Food Prices in Agricultural Markets - Essay Example

?Food Prices in Agricultural Markets Part 2: Food Prices and the Welfare of Poor Consumers of Lecturer] Macro & Micro economics [Date] Abstract The ever-rising food prices have brought a lot of challenges to the contemporary society. Most affected by these food price increases are the poor in the society. The main effect of the rising food prices on poor consumers is the reduction in their purchasing power. A number of economic theories and models have been put forward to explain the relationship between rising food prices and their impacts on poor consumers. Engle’s law and the standard demand theory are just some of these theories explaining the effects of rising food prices on poor consumers. According to Engel’s law consumers rely on non-food expenditures if food prices go up. Because the rich spend more money on non-food items, whenever food prices rise, they have excess non-food expenditures to cut and transfer to food expenditures. The standard demand theory on the other hand focuses on the effects of income and price increase on substitute food. The negative impacts of food price increase on poor consumers make it imperative that governments and the international community step in to provide for the welfare of the poor. To increase the purchasing power lost due to food price increase, safety net programmes such as food-for-work and cash transfers have been implemented in many countries. Due to certain barriers to the success of safety net programmes, other strategies such as local and international financial assistance and improved accessibility to land, seeds, farm animals, loans, and technical services have been applied in some countries. Introduction World over, people are often guarded against rising food prices, a trend considered as having a number of negative influences on people’s welfare, more so the poorest in society. In fact, rising food prices has been cited as one of the main factors that push the poor into starvation. Besides, rising food prices exert a lot of downward financial pressure on the poor while the wealthiest in the society are never affected by these food price increases (Westhoff, P. 212). Since majority of the world’s population could be described as poor, rising food prices have thus further dampened the already crisis-prone global economy. However, recent times have realized the emergence of a school of thought, which raises the question of whether food price increases are inherently negative. For instance, increased food costs have been found to be beneficial to farmers, who are the sole providers of one of the most basic human needs, food (Westhoff, P. 212). The argument according to this school of thought is that if farmers do well because of increased food prices, then others will also benefit from the increased food prices in one way or another. The second argument put forward by the school of thought that rising food prices have positive implications is that, high food prices have pushed the agricultural industry to develop genetically modified foods that not only resist draught and other natural calamities but also pests and diseases. Additionally, foods have been developed and grown that can survive and do well is marginally fertile areas. In other words, these foods have been quite useful to developing countries in which larger percentages of population live in abject poverty. The increasing food prices have thus made the agricultural industry rather alert in the creation of sustainable food productions, more so in developing and the under-developed countries. This paper thus explores the effects of the rising food prices on poor consumers, focusing on the welfare of this category of consumers and the possible interventions to address these effects. Theories and Models of the Effects of Rising Food Prices Because of the positive and negative effects of rising food prices on poor consumers, heated debates on the exact effects of rising food prices have ensued. Several theories and models seeking to explain the impacts of rising food prices on the poor in the society, particularly their consumption of food, have since been introduced into these debates. Among the theories and models explaining the effects of rising food prices on poor consumers include the standard demand theory and Engel’s law/model. According to the standard demand theory, there are two possible effects of food price increases on poor consumers. The first is the substitution effect according to which, rising price of a food in comparison with other foods could lead to a decrease in the demand and consumption of the more expensive food. The second effect is the income effect by which an increase in the prices of food implies that consumers’ budget and demand for other goods is reduced as they allot more money to food budget. In other words, poor families or consumers have bigger proportion of their expenditure or income allotted for food provision than the wealthy (Wodon et al., P. 62). That is, the relationship between food prices and income affect poorer families than richer ones. It should be noted that Engel’s law is not consistent with other standardized economic models, which postulate that the budget share of food for consumers is constant. In other terms, Engle’s law postulates that poor consumers are forced to allocate more resources or larger shares of their budgets to food provision than for other needs. Therefore, with increased food prices, poor consumers allocate less money for non-food items and social needs such as education and health care. The differences in the arguments on the effects of rising food prices notwithstanding, agriculture and world economy stakeholders are unanimous on the major causes of rising food prices, first among them listed as the global tightening of world food supplies, caused by rapid increase in food demand in emerging economic powers such as India, Brazil, China and Russia. Second, high energy prices have also been blamed for driving food prices high in addition to hoarding and tight export controls, which are the other easily identifiable causes of food price increases (International Monetary Fund, P. 23). Finally, poor weather and climate change have been identified as the other major contributors to rising food prices. The Opposing Views The debate on the effects of rising food prices on poor consumers does not only take place at local or national levels; internationally, organizations such as the World Bank have come to the front in blaming rising food prices for keeping the poorest on the edge. Although such statements could be understood in their simplest terms, the link between food prices and poverty could be a bit more complex. In fact, despite the belief that rising food prices make the poorest consumers suffer most, surging food prices could actually be a formidable force in lifting out those condemned to poverty. Using China as an example, some economists believe that the emergence and growth of China as an economic giant was due to its export driven economic strategy (International Monetary Fund, P. 35). Still, other economists believe that China’s rise as an economic powerhouse originated from its rural areas, which played a pivotal role in lifting China from the depths of poverty. By distributing land relatively equally to the rural people, rather than concentrate it on the hands of a few individuals, the Chinese government ensured the growth of its agricultural industry and improved food production. These agricultural strategies added value to the industry, making its value to quadruple between 1978 and 2008. Therefore, looked at from this perspective, what farmers who produce food for sale would want are higher prices for their produce. However, the fact that this strategy used in China succeeded does not imply it would automatically work elsewhere. Different regions or countries have different conditions and circumstances and it is important that thorough evaluations are undertaken and recommendations considered before trying such strategies. Engel's Law and the Effects of Food Prices on the Poor One of the measures by which food consumption by the poor may be gauged in the society is by the Consumer Price Index (CPI), which measures changes in the price level of consumer goods and services purchased by a household. CPI is therefore a measure of prices based on what the average person buys. For different classes of consumers, the percentage of CPI made up of food varies. Generally, a consumer’s basket would contain food, clothes, and detergents among other items. For poorer consumers, a bigger portion or percentage of the basket of goods would be composed of food since a larger percentage of their income is allocated for food (World Bank, P. 8). The percentage content of the basket thus varies from one region of the world to another, depending on the average levels of poverty. For instance, since the average Indian is poorer than the average US citizen, an Indian’s basket has a bigger percentage allocated for food compared to than allocated by the average US citizen (World Bank, P. 11). In economics, this relationship between one’s income and the percentage of the budget allocated for and spent on food is referred to as Engel’s law. Engel’s law has often been cited as the reason rich countries and consumers are less worried of rising food prices compared to poor countries and consumers. According to Engel’s law, rich consumers will always rely on non-food expenditures in cases where food prices go up. Since the rich spend quite a lot on non-food items, whenever food prices rise, they have excess non-food expenditures to cut and spend the extra income on food (Gonzales et al., P. 102). Unfortunately, poor consumers have few, if any non-food expenditures to cut down and use on food expenditures. This is the reason the poor suffer most during riots, wars and natural calamities such as floods and hurricanes (Wodon et al., P. 70). These calamities have the potential to disrupt the normal and healthy functioning of food markets and other markets, posing a lot of risks to those affected. However, the richer in the society always have means or mechanisms by which they prevent or lessen the effects of these natural and social catastrophic occurrences (International Monetary Fund, P. 63). Without the non-food expenditure buffer of Engel’s law, poor consumers are predisposed to routine vulnerability and hunger due to calamities such as famine, which often result in rising food prices. Nonetheless, many poor countries and consumers have mustered strategies such as public action to ensure and improve their food security. The main positive effect of public action in ensuring food security among poor consumers is the reduction in the percentage of poor populations facing hunger as incomes increase. These pubic action strategies also manage food economies in a manner that minimizes the triggers of food price shocks. Policies and Factors Affecting Food Prices and their Effects Based on Engel’s law and other models of food price increase and its effects in consumers, it has been established that fighting and succeeding against hunger among poor consumers is not a private decision, reaction or response to free-market forces. Rather, stringent government policies integrating food economy and development strategies that foster quick economic growth, accompanied by improved income distribution among the populace are the secret behind food security (Von Braun et al., P. 45). In fact, by applying these policies, the hitherto poor countries of East and Southeast Asia have shown that poor countries and consumers could quickly escape from hunger in the space of one generation (Lustig, P. 84). That the sharp rises in food prices in recent times have impoverished millions of poor consumers could therefore be blamed on bad and inappropriate government policies on food security. That is, governments and regional authorities have inadequate food safety nets, implying that the international community must come in and implement the necessary mechanisms by which poor consumers might be supported to cope with the increasing food prices (World Bank, P. 15). The severity of the food price crisis is evident by statistics, which shows that although world food commodities prices increased 130% between January 2002 and July 2008, individual food substances had more pronounced increases. For instance, in the same period, the prices of corn, wheat, rice, and soybean rose by 190%, 162%, 318%, and 246% respectively (World Bank, P. 15). Although there have been occasional drops in food prices, trends indicate that more food price increases could be experienced in the near future. Such a projection has quite a lot of worrying implications for poor consumers. The effects of these foreseen food price increases are however double-edged; if food prices are likely to increase in the near future, the small poor farmers are likely to benefit while the poor urban dwellers and the landless rural people who are net buyers of food will obviously suffer (Von Braun et al., P. 31). Therefore, the overall effects of food price increases on poor consumers depend on different factors. First, the important role that a given food commodity plays in a given market will largely influence the effects of its rising price on the poor. The importance of food is also has a two-fold effect; with regards to the production set and the consumption basket (Von Braun et al., P. 45). Also important to note is the difference between the importance of a given food in the production set and the consumption basket. For example, a food commodity may be important in the consumption basket but not as much in the production set. An increase in the price of such a commodity would be detrimental to the poor consumers of the commodity. The second factor influencing the effects of food price increases on poor consumers is the relative magnitude of the price change. The third influence on the effects of food price increases is the degree to which household incomes may be adjusted to compensate for the shocks created by food price increases (Lustig, P. 172). That is, food price increases could also indirectly affect or originate wage or income changes for net food sellers and buyers. The Role of Studies and Researches The assertion that poor consumers are more affected by rising food prices is a scientifically researched declaration. In fact, most researches on rising food prices and its effects have found that on average, poor consumers spend as much as about 60% to 80% of their income on food. But the poorest of consumers are net consumers of food (Will and Ivanic, P. 117). This scenario means that the effects of rising food prices have been most significant and severe among the poorest consumers. Being net consumers of food, the positive effects of food price increase on wages have not been felt by the poorest in the society. Experimental evidences have also shown that despite the fact that net sellers of food have been described as possible beneficiaries of rising food prices, the decline in the living standards of net consumers have outweighed these benefits. Most affected in this regard are hundreds of millions of poor people in underdeveloped and developing countries who have just recently been included in the world’s poor in the last 5 to 8 years (Will and Ivanic, P. 118). As mentioned earlier, governments have failed to address the real issues underlying the rising food prices by ignoring or failing to incorporate the safety nets into their food security policies and strategies. Especially in the developing and the underdeveloped world, food security has been so much unaddressed that even those just above the poverty line are likely to become poor if safety net programmes of food security are not implemented. Most current researchers are focused on the possible safety nets by which poor consumers who have lost their purchasing power due to rising food prices would be compensated. Even after safety net programmes will have been established, more will still need to be done to ensure the newly listed poor are included in these programmes. Importantly, governments must have the financial capabilities and space to provide the extra resources necessary to fund the safety net programmes (Asian Development Bank, P. 6). The table below shows some of the safety programs used in both low- and middle-income countries as assembled using data from the World Bank and the Asian Development Bank. It should however be realized that only a section of both the low- and middle-income countries have established and implemented these safety net programs. For instance, according to this data from the World Bank and the Asian Development Bank, 19 of the 49 low-income and 49 of 95 middle-income countries have not implemented any safety net programmes despite that big percentages of their populations are poor. However, for those that have these programmes, the safety nets include food for work, food ration/stamp, school feeding programmes, and cash transfers (Asian Development Bank, P. 9). Graph 1: Showing safety net programmes in low- and middle-income countries The most appropriate and effective way of alleviating the effects of rising food prices on poor consumers, given that it is not the supply that is affected but the power to purchase, is by compensating them for the purchasing power lost due to price increases. Unfortunately, as evident in the graph, less than half of the countries, both low- and middle-income, have implemented cash transfers as safety nets (Gonzales et al., P. 37). Worse still, the safety net programmes in the countries which already implement them do not cover sizeable percentages of the affected consumers. In fact, rather few cases are reported of programmes exceeding a quarter of the affected consumers. In addition, the poorest countries reportedly have the least number of safety net programmes to address the effects of increasing food prices on poor consumers. On a rather more positive note, safety net programmes are more successful and implemented more expansively in populous countries such as Brazil and Mexico (Gonzales et al., P. 53). There are several reasons for which cash transfer as a safety net mechanism has failed. Most conspicuous of these reasons is that it is quite difficult a task to incorporate the newly listed poor into these programmes. Moreover, the size and the benefits of cash transfers are negligible in comparison to its massive and severe effects on poor consumers. Because of its negligible size and effects, cash transfer can not be defined as a safety net against food insecurity and food price increases. Used in place of cash transfer by some governments is the food-for-work approach, a self-targeting safety net programme that incorporates even those consumers made poor by rising food prices in addition to those who were initially poor (Gonzales et al., P. 60). On the negative side, food-for-work does not tackle the purchasing power, which is adversely affected by food prices. Instead, this safety net approach deals with consumers’ employment. Recommendations and Conclusion As a result of the failures and challenges encountered in the above safety net programmes, certain strategies have been proposed that would address most if not all the underlying problems of the effects of food price increases on poor consumers. The first measure proposed is the need to make land more accessible to all and to improve subsistence and below-subsistence productivity among poor consumers. Even though most low-income earners live in the rural areas where they engage in agriculture, they are still net consumers of food and food price increases do them little good. If these groups are given more land and exposed to the latest and modern food production methods and technology, they would depend less on purchasing food. Instead, these people would start concentrating on the supply-end of food production. Closely linked to land accessibility and availability are measures touching on farm animal, technical assistance, and credit for input purchases, seeds, and fertilizers accessibility. Multilateral financial support should also be granted to poor countries and communities that cannot afford to expand old safety net programmes and finance new food security strategies. These financial aids could be in the form of grants and loans from World Bank, IMF, and FAO. Works Cited Asian Development Bank. “Food Prices and Inflation in Developing Asia: Is Poverty Reduction Coming to an End? (2008).” Special Report, Asian Development Bank. Gonzales, A., Marcos, R., and Rodriguez, V. “Rising Food Prices and Poverty in Latin America: Effects of the 2006-2008 Price Surge.” 2008. Inter-American Development Bank. International Monetary Fund. “Food and Fuel Prices—Recent Developments, Macroeconomic Impact, and Policy Responses: The Fiscal Affairs, Policy Development and Review, and Research Departments. 2008. International Monetary Fund. Lustig, N. “Thought for Food: the Challenges of Coping with Soaring Food Prices,” Working Paper, Center for Global Development, 2008. Washington DC: Center for Global Development. Von Braun, J. et al. “High Food Prices: The What, Who, and How of Proposed Policy Actions: Policy Brief.” 2008a. International Food Policy Research Institute. Von Braun, J. et al. “Rising Food Prices: What Should Be Done: Policy Brief.” 2008b. International Food Policy Research Institute. Westhoff, P. The Economics of Food: How Feeding and Fueling the Planet Affects Food Prices, first edition. 2010. FT Press. Will, M., and Ivanic, M. “Implications of Higher Global Food Prices for Poverty in Low-Income Countries.” Policy Research Working Paper Series 4594, 2008.The World Bank. Wodon, Q. et al. “The Food Price Crisis in Africa: Impact On Poverty and Policy Responses.” 2008. World Bank (mimeo). World Bank “Double Jeopardy: Responding to High Food and Fuel Prices.” G8 -Hokkaido-Toyako Summit, 2009. Washington, DC: World Bank. Read More