Food prices give rise to fears over ‘agflation’

The government disclosed measures to stave off possible risks from agflation amid rising international grain prices.

“International crop prices are spiking due to contracted production in the wake of droughts that hit the United States and South America, and fears are rising over agflation,” said Minister of Strategy and Finance Bahk Jae-wan at an anti-inflation meeting yesterday.

Bahk said inflation in grain prices would possibly continue in the coming months. He added hikes in international prices of grains would be reflected in prices of domestically processed foods four to seven months after they are imported.

Agflation refers to high food prices putting upward pressure on inflation. Droughts and other severe weather conditions in major farming countries have resulted in reduced harvests, especially corn and wheat, sending prices higher.

Korea depends on imports of almost all corn and wheat consumed domestically.

The country’s food prices remain high, even though growth in consumer prices reached a 12-year low of 1.5 percent in July after falling for eight straight months. Domestic food costs were driven higher by a drought early this summer.

One of the measures is to supply local rice harvested more than three years ago at prices as low as wheat.

The government will also provide loans for farmers to buy cattle feed with an annualized 1 percent interest rate.

Analysts also said that speculative money is going into grains as governments around the world release liquidity to boost the stagnant global economy.

“The Korean government should be worried about agflation rather than deflation at this moment,” said Jung Young-sik, a researcher at Samsung Economic Research Institute.

“It is too early to worry about deflation,” he said, “but the agflation phenomenon triggers concerns due to speculative funds invested in grains,” he said.

The Korean government also has a plan to stockpile wheat, beans and corn for use when domestic prices rise. It will import such grains at zero tariffs until next year, while increasing financial support for grain importers via the Korea Export-Import Bank.

Bahk added that the government will closely monitor local manufacturers of processed food and animal feed to see if they are raising their prices too much.

By Song Su-hyun, Yonhap [ssh@joongang.co.kr]