If we think that the pandemic is a ruthless outlier that has disrupted our norms, wait until we face the next wave of challenges — climate change, the post-Covid aftermath and the lingering effects of the Russia-Ukraine conflict.
We have seen the damaging impact of the pandemic on the Malaysian agriculture and food industries. The recent flash floods and ecological hazards, such as landslides, have caused much physical damage and economic losses. The upsurge in demand for food services coming up against supply constraints caused by logistical problems domestically and at the international level has caused prices to surge beyond our imagination.
The economic sanctions on Russia resulted in immediate effects, that is, an upsurge in petrol and natural gas prices affecting agricultural producers with an unprecedented increase in cost of production and exerting inflationary pressure on consumers. These shocks seem to come in a package, leaving a trail of inter-related disasters along the way. In addition, these calamities uncover Malaysia’s lack of preparedness to face, let alone address, these disruptions. The country’s resiliency is at its lowest point.
Where do we start to address the issues in these new troubled waters? When food scarcity strikes, everyone is looking out for himself. It’s only a natural reaction.
And that is what is happening in the trade arena where, as reported by the World Bank, 35 countries have instituted food export restrictions. Currently, about 21% of the trade in wheat has been curtailed, but this is still below the level during the 2008 food crisis when it reached 74%. During the 2008 crisis, we saw major rice producers instituting export controls. For instance, Vietnam imposed export restrictions, India, Cambodia and Egypt banned exports, Indonesia banned private exports and China removed 14% in export rebates. Except for China, those countries are developing economies where food insecurity among their poor is still a serious concern.
The dynamic that will occur is that demand for agricultural commodities outstrips supply and prices will increase. The bigger the supply deficit, the higher the price will be. This is the normal anatomy of any commodity market, except this time around the structural landscape has shifted to a new horizon, to an unprecedented and unexpected level.
The supply equation of a commodity is the result of the interplay of variables such as the price of the commodity and other factors like the cost of inputs, technology and climatic conditions. Changes in these determinants shift the supply to a new horizon. This is what is happening now. All these conventional determinants have been redefined by the pandemic, the Russia-Ukraine war and most of all climate change and natural resource conditions. For instance, the pandemic effect still lingers in the form of constraints such as labour shortages and unstable supply. Malaysia has just signed an agreement with Indonesia to enable the intake of 30,000 workers into our plantations. The international supply chain chokes are easing but the high freight costs refuse to ease.
The Russia-Ukraine war is impacting the world, including Malaysia, on many fronts. Note that the two warring countries are among the top five global exporters of wheat (34.1%), barley (26.8%), sunflower oil (23.9%) and corn (17.4%).
Each of these commodities has a strong link to our agriculture and food. An increase in the wheat price will affect Malaysia as it is a substitute for rice in the form of bread, roti canai and noodles. It is an important ingredient in local cakes and confectionery and, hence, impacts the food and beverage sector. As proven in 2008, the increase in rice price is highly correlated with the price of wheat.
Since the war began, the price of corn has escalated from US$276 per tonne to US$335, an increase of 21% in a month. Malaysia’s import of corn has increased from
RM3.26 billion per year in the pre-pandemic period (2019) to RM4.66 billion in 2021. Corn is an important ingredient in feed for the livestock industry as it accounts for about 70% of the production cost. The price pinch is causing an increase in the poultry price currently and will probably trend upwards if the war prolongs.
Sunflower oil is one of the oils in the fats and oils complex. The increase in its price will be a boon to the local oil palm producers but not to the poor consumers as cooking oil price hikes may affect their purchasing power.
Russia’s natural gas exports account for about 20% of global trade in the commodity. Natural gas is an important raw material for the production of nitrogenous fertilisers such as ammonia and urea. The economic sanctions may increase fertiliser prices as Russia is a major supplier of nitrogen fertilisers (15%) and potassium (17%). Malaysia, through Petroliam Nasional Bhd, does export urea, particularly to Japan. Petronas takes pride in exporting urea that meets the highest Japanese standard, but it should also take pride as the supplier of cheap but high-quality fertiliser to the local farmers to help ease the cost burden and boost production.
As the economy is recovering, demand for food has risen, particularly in the catering sector, while supply is constrained by labour and input issues. The tight supply situation in the international market has caused an inflationary impact for importers, including for the Malaysian economy.
The Food and Agriculture Organization reported that the global Food Price Index averaged 159.3 in March 2022, an increase of 12.6% from February, the highest ever recorded since 1990.
The above suggests a food crisis is in the making if it is not halted in time. What alternative does Malaysia have? As for external challenges — that is, the war and its lingering effects — these are beyond our control. However, domestic production is within our scope of action.
Short-term solutions include: (i) to increase and diversify imports (of both food and import sources); (ii) signing long-term food import contracts; (iii) giving matching grants to local producers of vegetables and fruit, livestock and aquaculture; (iv) encouraging urban farming; and (v) supporting start-ups in food production and distribution.
Matching grants and fiscal incentives should be given to innovators in farming practices that improve yield and reduce cost through advanced technologies.
Other incentives include cheaper credits and tax rebates on investment in food production and distribution. The high price of food may spur production but the country must help by facilitating food producers and reducing their cost burden. Petronas must chip in through high-quality and cheap urea for local producers.
The social supports for the poor include: food banks, food coupons for the poor groups and promoting zero-food waste campaigns to consumers. Malaysia wastes about 8,000 tonnes of food daily, 60% of which is avoidable, and one-third is still edible. This wasted food could feed about two million people.
However, it is the long-term policy that needs a big shift to make Malaysia resilient and self-reliant in food. The time is ripe for a “Food First Policy” that is aimed at enhancing the local food industry in all dimensions. The era of golden industrial crops is ending as only oil palm is left as a substantial revenue generator for the nation. Even there, by 2023, the sector will hit the 6.5 million hectare ceiling for acreage of the crop. Food doesn’t need vast amounts of land to produce value-added output, as proven by the farmers in Cameron Highlands.
Besides, all these years the country has imported food that it can produce locally. The country has a comparative advantage in the essential inputs in the production equation, such as ample sunshine and rain, land, water, biodiversity and infrastructure. The necessary policy shift entails domestic capacity building, which includes mobilisation of resources, human capital, local input production (fertiliser, seeds, breeds, machines), research and development in advanced agriculture and, most of all, political will.
Professor Datin Paduka Fatimah Mohamed Arshad is a senior fellow of The Institute for Democracy and Economic Affairs (IDEAS), a think tank based in Kuala Lumpur