Turkey’s consumer inflation overshot expectations in October, climbing 2.67% and bringing year-on-year inflation to 25.2%, much to the chagrin of Treasury and Finance Minister Berat Albayrak, the president’s son-in-law, who had declared an “all-out fight against inflation” in mid-September.
The details of the inflation data, released Nov. 5, show that food prices shot up nearly 30% from October last year. In the subcategory of fresh fruits and vegetables, the increase was even more staggering, hitting 50%.
For Turkey, such inflation is unprecedented since 2004. The sharp increases in food prices hit low-income groups especially hard, as they spend a significant part of their budget on food. According to official statistics for 2017, the largest item in household spending was housing and rent at 24.7% of total spending, followed by food at 19.7%. The lower the income, the larger the share spent on food. Impoverished households in the bottom 20% on the income scale spent 29% of their budgets on food.
Coupled with economic contraction and increasing unemployment, the surging inflation owes much to a structural setback, namely an insufficient supply in agricultural products or a food deficit. The concerned authorities, including the Central Bank, agree that Turkey will struggle to get rid of double-digit inflation unless these problems are resolved.
In its inflation report for the third quarter, the Central Bank said, “Occasional supply shortages in unprocessed food products in Turkey that lead to sudden and sharp price increases mainly stem from structural factors. Here, the inability to make an efficient and dynamic agricultural production plan is considered to be a significant structural problem. Developing a production plan requires strengthening of agricultural statistics, yield estimation and early warning system infrastructure.”
Yet the Central Bank failed to delve further into the core of the problem, focusing instead on the role of middlemen. “Another structural problem causing cyclical supply shortages is the mismanagement of the field-greenhouse-field transition, particularly in fresh vegetable products,” the report says. “Despite being short-lived, these transitions lead to supply shortages and enable the intermediaries who dominate the market to speculate on prices and achieve excessive gains.”
No doubt, speculative profits by middlemen should be prevented, but the primary problem that needs to be highlighted is that the agricultural sector is losing producers and its share in the gross domestic product is rapidly falling. Agriculture accounted for 6% of GDP in 2017, down from 10% in 1998.
In recent years, Turkey has become a net importer of food despite its abundant agricultural potential and recent classification as self-sufficient and safe from food security risks. In the 2016-2017 market term, for instance, the rate of domestic output meeting domestic demand in cereal products was 97.2%. In other words, the locally produced crops such as lentils, chickpeas, haricots, barley and sunflower were not enough to meet domestic demand.
The factors behind the decline of Turkish agriculture can be traced back to ill-advised policies in the 1980s and 1990s. Public enterprises that significantly propped up the sector prior to 1980 were privatized on the grounds they were a burden on the treasury. Similarly, subsidies were reduced on the grounds that agricultural support purchases contributed to central budget deficits. An agriculture law adopted in April 2006 appeared to legally guarantee support to farmers, but that was not the case on the ground. According to the law, funds of at least 1% of GDP must be allocated to supporting farmers, but according to Turkey’s Agricultural Chambers Union, the amount of support has remained at only 0.56% of GDP.
The decreased support condemned agricultural output to trail behind industry, which in turn meant that agriculture ceased to be a source of livelihood for a significant portion of the populace. In 2000, Turkey’s agricultural sector employed 7.7 million people, or nearly 36% of an overall 21.5 million people. In 2018, the overall figure was up at 29.2 million people, but the share of agriculture was down at 19.5%. The number of people employed in agriculturehas decreased by 2 million to 5.7 million in 17 years.
Farmers have been grappling with high input costs to sustain production. They often take losses, unable to sell at prices justifying the production cost, driving them to quit the sector.
The decline in agricultural activity and the aging population in rural areas have left vast farmlands uncultivated. Many agricultural fields in proximity to urban centers have become plots for housing projects and commercial buildings. According to data by the Turkish Statistical Institute, the country’s farmlands shrank to 38 million hectares in 2017 from 41 million in 2001, a remarkable 7.3% shrinkage. That only a third of the fields enjoy access to irrigation is another important problem of the sector.
Last but not least, Turkish farmers rely heavily on imported inputs both in crop cultivation and husbandry, another factor that drives them away from the sector. On the crop side, this reliance includes basic materials such as diesel fuel, fertilizers, seeds and pesticides. And because of the depreciation of the Turkish lira, the cost of imports keeps rising, coupled with hefty taxes.
In husbandry, many inputs are also import-reliant, including breeding animals for dairy farming and stocks bred for meat. Amid shrinking pasture areas, the sector has largely adopted manufactured fodder, and more than 50% of those raw materials are also imported. Even in the production of barley and corn, two key inputs for the fodder industry, the self-sufficiency rates have fallen to 89% and 88%, respectively.
In sum, agricultural and trade policies over the years have served to boost imports rather than agricultural output. As a result, the supply deficits in agricultural products and food have increased and so have their prices. Unless structural problems are resolved, Turkey’s food inflation is clearly bound to continue.