As I mentioned before, food expenditures in developing countries constitute a larger share in the basket of consumer prices than those on developed countries. It is as low as 15 percent in the U.S., as high as 60 percent in India. Moreover, income elasticity of food is also significantly higher in less developed countries. In Bangladesh, one percent increase in household income leads to 0.73 percent increase in food demand. In the U.S., however, a typical household who receives one extra dollar spends only 10 cents more on food. What does it mean? It means that as long as rapid growth rates in developing countries continue, the food demand is also likely to rise rapidly. In the post war period, we did not observe a similar surge in food demand, because the engine of world economy at that time was mainly advanced economies. Today, we face a different picture. Emerging market countries are growing fast. Their share in world consumption is three times higher than what it was in early 80s. More importantly, these countries, like China, India, and Indonesia have huge populations. According to our estimates at the Central Bank of Turkey, the contribution of only two countries (China and India) on food demand growth in the world reached almost 50 percent in 2007 – up from 10 percent in 1980. The growth in global food demand is estimated to exceed the growth in global food supply since early 2000s and it is likely to stay that way in the near future.
It is difficult to give an exact answer to these questions, but recent research conducted by the staff at the Central Bank of Turkey may give us some ideas. Empirical analysis of food prices in Turkey showed that external factors are quite dominant in food inflation. It was estimated that severe drought in Turkey and skyrocketing world food prices were responsible for almost 70 percent of annual inflation in processed food prices in 2007. It was less than 10 percent in 2006. It was also found that aggregate demand conditions, which are mostly within the domain of monetary policy, had a negligible contribution in processed food inflation. These findings show, on balance, that the recent climb in processed food prices was mainly fueled by supply shocks and external factors. Dear Guests, In recent months there are signs of some relief in food inflation. Inflationary pressures triggered by severe drought and related crop losses have been waning for some time around the world, including Turkey. Early forecasts for 2008 suggest that the weather will be more accommodating than 2007. As measured by current indicators, grain production will particularly rebound from its year-ago levels. The rate of increase in food prices is likely to decelerate during the second half of 2008. Yet, despite better prospects on the supply side, food prices are expected to stay elevated in the near future in the medium term as long as the demand pressure from rapidly-growing developing countries continues. Let me give you a few numbers and explain my reasoning.