Soaring commodities prices

The food price index for January as announced by the U.N. Food and Agriculture Organization was 230.7, the highest since the international agency started tallying the statistic in 1990. Measuring global wholesale prices of major foodstuffs every month including meat, sugar and dairy products, the index has risen for seven consecutive months. Food prices soared as supply failed to meet soaring demand amid abnormal weather conditions worldwide and the global economic rebound. The price spike was further spurred by political upheavals in Tunisia and Egypt.

Oil and commodities prices are also skyrocketing. North Sea Brent oil surpassed 100 U.S. dollars per barrel for the first time in 25 months, while Dubai crude also rose to 97 dollars. Venezuelan Oil Minister Rafael Ramirez said, “If the political unrest in Egypt deepens further to cause the shutdown of the Suez Canal, international oil prices could jump to 200 dollars per barrel.” Copper futures also reached a record high of 4.60 dollars per pound.

In Korea, prices of agricultural and livestock products soared from early this year due to unusually cold weather and foot-and-mouth disease, which has affected significant part of the nation. If the tsunami of concurrent spikes of commodities, foodstuffs, grain and oil prices from overseas adds to Korea’s inflationary pressure, it will deal a severe blow not only to the working and middle-class households, but also to Korean companies and the national economy. Considering that Korea is poor in natural resources and particularly vulnerable to inflationary pressure caused by external factors, the country could simultaneously suffer from inflation, deteriorating international trade balance, and slowing economic growth. The Korean economy, which has shown relatively robust recovery since the global economic crisis, could also fall into another slump.

In 2009, Korea posted a record-low self-substinence ratio of 57 percent for food and 26.7 percent for grain, including those for animal feed. The country barely managed to keep balance in the rice self-substinence ratio with 101 percent, but failed to meet half its demand with domestic production. Domestic wheat production accounted for just 0.9 percent of demand, corn 4 percent, beans 32.5 percent, and barley 44.3 percent. Moreover, entry barriers to the domestic food industry are high and the efficiency of the industry’s distribution structure is poor. If Korea is to cope with jitters over food prices, it needs to increase rice consumption and significantly lower entry barriers to its food industry.

The government projected average international oil prices at 80 dollars per barrel based on Dubai crude when setting this year’s economic management plan. If oil prices surge more than expected, however, this will pose bigger problems. The same holds true for the prices of other commodities and imported foods. All economic players including the government, companies and households need to feel a sense of crisis and remain vigilant. The government should also flexibly implement policy by temporarily lowering import duties for various commodities, foods and grain to minimize inflationary shocks from overseas. Companies have no other choice but to maintain competitiveness through cost-cutting efforts and managerial innovation.