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Russia-induced Agflation

Posted August. 09, 2010 11:36,   


The term "agflation," or inflation caused by higher crop prices, was first used by Merrill Lynch in 2007. With the price of international wheat soaring 42 percent last month, fears of agflation are rising for the first time since the 2008 crisis. The price of wheat is rising because of Russia’s suspension of crop exports because of the expected drop in domestic crop production amid the country’s most severe drought in 130 years. A rise in the price of wheat drives up those of food products, such as bread and noodles, whose main ingredient is wheat.

A major cause of agflation is growing food demand from emerging Asian economies such as China and India. Their rapid economic development coupled with their combined population of 2.5 billion has led to an exponential jump in food demand. Rising meat consumption stemming from dietary changes has raised demand for animal feed, further driving up crop prices. With abnormal weather conditions due to global warming reducing crop production worldwide, increases in biofuel production to deal with global warming are also raising crop prices.

Whether the latest rise in crop prices will lead to a recurrence of 2008 remains to be seen. Unusual weather phenomena is occurring not only Russia, however, but also many other parts of the world. Flooding has hurt rice production in China and wheat production in Canada is expected to decline due to heavy rain. Another factor is higher sugar prices at the end of last month due to drought in India. Certain experts are downplaying such fears, however, saying global wheat inventory in June next year will reach 187 million tons and the international price of oil is half that of two years ago.

Korea is vulnerable to rising crop prices because its self-sufficiency rate was 26 percent in 2008, near the bottom among member countries of the Organization for Economic Cooperation and Development. The country’s food self-sufficiency rate excluding animal feed was 49.2 percent as of 2006, but if rice is excluded, the figure declines to five percent. To raise food security, what is needed is improvement of the domestic crop production system, better management of crop importing channels, and continued development of overseas bases for agricultural production. The government project to create wheat flour using 10 percent rice powder is also likely to succeed. This will reap the double benefit of increasing rice consumption and reducing wheat imports.

Editorial Writer Kwon Sun-taek (maypole@donga.com)