Rise in global fertiliser price may affect production, expert says

by AUFA MARDHIAH/ pic by MUHD AMIN NAHARUL

MALAYSIA will not be directly impacted by the rises in food prices due to supply issues on the Russia-Ukraine crisis, an analyst says, but global fertilisers price may affect production.

“This crisis has caused global fertiliser prices to surge. We see prices of food items going up — this is exactly what is happening in Malaysia for vegetables and chicken.

“The rising cost of fertilisers caused vegetable prices to go up. In the poultry industry, global fertiliser price hike translates to higher feed prices (maize and soybean), which in turn, results in a surge in the cost of producing chicken for meat and eggs,” Khazanah Research Institute deputy director of research Dr Sarena Che Omar told The Malaysian Reserve (TMR).

Read more: Expect 50%-60% price hike in June

She also informed that the inflation of food prices is likely to persist for a year or more if conditions remain as it is: The Ukraine-Russia war, Covid pandemic and export bans by key exporting countries (for example Indonesia with the export ban of oil palm).

In order to mitigate the situation, she suggested “short-term measures which can include providing targeted food-based cash aid to the consumers or subsidies to the producers”.

According to her, these are measures that must be implemented carefully and only as a last resort, because there is always the likelihood that it ends up becoming a long-term financial burden to the country.

More sustainable longer-term measures involve improving the efficiency of our farming practices to enable higher output on the back of lowered costs of production and farming practices that are safe and environmentally sustainable.

However, if Malaysia has to rely on imports for certain types of food, she advised that Malaysia to not import from only one country but to diversify the import portfolio to sources from many countries, at once diluting any county-related risks.

“If you refer to the Global Food Security Index, there are several dimensions of food security. It is not just about domestic agricultural production, but also about food safety, sustainable agricultural practices, climate change resilience and investments in research and development, to name a few. Hence, to improve our food security, we need to address all these dimensions holistically,” she added.

Previously, Fitch Ratings Inc in its latest Economic Dashboard, mentioned that the war in Ukraine has caused the highest global food price hike in history, at the same time intensifying inflation dynamics when global consumer price index inflation rates are already high in the previous years.

Citing from the Fitch Ratings’ commentary on the “Fitch Affirms Malaysia at ‘BBB+’ with a stable outlook”, Malaysia is showing strong growth, but it is high on debt. Fitch Ratings stated that Malaysia’s ratings balance prospects of strong and broad-based medium-term growth with a diversified export base, in opposition to high public debt and lingering political uncertainty. Furthermore, budgetary flexibility is constrained by a low revenue base relative to the operating expenditures, making medium-term consolidation challenging.

Commenting on the possibility of Malaysia being affected by food price hike due to the Ukraine-Russia crisis, Fitch Ratings’ Asia-Pacific Sovereign team said, “Inflationary pressures are rising, as elsewhere, but we expect inflation to remain contained in Malaysia. Price controls and subsidies on certain commodities and daily essentials limit the pass-through from soaring international commodity and food prices to domestic consumption.”

The team expects the inflation to stabilise at around 2.5% in 2022, as domestic inflationary pressures are likely to remain limited, saying, “We expect Bank Negara Malaysia to start its tightening cycle in 2022 with one 25 basis points rate increase, followed by two hikes in 2023.”

On the other hand, Malaysian University of Science and Technology Institute of Postgraduate Studies dean Dr Geoffrey Williams opined that although Malaysia is no exception in global inflationary pressures, core inflation and oil-free inflation are both relatively low. Malaysian headline inflation in April 2021 reached 4.7%, declined to 3.2% in December and declined further to 2.2% in February 2022.

He informed that the increase of oil prices (which had increased before the Ukraine conflict) has spiked and Brent crude prices are now consistently above US$100 (RM439.80). These are not unprecedented and much higher over a very long period of more than a decade (prior to the pandemic).

“The difference now is that the high oil prices come after a period of significant supply-side restrictions due to lockdowns and disruptions to the supply-chain, especially for food. Food supply, particularly in grains which are used in consumer goods as well as feed for livestock, is further restricted by the Ukraine conflict and this will push up food prices further both directly for consumers and indirectly for meat and poultry because feedstock is more expensive,” he said.

However, he said that in Malaysia these impacts have been muted by petrol subsidies and price controls.

Williams also said that it is very difficult to predict the Ukraine conflict’s effects, explaining, “If the situation prolongs, problems will emerge in two ways: Companies producing priced controlled goods stop supplying or when petrol subsidies become a burden on government spending; as well as the possibility of austerity in the US and Europe hurts global growth or if sanctions in China hurts growth, particularly in Asia.

“Hence, we might not see the recovery of the economy and incomes in Malaysia that we hope for, and so, living standards will fall due to a combination of low inflation and stagnant incomes,” he added.

In terms of the solution to mitigate the situation, he highlighted that the Malaysian government has handled the inflation problem reasonably well: Price controls work to mitigate inflation in a short-term period (but not a long-term solution).

In order to improve Malaysia’s food security and resilience in the long term, he suggested the liberalisation of markets, removal of restrictions such as Approved Permits and other import regulations and competition policies to remove uncompetitive even monopoly activity in the marketplace, especially for food.