Saturday, October 06, 2007

Rising food prices

The complaints against the recent rise in food prices don't seem to go away. Often these are peppered with accusations of improper behavior by government officials or collusion among producers and suppliers.

What the media seems to overlook is that the increase in food prices is a global phenomenon. There is an unprecedented increase in demand fueled by increased production of biofuels as well as the rising prosperity of China. Add to this the higher oil price, which drive up production cost, as well bad weather in places like Australia and China.

For example, wheat prices have nearly doubled over the past year. According to the US Department of the Agriculture, US farmers received about USD 7.16 per bushel in September 2007 compared to 3.52 at the beginning of 2006 (36.743 bushels make one metric ton). Add to this the cost of placing the grain at the loading spout, and the price may go up to USD 9 and 10 per bushel before including the buyers ocean freight cost (see US Wheat Associates).

Indeed, referring to the poor nations, Alexander Sarris, director, commodities and trade, of the Rome-based Food and Agriculture Organization (FAO), as a keynote speaker on October 4, 2007, at the Commodities Week Europe 2007 conference in London, said "We are squeezed between increasing oil prices and food price hikes". The government in the short run protected (subsidized) its citizens from higher prices of imported Russian natural gas. But within a year, and depending on the value of the Dram, the people may be faced with the prospect of both higher food and energy prices.

While the finger pointing at government officials by the media may not be totally appropriate given the global nature of the price trend, the implications of this trend particularly on the poor are critically important and should be highlighted. Is anyone studying the impact of this on household budgets? What are its inflationary implications, and would the central bank raise interest rates and dampen economic activity? Also, how much of the appreciation of the Dram has softened the impact of higher global food prices?

[Note: The pattern of retail prices from 2002 through 2007Q2 is not bad at all. But data for the recent quarter are not available yet. See here]

1 comment:

Ara said...

--Food prices are increasing significantly, which could cause an increase in poverty, especially in the cities. Therefore inflation of food prices should be the concern of the policy makers.
--In order to address this potential increase in poverty, a populist tendency might be to introduce food price control. Unless there is monopolistic behavior and abuse of market power, price regulations could create distortions and could hurt Armenian farmers. Domestic food price control could cause reduction in domestic food production. Rich countries do the opposite. They subsidize high agricultural prices and protect farmers, which increases the production of agricultural goods.
--Instead of regulating food prices, it is more efficient to improve social programs targeting the poor. We should discuss and analyze questions related to social programs. How poverty line should be determined and adjusted every year? Does the poverty line represent a reasonable threshold in determining the poverty? Is it set at very low levels? Is there possibility of indexing the poverty basket?
--If food prices are increasing in Armenia more than the average price level, then the farmers and the agricultural sector in general is doing better than the rest of the economy. Therefore is there possibility to improve the taxation of the agricultural sector and land and transfer these tax dollars to support the poor in the cities, who are suffering because of higher food prices?