Leaders of the South Asian Association for Regional Co-operation (SAARC) has proposed to improve 'food security' and claimed that there was an "emerging situation of reduced food availability" as well as a worldwide spike in food prices.

A 'Colombo Statement on Food Security' released at the end of the summit meeting said agriculture ministers of SAARC member states would meet in New Delhi in November 2008 to come up with ways to improve food security.

Shortage?

The statement said projects would be devised to increase food production, to invest in agriculture and agro-based industries, to prevent soil erosion and to research agriculture.

SAARC nations would also share agricultural technologies and best practices in procurement and distribution and manage climatic and disease related risks in agriculture.

Panic claims that there is a food 'shortage' have not only come from South Asian leaders but also from developed country leaders, despite many countries including India and China - the most populous countries in the world - having surplus grain stocks.

Other statistics also contrast sharply with claims of 'food shortages'.

Australia is expected to have a wheat harvest of 23.7 million tonnes this year, up from a drought hit 13 million tonnes last year. Both rice and wheat production in 2008 are expected to be the highest in global recorded history.

Wheat prices have been falling from February 2008, and rice prices from April. But not only food, all commodities including base metals and precious metals have been rising steeply, in a 'boom' or 'bubble' that worsened from 2003.

Sri Lanka's tea prices have boomed, and exports are bringing record revenues, but no South Asian leader or other analyst has suggested that there is a 'shortage' of tea.

While Indian and Chinese consumers have been partly blamed for the rise in commodities by some analysts it is difficult to do so in the case of tea as India is a net tea exporter. China consumes most of the tea it produces. India is also a net rice exporter.

But Indian politicians banned rice exports when prices peaked in April 2008, as did several Asian rice surplus countries whose prices spiked, creating an artificial short supply.

Surplus Puzzle

The rise in rice prices in surplus countries, especially Thailand and Vietnam also showed that having surplus production did not help avoid the so-called 'food crisis', raising questions about the fundamental objective of the Colombo declaration on food.

"We have fertile land and irrigation systems. Our societies are agrarian. We export agro products to the rest of the world," a puzzled Pakistan prime minister Syed Yousaf Raza Gilani said during his inaugural speech at the Colombo summit.

"Yet the region faces food shortages from time to time."

A country that either exports or imports food or any other commodity will face the same global price, as export prices will also rise in line with global prices, as has happened with Sri Lanka's surplus tea.

South Asian politicians and policymakers who are espousing higher food production to ride out a global boom seem to find this concept difficult to grasp.

The Indian rice export ban also forced countries like Sri Lanka, which have traditionally imported rice from India, to look elsewhere for its supplies despite South Asia not having a 'shortage'.

This 'hoarding' behaviour worsened rice prices and prevented the free flow of food within the region.

Shortages and 'blackmarkets' can only happen with government intervention either through price controls or quantity restrictions; because when markets are allowed to function it is impossible to have a 'shortage'.

This shows that economic policymaking and political understanding of how commodity markets work has to improve in the region.

Monetary Shock

High inflation of 30 percent in Sri Lanka and 20 percent in Pakistan has also made people poorer, making them vulnerable to rising food prices.

This shows that central banking and government budgeting or monetary and fiscal policies have to improve and state-led impoverishment of the people through deadly mis-use of paper fiat money inflation has to be contained.

Most monetary authorities in the South Asian region which were converted from British colonial currency boards with an obligation to finance government with printed money are also fundamentally flawed as they are prone to high inflation and currency collapse, helping impoverish the people of the region.

The region of 1.5 billion people is estimated to house half the world's poor.

An International Monetary Fund (IMF) study released in May 2008 has said that the 2008 commodities boom is also a bubble fired by a 'monetary shock' coming from loose monetary policy (money printing) of the Federal Reserve in particular.

Global reserve currency central banks, such as the Fed, the European central bank and Bank of Japan have poured billions of artificially created 'liquidity' to prevent credit markets from freezing after the sub-prime bubble burst in July 2007.

This sent commodities rocketing up.

The sub-prime credit bubble was also fired by earlier money printing and both real estate and commodities have been 'booming' from the late 1990s or the time of the dot com bubble in the US.

The IMF has pointed out that the current 'bubble' is the worst since 1973 when modern paper fiat money, unbacked by gold, was born.

The world experienced its worst oil shock in that year when the US dollar was forced off the gold standard and the Bretton Woods agreement collapsed in the wake of massive money printing to support the Vietnam war and President Nixon's populist spending.

Under the gold standard, when money was backed by gold, the value of paper currency also rose when commodities rose, helping prevent commodity bubbles and high inflation and protecting the poor and especially old people's savings and pensions.

IMF has been confidently predicting an end to the current bubble as early as this year as the underlying credit bubble that fired the food and energy boom has now collapsed.

Stop Press

An IMF study called for a reversal of rate cuts (rates are 'cut' by printing extra money) by reserve currency central banks to end the current commodity bubble.

"Maintaining present monetary stance would cause further inflammation of commodities prices, could disrupt supplies, and could cause significant world recession and disorderly financial markets," the study Recent Inflationary Trends in World Commodities Markets by Noureddine Krichene said.

"In order to rein in inflation and bring back a measure of stability in commodities and financial markets, monetary policy has to be tightened considerably and be directed to strictly controlling credit and money supply."

The IMF study pointed out that from 1973 to 1980 crude prices had bubbled by an average of 46.5 percent, gold by 31 percent, rice 14 percent and wheat 11.2 percent.

Around 1980 reserve currency central banks led by Paul Volcker's Fed went into strict monetary targeting bringing inflation and commodity prices (and gold) down to earth. This drove the US and parts of the world into a recession.

But crude oil prices expanded only 2.0 percent a year between 1981 and 1999, while gold fell 2.4 percent, rice fell 1.5 percent and wheat fell 1.7 percent. All commodities on average only rose 2.5 percent a year.

The bubble started to pick up in the 2000 to 2003 period and accelerated after 2003, when interest rates in some reserve currencies were near zero.

"…with the effect of expansionary monetary policy building momentum and demand expanding, commodities prices became almost uniformly under pressure…with price increases accelerating to unprecedented double digit rates," the study said.

From 2003 to mid-2007 crude oil had risen by an average of 30.3 percent a year, metals 32.9 percent, rice 13.1 percent, wheat 14.1 percent and gold 17.7 percent. All commodities had on average shot up by 23.0 percent a year.