Across Asia, food is the new oil as prices surge

By Alan Wheatley, China Economics Editor

BEIJING (Reuters) - From India to Indonesia, governments across Asia are scrambling for solutions as it dawns on them that sky-high food prices might not fall any time soon.

With food accounting for a third of China's consumer price basket and even more in some other countries, the high prices are a ticking time bomb for the region, where fuel increases periodically touch off sometimes violent protests.

"If the inflation problem gets out of hand, it could have devastating implications for not only economic but also political stability," said Yiping Huang, an economist with Citigroup in Hong Kong.

In Pakistan, where the government has blamed a shortage of flour on smugglers and hoarders, paramilitary troops have begun escorting wheat trucks to deter thieves.

Malaysia briefly rationed cooking oil this month before the government boosted supplies of subsidized oil.

In China, where inflation is at an 11-year high, the government has taxed grain exports to boost local supplies and resorted to command economy-style price controls.

India has been considering cutting import duties on edible oil, while in Indonesia the government has subsidized cooking oil refiners and suspended a 10 percent duty on imported soybeans.

"Scrapping the tax is not sufficient. The government must ensure prices won't increase every day," said Sutaryo, who leads a group of tofu and soybean cake producers in Jakarta.

Some 2,500 of them protested in the capital on January 14 over a doubling in soybean prices since the start of the year.

The common thread in every country is unease over a sustained rally in global commodity prices that has carried wheat, palm oil and soybeans to all-time highs.

CYCLICAL OR STRUCTURAL?

Economists are split -- aren't they always? -- on how sustainable these price trends are.

In the same way that the forces of supply and demand, in the form of weaker global growth, are pegging oil back after its recent record run to $100 a barrel, some are confident that farm output will quickly respond to the signal of higher prices.

What's more, the law of averages says that last year's supply shocks, including a disease that decimated China's pig stocks, will not be repeated in 2008.

Others, though, see spiraling prices as more than a passing phase. Every year, millions of Asians move to better-paying factory jobs in cities and can afford more meat, milk and other high-protein food, boosting demand for animal feedgrains.