highest price jumps were meat, fresh fish, flour and other cereals, grains, milk, cheese and eggs, as well as oils and fats.
As food prices were already increasing pre-war, the current situation has further intensified the trend.
The ringgit’s depreciation against the US dollar is another issue that is casting a profound impact, especially on the stability of food items.
Bank Negara, in one of its reports, suggested that the direct impact of exchange rate changes on consumer prices is often not pervasive and limited to selected items.
However, it has a lag effect, hence, affecting future consumer prices.
Thus, if the current weakness sustains, then the rise in food prices will persist and this could worsen if supply constraints remain in place.
Effective and efficient strategies need to be in place
Although the driving factors of food price hikes are mostly exogenous, continued government intervention is still needed to tackle rising food prices and the headline inflation rate.
In view that food inflation will continue to soar in the foreseeable future and its potential implications on the welfare of society and economic development, it is crucial for policy makers to design appropriate policies to curb the rising prices.
Most importantly, the strategy to control the headline inflation must be implemented on a long-term basis, especially for food items.
Despite the imported inflation, the domestic market structure, which may cause food price hikes, is often left unexamined.
There may be a few market operators who control supplies and influence the prices for wholesale and retail markets; yet they may not be perceptible to the public.
Hence, it is important for public agencies such as the Federal Agriculture Marketing Authority (Fama) to intervene and facilitate importation of food items at least until prices are returned to normal level.
Such intervention could eventually reduce the increasing prices, especially of the imported food items.
Another viable solution is to enhance the distribution channels and the supply chain.
Fama should be revamped to become the effective middleman between farmers and consumers, thus the role of private middlemen and cartels can be curbed.
This will be a win-win situation for both producers and consumers.
To address the unequal market power between farmers and middlemen, having a cooperative vehicle for small farmers may be the best solution.
The government can encourage the formation of this cooperative among the farmers to look after the distribution channel through the Entrepreneurs Development and Co-operatives Ministry.
The objective is to enable the small farmers to gather strength through a bigger voice to bargain with big-time dealers or millers.
Middlemen cannot be eliminated overnight.
This is due to their roles as marketers, distributors, retailers, wholesalers and even last-resort creditors for small farmers.
Shortening the supply chain via integrated cooperatives
However, the supply chain can be shortened through integrated cooperatives among the small farmers for higher income and sustainability.
In the long term, this will eventually reduce the prices that are passed on to the consumers.
Providing subsidies across the supply chain is another option that the government can consider to combat food inflation.
The government could also introduce time-limited subsidies for producers to cover the logistics cost of intermediate inputs.
The increase in global commodities will usually increase the cost of production by the producer which is then passed on to consumers, except that the impact will be more or less cushioned by such price control or subsidy programmes implemented by the government.
The government is currently in the midst of reviewing the targeted subsidy approach to lower the burden of the increasing price pressure among B40 households.
Adding to that, the prime minister has also announced a new round of cash aid as part of the additional Bantuan Keluarga Malaysia (BKM) funds to combat rising prices.
Along with the subsidies and cash aid, I strongly suggest the government consider introducing more “myKasih” cards for eligible people from low household income group.
A specialised or dedicated counter should be opened at wholesale and retail shops to enable the myKasih cardholders to buy essential goods at a discounted price, whereby the difference between the discounted and market price will be compensated by the government.
Such a mechanism is being practised in India, which is called “ration card”.
Ration cards are official documents issued by state governments in India to households that are eligible to purchase subsidised grain from the Public Distribution System under the National Food Security Act.
Introducing such a card-based system in Malaysia could also reduce the issue of food shortages and ensures food security.
On the supply side, this could be even a perfect time to reinitiate the Buku Hijau (Green Book) which was launched by Tun Abdul Razak Hussein in 1974 to encourage every citizen to take up short-term gardening or farming.
Malaysians should be encouraged to develop an organised farming unit, such as planting greens and running dairy or fish farms, be it for personal consumption or to supplement their household income.
Malaysia has been reliant on food imports, notably importing over RM50bil in food commodities annually.This raises the questions on our food security.
To grow enough food to feed the nation and reduce the food import bill, the government should be actively playing a supporting role through Agrobank, Mardi and Fama.
Manokaran Mottain has served the industry as an economist for more than 30 years and is currently the director of Rising Success Consultancy Sdn Bhd. The views expressed here are the writer’s own.
Source: https://www.thestar.com.my/business/business-news/2022/06/28/insight—soaring-prices-may-hamper-recovery