Implications of food price rise on households and the right policy response

The rapid rise in prices is due to a series of supply and demand side factors analysed as follows. Supply side factors include weak growth in production relative to demand over a long period that has led to a significant reduction in stocks of rice and grains; relatively rapid growth of real agricultural input prices and below average harvests of grains by major food exporters in the last few years. Demand-side factors affecting food production:Rising populations obviously add to global food demand. The world’s population is expanding at around 1.5 percent per annum, which is roughly an additional 100million mouths to feed each year. It is projected that the world population will grow from around 6 billion at present, to over 8 billion by 2030. In addition, the rapid rises in incomes, mainly driven by China, and emerging India, have seen increases in demand for meat and dairy products and the same time demand for bio-fuels, towards levels enjoyed by consumers in developed countries. According to some writers such as Malthusian who asserts that the increase in fertility will lead to hyper exponential population growth in this case this will eventually outstrip growth in economic production hence a decrease in food supply. Implications of the food price rise Rapid food price increases can have severe social impacts. In particular, rising food prices can exacerbate poverty in low-income countries. As the price of staples such as wheat, rice and maize rise, they become less affordable for people with low incomes. According to the World Bank, the poorest people spend roughly three-quarters of their incomes on staple foods. Again, it is common knowledge that people with low incomes have low marginal propensity to consume. The inability of these people to afford sufficient food leads to hunger and malnutrition. The soaring food prices have had negative short-run impacts on developing countries that depend on imports for their food security and where the vast majority of households, including in rural areas, are net food buyers. For this reason, it is not surprising that increasing food prices have triggered riots and even contributed to political instability in some countries. Instabilities linked to high food prices have already occurred in Burkina Faso, Cameroon, Egypt, Haiti, Mauritania, Mexico, Morocco, Nepal and Senegal. This highlights the impact of increasing food prices as a development issue. For example, the total cost of food imports for low income food deficit countries was 24 percent higher in 2007 than in 2006, rising to $107 billion. Households in the developing world, where food represents 60-80 percent of consumer spending are suffering from domestic high food prices. In the Ivory Coast for example prices of rice in March in 2008 doubled their level of a year earlier, while in Senegal wheat prices by February 2008 were twice the level of a year ago and sorghum was up to 56 percent. In Niger, prices of sorghum and millet have doubled in the past five months. “Impact on households” Different risk analyses such as those conducted by the World Food Program suggest that the impact on household food security will be significant. It is likely that high food prices will make the fight against hunger and poverty an uphill struggle if no additional measures are taken to mitigate the impact. The vast majority of the poor rural and urban households in developing countries are net food buyers who are much negatively affected by higher prices. However, faced with food prices, many governments have tried to limit the increase in domestic food prices by raising subsidies, lowering import tariffs or imposing export restrictions by keeping domestic prices below international levels. However, in this case, these interventions provide short-term relief for distressed consumers, but could also have negative effects for three reasonsl. Firstly, by maintaining farm-gate prices artificially low they discourage the much needed supply response and productivity increase that is required for long-term food security. Secondly, export restrictions lower supply on international markets, hence pushing prices higher and aggravating the global situation. And thirdly, tariffs increase the pressure on national budgets and reduce fiscal resources available for much needed public investment and other development expenditures. “What should the right policy response be?” The initial point is to consider what should the goal of food policy be? The overarching purpose of food strategy should be to support the method of production, distribution and consumption of food that leads to the subsequent outcomes: That precise quantity of food of the right type is produced. That Production and subsequent distribution should be done in a way that makes the best use of the planet’s scarce resources with the least amount of waste and pressure on the environment. In short, the political forces on governments to find a short-term solution to the problem of rising food prices may lead to policies that are destructive in the long term. Since rising food prices have been a universal phenomenon, attempts by governments to hold back price increases will distort market forces for agricultural products, which is not reliable with longer-term policies to get better food security. Ends