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Rising food prices raise inflation concerns in Asia

But risk of inflation here is tempered by Singapore's strong currency and diversified food sources
Wednesday, March 12, 2014 - 06:00

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The impact on Singapore, however, will be moderated by its strong currency and the relatively smaller effect food costs (and that of other basic necessities) have on overall inflation in the city state, as is typical of more developed economies - PHOTO: SPH

[SINGAPORE] Politics and adverse weather are pushing food prices up, creating potential for inflationary pressures in South-east Asia.

The impact on Singapore, however, will be moderated by its strong currency and the relatively smaller effect food costs (and that of other basic necessities) have on overall inflation in the city state, as is typical of more developed economies.

The food price index tracked by the United Nations food agency rose 2.6 per cent last month - its sharpest climb since July 2012, when a drought in the US sent corn and soybean prices to new highs.

The Food and Agriculture Organisation's (FAO) index, which measures monthly price changes for a basket of cereals, vegetable oils, dairy, meat and sugar, stood at 208.1 points last month, up from January's 202.9. Within this basket, prices rose in all groups except meat, with dry weather in Brazil and South-east Asia pushing up sugar, soy oil and palm oil prices.

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The ongoing tension between Russia and Ukraine has pushed grain prices up. (Ukraine and Russia account for 17 per cent of the world's supply of wheat, and Ukraine is the world's third largest exporter of corn.) US wheat futures surged 4.6 per cent last Monday in the largest one-day percentage gain in more than 17 months.

The impact of this will be felt in this month's index, FAO has warned.

This poses upside risks to inflation in Asia, Nomura's chief economist for Asia ex-Japan Rob Subbaraman told The Business Times. "The inflation genie might be starting to rumble in the bottle," he said.

This is particularly the case since the weightage given to food is higher in many Asian countries than in developed economies, say economists.

Singapore, however, may be spared the worst from rising food prices, as food makes up only 22 per cent of the consumer price index (CPI) here.

Mizuho Bank economist Vishnu Varathan said food is not insignificant as a potential driver of inflation, but that the appreciating Singapore dollar, coupled with the country's diversified sources of food imports, tempers the risk.

Agreeing, UOB economist Francis Tan said he expects labour costs to have a bigger impact on inflation here this year. Stripping out the prepared-food segment to exclude inflationary effect from the tightening labour market, food is whittled down to only 9 per cent of the total CPI basket.

Compare this to the Philippines' 36 per cent, Thailand's 33 per cent, Indonesia's 20 per cent and Malaysia's 19 per cent.

Weakening regional currencies, coupled with the reduction of food and fuel subsidies in Malaysia and Indonesia, could fan inflationary effects in these countries.

Rice prices are providing some relief. A glut in the rice market, created by Thailand offloading the record stockpiles it has accumulated, is leading to expectations of lower rice prices ahead. Bangkok is now under pressure to sell rice cheaply to raise money to fund its controversial rice-buying programme.

The price for benchmark Thai 5 per cent-broken rice has fallen US$20 in the last three weeks to between US$415 and US$425 a tonne; rice traders are now holding their breath, watching for a further slide, Bangkok Post reported.

Falling rice prices would relieve inflationary effects for the Philippines, where rice makes up almost 9 per cent of the food basket, said Mizuho's Mr Varathan. "Overall, Indonesia and Malaysia could grapple with higher food-inflation risks, with rice mitigating the risks most for the Philippines and Thailand," he said.

Inflation aside, price increases in palm oil would benefit Malaysia and Indonesia, where palm oil constitutes a significant portion of exports, said Standard Chartered economist Jeff Ng.

The extent of the impact of rising food prices on inflation and growth depends on how long the contributing factors stay in play, said economists.

Nomura's Mr Subbaraman said: "At this stage, we haven't changed any of our forecasts. Commodity prices have to be sustained - the economic impact is usually not important if they go up for a month, and then come back down. We're waiting to see another month of data."

Food prices take three to eight months to feed through the supply chain, so higher food inflation will become noticeable only in the middle of the year if prices remain high, Mr Varathan said.

"What we watch for, in particular, are the confluence of Brazil, regional and Ukraine effects simultaneously squeezing grain (including feed), cooking oil and sugar prices higher; this could result as broader food inflation," he said.

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