Factors driving higher food prices in Malaysia: impacts on consumers and producers

Food Prices Malaysia

Malaysians enjoy one of the world's best cuisines, rich with influences from Tamil, Malay and a number of different Chinese cuisines. For the most part, traditional foods match high quality with low prices -- the nation's breakfast staple, nasi lemak, retails for 1RM ($0.30) a bundle even in central Kuala Lumpur. From a 3RM char kway teow at Penang's famous hawker stalls to a whole fried chicken for RM5 at the Kampung Baru night market, lunches and dinners can be had for little more than that. But digging deeper, one finds that food prices have been steadily increasing in Malaysia in recent years. This paper will investigate the impacts that higher food prices will have in Malaysia. The country relies primarily on local produce for much of its food needs, and despite the nation's rapidly advancing economy, many Malaysian remain trapped in low-income jobs, reliant on cheap food in order to survive. The paper will address the issue from an economic perspective.

Malaysian Food Industry and Price History

Malaysia was at one point nearly self-sufficient in food. In the 1970s, the country produced 90% of its rice needs, but this has declined significantly. The rice production level in the 1990s -- around 70% - is now the target for the government's rice padi development efforts (Bernama, 2010; Netto, 2008). The country remains, however, a net importer of meat and has seen its fish production decline in recent decades. Compounding the problem, as Malaysian increase their wealth, they also increase their diets. Obesity is now a critical health issue for the country (Simon, 2010). Another contributing factor to declining agricultural output in Malaysia has been the repurposing of rural land for palm oil plantations. These plantations, which sprawl for miles to the south of KL and which dominate the landscape in Sarawak, have resulted in the destruction of fishing grounds and a reduction in the agricultural land for food production. Malaysia therefore has become dependent on food imports.

This dependency has set the stage for the current steady increase in food prices. The first major bout of food price inflation in Malaysia occurred in 2008. Investors, exiting global real estate markets and Western stock markets, turned to futures as a means of making money. This resulted not only in oil price run-ups but also in substantial increases in the price of food staples, many of which are traded on the global commodity markets. The proliferation of global trade policies aimed at opening up agricultural sectors around the world contributed to the problem by creating uneven trade policies around the world. Rice prices increased 20% in the first half of 2008 because the major rice producing nations limited exports, while other countries did not. Flour prices have also increased due to higher global wheat prices, resulting in increases in noodle prices (Ali, 2008).

Malaysia's emphasis on non-food agricultural production has also been fueled by these global trade policies, to the detriment of the nation's food security and to the detriment of its ability to control food price increases (Netto, 2008). Recently, the trend of food inflation has continued, with costs increasing 1.6% in May 2010 and 1.7% in June 2010 and food price increases accounted for over half of the country's total inflation (RTT News, 2010).

Impacts of Inflation

There are few beneficiaries of food price inflation. For consumers, increased prices simply means less money for savings as total consumer consumption decreases (ADB, 2008). Food-loving Malaysians are unlikely to decrease their intake unless absolutely force to. However, for poorer Malaysians, the consequences of increased food prices are dire. Those living at or below the poverty line are hit hardest by food price increases, as food accounts for a much more significant portion of the budget.

Ultimately, there is the risk that food price inflation in Malaysia may counter other poverty-reduction strategies. The price increases may not impact the educated, well-paid segments of the populace but they do reduce the ability of 5.1% of Malaysians living below the poverty line to improve their lot. It also could raise the poverty line to include more Malaysians -- the current low amount below this line reflects the relatively low price of food. While the official poverty line is at RM691 per month for a family of five, up to 25% of Malaysians earn less than RM500 per month, meaning that many Malaysians are close to the poverty line (Ali, 2008).

Nor do producers benefit. In Malaysia, many food producers are subsidized, so any increase in the price to the farmer is likely to be offset by a reduction in subsidies from the government. Indeed, the Malaysian government has already announced plans to cut agricultural subsidies as an inflation-fighting measure (Adam, 2010). Even if the producers did benefit, only 13% of Malaysians work in agriculture (CIA World Factbook, 2010), fewer still in food agriculture, so most Malaysians would only see an erosion in their living standards as the result of food price increases.

The primary beneficiaries of higher food prices, therefore, are the MNCs and retailers that market these foods. The price increases at the global commodity level are passed on to consumers on a percentage markup basis, so higher prices means higher profits for global food giants and retailers such as Tesco, Cold Storage, Jusco and other grocers (Netto, 2008). During the commodities price run-up in 2008, most major food retailers saw record profits as they passed higher commodity costs onto consumers, with markup.