Indonesia is one of the top 5 food import dependent nations of the world. Hyperinflating food prices are likely to lead to be (to quote this article from the Jakarta Post) "lethal ammunition for macroeconomic instability"
-------------------------------------------------- Food prices rise December 19, 2007 The Jakarta Post
The prices of food commodities and several other basic needs have started to rise in several cities in Indonesia, partly due to upward price trends on the international market and because the country depends largely on imports for such staple foods as wheat, corn, soybean, sugar and, to a lesser extent, rice.
More worrisome is the fact that the uncertainty about oil prices also played an important part in the upward price trend, not so much because of the height of the fuel price itself but largely because of the capricious stance of the government regarding its energy policy in general and fuel subsidies in particular.
Over the past several years, the price of Thai rice has almost doubled, to over US$330 per metric ton; the world price of wheat is up to its highest ever, at $400/ton; corn is at $150/ton; palm oil has tripled to $900/ton; and coconut oil more than doubled to $1,030/ton.
What is concerning is that high food prices usually reflect scarcities caused by crop failure, but what is most remarkable about the present bout of food price rises is that record prices are being achieved at a time not of scarcity but of good harvests.
This trend shows that something fundamental has been greatly influencing the world's demand for food, notably cereals. This is a trend that the Indonesian government, notably the National Logistics Agency and the ministry of trade should watch and analyze.
Most analysts trace the marked food price rise, despite the relatively good harvests in major producing countries, to the steeply rising incomes of people in India and China, which has stoked demand for meat, in turn boosting the demand for cereals to feed to animals. Higher incomes in India and China have made hundreds of millions of people rich enough to afford meat and other higher-quality foods.
The global concern for climate change driven by fossil fuels has also generated a huge demand for ethanol and other biofuels and this in turn has caused steep increases in the use of corn for biofuels.
The strongest message from this development is that departing from the ways of past decades, when food prices tended to fluctuate along with the quality and volume of harvests, food prices will continue to be steadily high due to the rising demand in the two emerging giant economies and the use of biofuels.
Put another way, the developments could put an end to the era of cheap food, similar to the trend in energy, as the huge demand in China and India has now terminated the end of cheap oil.
Yet most unfortunately, costly food prices would affect most severely the poor in developing countries, notably the around 110 million people in Indonesia who still live on less than $2 a day. The poor people in Indonesia have been greatly vulnerable to food, notably rice, prices, as the situation in 2006 testified, when the number of people living in absolute poverty increased by 11 percent to almost 40 million, due mainly to higher rice prices.
Theoretically, farmers overall should gain from higher farm incomes due to the higher prices of palm oil, rubber, cocoa, spices and so on but in actuality farmers' trade power has remained negative due to their usually tiny landholdings, poor infrastructure for market deliveries and inadequate credit funding. The end result is that farmers lose more from higher food bills than they gain from higher farm incomes. And in Indonesia, like in most other poor countries, food accounts for more than half the consumer price index.
What has made the prices of most basic needs goods even more uncertain is the government's wavering attitude in coping with oil prices, which have of late been hovering between $80-90/barrel, as against the $60 average assumed for calculating fuel subsidies for this year and 2008.
Barely ten days ago, the government announced a plan to float the price of gasoline for private cars to cut fuel subsidies, which have in any case been enjoyed mostly by middle- and high-income people.
However, the government later announced that it might reconsider the plan since international oil prices have started to decline again from over $90 to $80-85/barrel.
The longer the government delays bold measures to cope with the rising oil prices the more uncertain and nervous it will be for businesses about cost calculation.
Just look at how fuel supply shortages have occurred in several areas. State oil monopoly Pertamina claimed problems in some technical problems in transportation. But we strongly suspect speculative hoarding or smuggling overseas played an important part in the shortage.
This oil uncertainty and the upward trend in food prices could be lethal ammunition for macroeconomic instability.
