OREANDA-NEWS. August 21, 2014. The most acute risks from an El Nino in the Pacific Ocean have subsided for 2014 but the risks to Asian food inflation don’t end there. Less severe El Nino occurrences have affected India’s economy through a weaker monsoon season, for instance, while agricultural production in the Philippines was still recovering from last year’s weather, even as the new typhoon season set in.

Japan has Asia’s highest food inflation momentum with the annual increase at a 21-year high, but this is explained by April’s sales tax hike and the weakening yen. Japan imports 60 per cent of its agricultural consumption and much of the rest is highly subsidised. In Taiwan, food inflation is coming on the back of higher dairy, meat, fish and fruit prices.

In the Philippines, the effect of 2013’s Typhoon Haiyan on domestic food supply is still being felt. Government subsidies of domestic rice producers contributed to high prices but this policy is changing: large purchases of relatively cheap rice from Vietnam should ease the Philippines' food inflation, which is one of the highest in Asia. 

India and Indonesia, two countries prone to food inflation, are facing relatively tame prospects. Nevertheless, the situation remains potentially volatile.

In the past, even weak and moderate El Nino occurrences have led to serious Indian droughts. Food prices jumped by more than 20 per cent during 2009-10’s relatively mild El Nino. This year’s rains are already significantly below target and many are debating whether a monetary-policy adjustment would be warranted. Government granaries are well stocked but we believe a full drought could cut GDP growth by half a percentage point.

For Asia at large, the weak and moderate El Ninos of 2006-07 and 2009-10 arguably caused cyclical momentum in food inflation. Just a small adjustment in rainfall risks can exacerbate Indonesia’s forest fire season, for instance, with crop burning getting out of control. Eastern Indonesia already has a drought alert because of El Nino-related conditions.

But the risks are countered by a positive global outlook and better policy across Asia. While prices of fish, pork and chicken rise on the back of increasing consumption from a larger middle class, the short-term price dynamic for most cereals – used both as a staple and a feed input for farmers – is favourable for consumers.

Asia learned lessons from past food crises when rice prices tripled in weeks. Thailand and Vietnam are among nations with large reserves that serve as a regional food buffer. India’s rice reserves at government warehouses in April were double the required strategic reserve. However, this year’s poor monsoon will likely result in India losing its role as the world’s largest rice exporter.

Across emerging Asia, policymakers have improved the response mechanism to food crises and the global outlook is currently favourable. However, over the long term, a rising middle class and world population will cause increasingly strong price pressures. And although this year’s El Nino may not be too problematic, these events seem to be happening with increasing regularity.

Given that there are likely to be more weather-related disruptions to agriculture and the environment, increased economic volatility appears inevitable. Asian policymakers must ensure that proper stocks are maintained and contingency plans are in place.