mystery behind price rise

8/7/2019 Mystery behind Price Rise

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MYSTERY BEHIND

FOOD PRICE RISEKHEM SINGH


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Contents

Inflation

Food Inflation in India

Major reasons for Food price Inflation

Initiatives to boost Agricultural growth

Real culprit behind Food Inflation

Commodity Futures

Addressing the problem

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Inflation

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A situation in which supply of money increases at a ratemuch faster than the supply of real output.

Always better to have a moderate inflation

Inflation is calculated mainly by wholesale price index

and consumer price index

Inflation can have positive and negative effects on an

economy


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Food inflation in India

Is exactly the rise in the price of food items

Food inflation hit a more than decade high of 20.2% in

the month of Jan 2011.

The present inflationary rate is 11.49%

In India food inflation is calculated on the basis of WPI,

Base year being changed from 1993-1994 to 2004-2005.

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FOOD INFLATION CONTINUE

TO RISE

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The FAO Food Price Index (FFPI) rose for theseventh consecutive month, averaging 231 pointsin January 2011, up 3.4% from December 2010 andthe highest (in both real and nominal terms) since

the index has been backtracked in 1990.


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- Meat - 25% - Dairy 12.5%

- Cereals - 53% - Sugar 13.5%

- Oils & Fats - 64%


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Way the Indians spend

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Major Reasons ForFood Price Inflation

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a

UPTO 45% of Food Wastage Dueto LackOfProper

INFRASTRUCTURE


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MAJOR FOOD GRAINS IMPORTING COUNTRIES SUCH

AS AUSTRALIA ,BURMA , MALAYSIA SUFFERING DUE TO

NATURAL CALAMITIES . THUS CREATING GLOBAL

SHORTAGES AND INCREASE IN PRICES..

AUSTRALIAMALAYISIA

BURMA


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Results In Gradual Reduction In PerCapita

AvailabilityOf SomeOfThe Food Items. For Instance, PerCapita Net AvailabilityOfPulses

Per Day Has Gone Down From Around 60 Grams

DuringThe 1950 To Around 37 Grams In 2010

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RESULTING IN LOW AgricultureProductivity

Compared To The Best In The World SUCH AS

US,CHINA,AUSTRALIA.

India's Spend On Agri-R&D Should IncreaseTo

Around 1% Of Agri-GDP From TheCurrent 0.6 % Of

Agri-GDP.

OLD TECHNIQUE SMALL LAND


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FLOW OF FOOD PRODUCTS

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FARMERAPMCAGENT

RETAILERS CONSUMER

HOARDING

RESULTS

The high margin between wholesale prices and retailsprices.

E.g. - The retail prices of onions mounted to Rs 60/Kg (inDelhi market) during Jan-11, while the wholesale pricestood at Rs 30/kg during the same period


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MINIMUM SUPPORT PRICE

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RESULTS IN FIXED INFLATION


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Who is the culprit behind high Food

Inflation Commodity futures orsomething else ??

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Commodity Futures

An agreement to buy or sell a setamount of a commodity at apredetermined price and date.

Both the buyer and seller are obligatedto buy/sell the agreed commodity.

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How exactly it works

Futures market platforms offer operations through theInternet. Some of them also provide warehousing facilities.

Once after verifying the quality and grade of the produce,

farmer store his produce in these warehouses. He can

visually ascertain the prevailing spot price as also thefutures prices in on the internet.

The farmer can decide to sell at the current price, in which

case he gets the full amount in cash.

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How exactly it works

Or, if he decides to sell at any convenient future date, hegets an advance of about 70-75 per cent of the current

price as also a warehousing receipt, which is a negotiable

instrument.

On or before the contract date, the holder of thewarehousing receipt(i.e. farmer) is assured of getting the

contracted price.

The farmers have no difficulty understanding the scenario

and would rather transact through the futures market .

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A variety of reasons has been cited forhigh food inflation and it is indeed aninterplay of various factors

Political constituencies have argued thatfood inflation is due to the role of futuresmarkets.

Yet, the movement of pulses prices show,the causality between prices and futurestrading is only a myth.

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During the one-year period ofDecember 2008 to

December 2009,spot price of chanaincreased by 12%while that of tur

and urad increasedby 61% and 70%respectively


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So the question arises, If

commodity futures are not at theroot of inflation, what is ??

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1. Price volatility

In localized and fragmented physicalmarkets, information flow remains poorand limited only to influential marketmanipulators

Due to which market-related informationis given too high a premium, leading tounwarranted price volatility

The usual business reaction to pricevolatility is hoarding of the commodity

Thus leading to high Inflation

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2. Fragmented nature of Indian

Agricultural markets

In the name of food security, the bordersseparating Indian states are as stringentin movement of agro-commodities asinternational borders.

Trade in agro-commodities is subject to aplethora of regulations and taxation

Builds up costs of intermediation leadingto cost-push food inflation

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Addressing the problem

Steps to remove the excess of state levelregulations binding agro-commoditiestrade, thus creating a pan- India market,leading to faster and efficient movement

of goods

Debottleneck the agriculture supply chainand bring down intermediation costs.

Targeting futures markets is counter-productive as evidenced in commoditiessuch as pulses

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Contd.

Strengthen the market institutions thattransmit market information in aneffective manner so that agri-commodities are passed on to consumers

with minimal risks

Effective use of various other tools suchas strategic storage, transparent andflexible trade policy, strengthening ofcountrys agricultural marketinginfrastructure

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mystery behind price rise

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