The Upside of High Food Prices

ODI and Guardian blogs, which I quote at length, because I think it’s an important correction to the discussion on the current food price spike. ‘In 2008 developing countries, and poor people within them, were hit hard by the price spike in the international cereals market. Once again food prices are moving up, not that far short of the levels seen three years ago, so does this mean another bout of hardship? Not quite: there’s a difference this time. Why? It is not just cereals prices, nor just food prices, that are rising, but almost all agricultural prices – including those of the main tropical exports: cocoa, coffee and tea; cotton; palm oil; sugar; and rubber. Most low income countries, leaving aside the few with minerals and oil, depend heavily on these for their export earnings. Often, much of the production comes from small farmers. Higher prices mean windfall gains for them, gains that are likely to be spent on local goods and services, with strong multipliers in additional jobs and incomes for others on low incomes. On the other hand, most of these countries are net importers of cereals and will suffer from higher prices on these items. So where will the balance between extra costs and windfall gains fall? Let’s consider five countries: Burkina Faso; Ghana; Indonesia; Kenya; and Nicaragua; then see the likely impact through changes in the value of their trade in 10 of the most commonly traded items – maize, rice, wheat; palm oil; tea, coffee, cocoa; sugar; cotton, and rubber. Look at the data and it is clear that all five countries get a large boost to their export revenues – by around 20% in two cases, by 40% in another two, and by more than 100% in Burkina Faso – the latter thanks to it being so heavily dependent on cotton, the price of which has risen dramatically over the past six months. None of this will provide much solace to those who are feeling the brunt of price increases. We should focus efforts to ease the consequences of another price spike on those we know are most prone to shocks. By identifying those countries with the highest existing levels of hunger who are also major consumers of cereals and dependent on cereal imports we can pinpoint the areas where need is likely to be greatest. Overseas Development Institute studies show these countries are clustered in West Africa, the Horn of Africa and South Central Asia. When may prices come down from current levels? Provided that the harvests of 2011 are not hit by bad weather, then prices of cereals should come down substantially by the late summer: from experience in 2008, farmers can be expected to produce large harvests in response to higher prices.” Net impact of commodity windfall minus higher food import prices is shown here. ODI windfall gainsConclusion? An obvious point, but one that often gets lost – we need to consider the net impact of price changes on both producers and consumers and on the economy as a whole (eg are commodity exports properly taxed and the proceeds spent progressively? To what extent do high prices reach small farmers and landless labourers?). Reality is, as researchers and wonks love to stress, complicated.]]>

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9 Responses to “The Upside of High Food Prices”
  1. Constantino

    Yes, this is good. It explains well why to consider the possible impact of any crisis it is important to consider food imports AS WELL as exports and how internal food distribution policies (not necesarily within the market only) are defined.

  2. This may be some good news for farmers and rural communities, but the urban poor – those who have no farms on which to grow export or subsistence crops – are most vulnerable and suffer most. Some questions:
    How long will the favourable prices for export crops last?
    How much of the export price increases are passed on to farmers? And will the future fluctuations in cereal prices and the value of export crops conicide?

  3. Milla Perez

    Yes, I agree with Winston. I think that the main issue is his 2nd question: How much of the export price increases are passed on to farmers?
    If there is no fair share of incomes with farmer, it doesn’t matter how the market behaves.
    And that’s why, I think, we must emphasize on local trades and fair trade.

  4. Miles Teg

    This is good and bad news. The good news is less so especially if prices charged are not really linked to what producers actually get due to forward selling and actions of “middlemen”.
    The rich world has allowed large corporations and trade to operatee in an “unregulated” market which hardly takes into account cost of production. It allows large conglomerates to dominate markets, stifles local production with food aid, subsidises its agriculture while prying open markets in poor countries on no less than the theory of comparative advantage. Producers in the South have been decimated and continue to struggle so this is a mild reprieve only with the normal huge blowback…

  5. gawain kripke

    Thanks for this, duncan. Very useful to view high prices as “double-edged” indeed. There are winners and losers, usually not the same people. On balance and at the macro level, it’s great to see that there may be a net benefit for these countries. But, the details and distribution are at least as important.
    Another, possibly more important issue is volatility – which affects the ability of producers/exporters to benefit from the prices. If price volatility is high and predictable, this creates risks that can undermine confidence and the ability to capture the benefits of higher prices. I think addressing price volatility is one of the key elements we need to focus on going forward.

  6. Interesting blog post! I think these arguments have merit at the macro-economic level, but would argue they risk deflecting attention from farmers’ actual experiences of high food prices, which should remind us why high food prices are generally harmful. In particular:
    1) At a household level, most farming families in the developing world are net buyers of food. Thus, while they may experience short term increases in farm-gate prices, they are also paying more for what they eat.
    2) Volatility is the mortal enemy of the farmer. The timing of high food prices on global markets does not necessarily coincide with investment, planting and harvest cycles for producers. Given how the prices of grains have jumped around over the past year, the promise of a gain today is by no means a guarantee of higher earnings come harvest time 6 months down the line. This is even more pronounced in the case of some soft commodities, where investment and production cycles are far longer.
    Of course, the irony is that volatility is increasingly driven by excessive speculation on the futures market, which was initially designed to offset unpredictability of income in agriculture!
    3) Structural problems within the global food system radically reduce the translation of positive price movements on international markets to the farm level. The relationship between small scale family farmers and global markets is highly mediated via local middle men, transnational agribusiness, processors, traders, and retailers. As such, in most cases only a fraction of price increases trickle back to farm level.
    Worse still, the price increases captured by the more powerful actors in the supply chain are often ‘locked in’, even after prices on world markets fall again, meaning that high food prices remain in place even after farm incomes fall again. This phenomenon has been documented by several notable academics, including the Indian economist Jayati Ghosh, and corresponds with WDM’s field research in Kenya.

  7. Like Julian says, poor farmers are often net buyers of food. Indeed, as the local food prices are seldom competitive, the food production is more for partial self-sufficiency, and cash crops are grown for income. However, when prices rise sufficiently, this balance moves in favour of more food production, suppressing local prices and needs for import, while having only marginal impact on the world food market. However, as the prices for traditional cash crops seem to go up more than food prices, on farms where both can be grown, the balance should move in the other direction: towards less food production.
    In any case, the farm income seems to go up, and the incentives to produce too.

  8. toby quantrill

    apologies if i have missed something – I have not read the linked articles – but i don’t see much reference to price of agricultural inputs – fertilizers , tansport etc which are largely oil based – which are also rising as part of the overall commodity ‘package’? Most of the comments i have heard from farmers recently would echo much of what Julian says, higher prices are rarely captured in full by smaller producers while cost of inputs, food etc is felt in full. As ever I’d guess whether you are a winner or a loser in this game is likley to depend on the power you wield in the system. The fact that there are ‘winners and ‘losers’ doesn’t exactly make it feel like the imapacts ‘even out’ to me.