Deep Currents

For some time now the price of basic foodstuffs has been climbing to unheard-of levels, causing suffering for many of the world’s poor. Here are some key facts on the subject from several good Economist articles and a few other sources.

1. The immediate causes

The issue is a radical rise in the price of staple foods, as can be seen in the chart below. Wheat and rice, for example, increase 77% and rice 16% during 2007, some of the sharpest rises in food prices ever. In 2008 rice has shot up 141%.

The surge in food prices has ended 30 years in which food was cheap, farming was subsidized in rich countries and international food markets were wildly distorted. Food is riddled with state intervention at every turn, from subsidies to millers for cheap bread to bribes for farmers to leave land fallow. The upshot of such quotas, subsidies and controls is to dump all the imbalances that in another business might be smoothed out through small adjustments onto the one unregulated part of the food chain: the international market.

The rising prices mainly reflect greater demand rather than a lack of supply for reasons such as harvest failure. The two major forces pushing up demand are the gentle upward pressure from people in China and India eating more grain and meat as they grow rich and the sudden, voracious appetites of western biofuels programs, which convert cereals into fuel. There is also the fickle behavior of markets: export quotas by large grain producers, rumors of panic-buying by grain importers, and money from hedge funds looking for new markets.

2. The immediate consequences

The result is a widespread lack of food security: the availability of food and one’s access to it. Thirty-seven countries are officially in crisis and in need of aid. The effect on the poor will depend on whether they are net buyers of food or net sellers. The price rises may be enough to turn some net buyers into sellers but such cases are bound to be few and far between.

The scale of the impact is hard to judge since national statistics are now out of date but reporters on the ground are observing a sharp tightening of the belt: middle classes in these countries are cutting out medical care; those living on US$2 a day are cutting out meat and taking children out of school; those on $1 a day are cutting out meat and vegetables and eating only cereals; those on 50 cents a day are simply starving, many selling their housing and animals. In El Salvador the poor are eating only half as much food as they were a year ago. Afghans are now on average spending half their income on food, up from a tenth in 2006. Roughly a billion people live on $1 a day. If, on a conservative estimate, the cost of their food rises 20% (and in some places, it has risen a lot more), 100m people could be forced back to this level, the common measure of absolute poverty. In some countries, that would undo all the gains in poverty reduction they have made during the past decade of growth.

Naturally, the people facing these dire straits have been rioting in an attempt to voice their anger and force political action. In Haiti, protesters chanting “we’re hungry” forced the prime minister to resign. Twenty-four people were killed in riots in Cameroon.

3. Responses to date

There are very few ways for governments to lower the cost of food. Most have troublesome side effects. The simplest option is to cut taxes on imported food, which has been done by 24 of the 58 countries tracked by the World Bank. Other options include price controls, consumer subsidies, export restrictions, and lower tariffs, which have been used in various combinations by 48 of those same countries. Another approach is selling subsidized bread to the poor, as is being done by Pakistan, Yemen, and Egypt. This can be helpful but does require more administrative competence and can easily become an entrenched practice with spiraling costs.

The people who haven’t reacted yet are the farmers, whose natural incentive in the face of high prices is to grow more. One reason why they haven’t yet is that they can only react on a timeframe of months to years, but another is that the same subsidy-lowered prices that help the poor also dull the farmers’ incentives. There is also the spiking price of oil, a major input to agriculture. In Kenya’s Rift Valley the farmers are planting a third less of the land than last year since fertilizer has more than doubled in price.

4. What happens next

Eventually the market should stabilize as farmers respond to higher prices by growing more food. Food may even become affordable again without the subsidies, dumping and distortions of the earlier period, but the era of cheap food is over.

For more information:

The International Food Policy Research Institute, the World Bank, the World Food Programme, the Food and Agriculture Organisation, the International Rice Research Institute and the International Fund for Agricultural Development all have information on world food supplies and prices.

Written: May 22nd, 2008