I never thought this article I once wrote had great implications - read on.
Background of the 2011 food crisis
There had been unfortunate natural disasters around the world early this year. They caused a great impact on food prices.
In Australia, there had been floods in Queensland and Victoria in January 2011, damaging S$2.6 billion of agricultural produce. In China, Russia and the United States, cold weather, snowstorms and droughts had adversely reduced crop production, and Chinese wheat production was even cut by up to 35%. Thailand also experienced floods on October 2010, as its rice crop was reduced by 20%. All countries mentioned above are major agricultural producers and exporters globally.
As a result, the combined effects of these natural disasters mentioned above have caused food prices to rise. Wheat futures in Chicago rose 47% last year, and are poised to rise even further. In United States, the Labor Department also reported that the Producer Price Index rose 1.6 percent on food costs in February 2011. The U.N. Food and Agriculture Organization Food Price Index also rose to 231. This surpasses the previous high of 224, set in 2008, during the previous food crisis caused by the bio-fuel led commodities boom. This shows that the current food crisis is worse than the previous one.
Such increases in prices are termed as a ?supply shock?.
With food being a necessity good, its consumption is constant. With rising prices, real incomes will fall. As food becomes relatively more expensive, in periods of rising incomes around the world, there is less expenditure in other goods and services.
For example, in the case of the recent Chinese New Year, Malaysian Chinese are reported to spend less on other goods for the festive season. With more money spent on food for reunion dinners due to inflation, with slower growths in income, other areas of spending have to be cut ? such as new clothes.
Effects of the Food Crisis
The increase of food prices have brought to different effects in different types of economies, namely, developed economies and emerging developing economies.
For countries with higher incomes, increases in food prices lead to consumers choosing lower-cost alternatives. Fast food restaurants are making record earnings. KFC even posted a 14% increase in profits. The developed countries, though, have more than enough resources, like food reserves, to help their people to tide over the food crisis.
For emerging economies, in South, Southeast and East Asia, governments have different strategies to contain food price inflation. They hold more than half of the World?s people. The focus of governmental action will be on these emerging countries, with the influence exerted by these countries? sheer size in populations.
One economic trend to consider in these emerging economies is the growth of the working- and middle-class individuals within these economies. The working-class and middle-class people of India and China are rapidly growing in numbers and wealth. Both countries now have fewer people living under poverty, as compared to 20 years ago. In particular, India has lifted one-fifth of its people from the international poverty line of US$1.25 (purchasing power parity) over the past 30 years.
But it is of great governmental concern that the increase of incomes in such countries could be undermined by the increase of food prices. With no suitable alternative to the production of such staple foods such as maize, wheat, rice, which make up 87% of current total food production, cost-push inflation then ensues.
Aggregate supply on the whole shifts left, as producton capacity falls. It causes an increase in the general price level, while output of goods and services (real output) in the economy shrinks. With cost-push inflation, the rise of price in food leads to a price/wage spiral. Firms? wages chase increasing prices, while prices may in turn chase rising wages, seemingly with no end. Inevitably, wage earners need an increase of wages to protect their purchasing power, by finding a way to negotiate and try to force their salaries increasing faster than the price of goods, especially food, as reflected in the Consumer Price Index (CPI).
In the case of business owners, their profit margins will be squeezed, both by the increases of raw materials (in the grains or other raw materials they use), and even more likely, the increase of wages. Hence, firms are forced to raise prices to protect a certain profit margin, from rising costs. This in turn negates the effects of the wage increases, and workers continue to bargain for higher wages, with all factors constant. This can help explain the labour unrest in emerging economies such as Bangladesh and China, in the 1st quarter of 2011.
Another economic factor for emerging markets? governments to consider is the interest rates of the economy. To control runaway inflation, the economy has to cool off, with reduced aggregate demand. As a result, governments choose to increase their interest rates. It will reduce the demand for lending to firms and households, and increase market rate in saving. Vietnam, for example, is raising main borrowing rates from 9 to 11 percent. The increase of interest rates ultimately leads to households being poorer off, and less able to buy food that still becomes increasingly expensive.
Possible Policies to control food prices
Governments can choose to impose price controls on their economies. Wages are kept to a maximum, while the prices of goods and services are kept steady, through subsidies. This works when the industries in the economy are working in a monopolistic or oligopolistic market structure.
However, the success of price controls is dependent upon the ability of governments to cover such huge costs in subsidising the prices of the goods. The ability is assessed by the country?s governmental budgets, which is in turn affected by their overall net income, in the form of current account balance. Countries with current account surpluses such as China, Thailand and Indonesia, with their current account balance totaling over 10 billion US dollars, are in a better position to tackle the cost of subsidizing food prices. Countries with current account balance deficits, such as India, Turkey and Vietnam, may not be able to subsidize food prices effectively, as they do not have the means to fund food subsidies.
Another possible policy, though seemingly unrelated to the current food prices increases, is the deregulation of industries. More free trade should be allowed in countries where there are high tariffs for imported goods. This will help to reduce the cost of imported food in the market, and it will make the market for food more efficient. The European Union, for example, charges up to 146 percent on tropical fruits such as bananas, for trade tariffs. Reducing the tariff costs could possibly make food industries more competitive, with lower entry costs and lower prices, which leads to more food being produced and sold in the market. Thereafter, prices will also be lower. Thus, sustained increases in prices will cease.
The future of food prices
The earthquake in Tohoku, Japan on 11 March 2011 influences future food prices. Unlike other net food exporters on the list, as mentioned above, Japan is the largest net food importer in the world. Japan currently imports 60 percent of its caloric intake from other countries. The earthquake has brought about a temporary halt in short-term demand for food, keeping food prices in the next quarter in check.
However, despite the level of uncertainty surrounding food prices from the Japan earthquake, researchers Thomas Helbling and Shaun Roache wrote, ?the world may need to get used to higher food prices.?
Food prices could be a problem in our future. Given that incomes in emerging economies continue growing for the working and middle classes in the next few years, demand for food is expected to increase for this period. Increasing food prices could hurt people living under poverty around the world, who may not have the means to feed themselves.
Conclusion
Food prices affect our everyday lives. As the Roman philosopher Cicero puts it succinctly, ?one must eat to live, not live to eat?. Food is really necessary to keep us going. The prices of food affect our quality of life, as we have to spend money every day for our meals. No matter how interlinked our lives are with other people around the world, through the forces of information and communication technologies and globalisation, we have to eat. We have to pay for the food that we eat, before we eat them.
The current food crisis, while reflecting a more volatile world that we have, also affects the stability of an economy, or a country. For example, with rising food prices, there had been huge levels of discontent in different governments that toppled in the 1st quarter of 2011, such as Tunisia, Egypt, Syria and now Libya. Eventually solutions, in the form of better production and distribution techniques to reach people, have to be put in place, to feed people across the world.
Background of the 2011 food crisis
There had been unfortunate natural disasters around the world early this year. They caused a great impact on food prices.
In Australia, there had been floods in Queensland and Victoria in January 2011, damaging S$2.6 billion of agricultural produce. In China, Russia and the United States, cold weather, snowstorms and droughts had adversely reduced crop production, and Chinese wheat production was even cut by up to 35%. Thailand also experienced floods on October 2010, as its rice crop was reduced by 20%. All countries mentioned above are major agricultural producers and exporters globally.
As a result, the combined effects of these natural disasters mentioned above have caused food prices to rise. Wheat futures in Chicago rose 47% last year, and are poised to rise even further. In United States, the Labor Department also reported that the Producer Price Index rose 1.6 percent on food costs in February 2011. The U.N. Food and Agriculture Organization Food Price Index also rose to 231. This surpasses the previous high of 224, set in 2008, during the previous food crisis caused by the bio-fuel led commodities boom. This shows that the current food crisis is worse than the previous one.
Such increases in prices are termed as a ?supply shock?.
With food being a necessity good, its consumption is constant. With rising prices, real incomes will fall. As food becomes relatively more expensive, in periods of rising incomes around the world, there is less expenditure in other goods and services.
For example, in the case of the recent Chinese New Year, Malaysian Chinese are reported to spend less on other goods for the festive season. With more money spent on food for reunion dinners due to inflation, with slower growths in income, other areas of spending have to be cut ? such as new clothes.
Effects of the Food Crisis
The increase of food prices have brought to different effects in different types of economies, namely, developed economies and emerging developing economies.
For countries with higher incomes, increases in food prices lead to consumers choosing lower-cost alternatives. Fast food restaurants are making record earnings. KFC even posted a 14% increase in profits. The developed countries, though, have more than enough resources, like food reserves, to help their people to tide over the food crisis.
For emerging economies, in South, Southeast and East Asia, governments have different strategies to contain food price inflation. They hold more than half of the World?s people. The focus of governmental action will be on these emerging countries, with the influence exerted by these countries? sheer size in populations.
One economic trend to consider in these emerging economies is the growth of the working- and middle-class individuals within these economies. The working-class and middle-class people of India and China are rapidly growing in numbers and wealth. Both countries now have fewer people living under poverty, as compared to 20 years ago. In particular, India has lifted one-fifth of its people from the international poverty line of US$1.25 (purchasing power parity) over the past 30 years.
But it is of great governmental concern that the increase of incomes in such countries could be undermined by the increase of food prices. With no suitable alternative to the production of such staple foods such as maize, wheat, rice, which make up 87% of current total food production, cost-push inflation then ensues.
Aggregate supply on the whole shifts left, as producton capacity falls. It causes an increase in the general price level, while output of goods and services (real output) in the economy shrinks. With cost-push inflation, the rise of price in food leads to a price/wage spiral. Firms? wages chase increasing prices, while prices may in turn chase rising wages, seemingly with no end. Inevitably, wage earners need an increase of wages to protect their purchasing power, by finding a way to negotiate and try to force their salaries increasing faster than the price of goods, especially food, as reflected in the Consumer Price Index (CPI).
In the case of business owners, their profit margins will be squeezed, both by the increases of raw materials (in the grains or other raw materials they use), and even more likely, the increase of wages. Hence, firms are forced to raise prices to protect a certain profit margin, from rising costs. This in turn negates the effects of the wage increases, and workers continue to bargain for higher wages, with all factors constant. This can help explain the labour unrest in emerging economies such as Bangladesh and China, in the 1st quarter of 2011.
Another economic factor for emerging markets? governments to consider is the interest rates of the economy. To control runaway inflation, the economy has to cool off, with reduced aggregate demand. As a result, governments choose to increase their interest rates. It will reduce the demand for lending to firms and households, and increase market rate in saving. Vietnam, for example, is raising main borrowing rates from 9 to 11 percent. The increase of interest rates ultimately leads to households being poorer off, and less able to buy food that still becomes increasingly expensive.
Possible Policies to control food prices
Governments can choose to impose price controls on their economies. Wages are kept to a maximum, while the prices of goods and services are kept steady, through subsidies. This works when the industries in the economy are working in a monopolistic or oligopolistic market structure.
However, the success of price controls is dependent upon the ability of governments to cover such huge costs in subsidising the prices of the goods. The ability is assessed by the country?s governmental budgets, which is in turn affected by their overall net income, in the form of current account balance. Countries with current account surpluses such as China, Thailand and Indonesia, with their current account balance totaling over 10 billion US dollars, are in a better position to tackle the cost of subsidizing food prices. Countries with current account balance deficits, such as India, Turkey and Vietnam, may not be able to subsidize food prices effectively, as they do not have the means to fund food subsidies.
Another possible policy, though seemingly unrelated to the current food prices increases, is the deregulation of industries. More free trade should be allowed in countries where there are high tariffs for imported goods. This will help to reduce the cost of imported food in the market, and it will make the market for food more efficient. The European Union, for example, charges up to 146 percent on tropical fruits such as bananas, for trade tariffs. Reducing the tariff costs could possibly make food industries more competitive, with lower entry costs and lower prices, which leads to more food being produced and sold in the market. Thereafter, prices will also be lower. Thus, sustained increases in prices will cease.
The future of food prices
The earthquake in Tohoku, Japan on 11 March 2011 influences future food prices. Unlike other net food exporters on the list, as mentioned above, Japan is the largest net food importer in the world. Japan currently imports 60 percent of its caloric intake from other countries. The earthquake has brought about a temporary halt in short-term demand for food, keeping food prices in the next quarter in check.
However, despite the level of uncertainty surrounding food prices from the Japan earthquake, researchers Thomas Helbling and Shaun Roache wrote, ?the world may need to get used to higher food prices.?
Food prices could be a problem in our future. Given that incomes in emerging economies continue growing for the working and middle classes in the next few years, demand for food is expected to increase for this period. Increasing food prices could hurt people living under poverty around the world, who may not have the means to feed themselves.
Conclusion
Food prices affect our everyday lives. As the Roman philosopher Cicero puts it succinctly, ?one must eat to live, not live to eat?. Food is really necessary to keep us going. The prices of food affect our quality of life, as we have to spend money every day for our meals. No matter how interlinked our lives are with other people around the world, through the forces of information and communication technologies and globalisation, we have to eat. We have to pay for the food that we eat, before we eat them.
The current food crisis, while reflecting a more volatile world that we have, also affects the stability of an economy, or a country. For example, with rising food prices, there had been huge levels of discontent in different governments that toppled in the 1st quarter of 2011, such as Tunisia, Egypt, Syria and now Libya. Eventually solutions, in the form of better production and distribution techniques to reach people, have to be put in place, to feed people across the world.
