By Dr Clive Thomas
As promised last week I propose to cover some of the considerations that lie behind spiralling global food prices, as a final issue in this fairly extended discussion on rising food prices, the government’s relief package in response to it, and the impact of the Value Added and excise legislation on the pain we all feel when we have to purchase food. At last count I had encountered scores of issues that have surfaced in the global debates on this matter. Time and space however do not permit the opportunity to cover all these. I shall therefore, focus on those that every informed Guyanese should be aware of, if they are to appreciate the complexity of the problems we are all facing.
Two summits
The upcoming G8 Summit of the eight leading industrial powers that is to be held in Japan has added the global food crisis as a priority topic on its already crowded agenda. This echoes a similar focus given to it at the recently held United Nations Food and Agriculture Organization (FAO) sponsored Food Summit, which about one-quarter of the world’s heads of government and/or states attended.
About a year ago though, when the agendas for these two summits were being framed, rising global food prices were not urgent and not considered a priority agenda item. The about-face at these summits speaks volumes about one aspect of the rise of food prices in global markets – that is, its suddenness and the failure of leading experts worldwide to anticipate it.
Global and local markets
It is important that at the outset of this discussion readers are aware of a very important fact. Research has conclusively established that the price behaviour of a given food item on its global commodity market is not necessarily the same as its behaviour in local municipal markets, groceries or supermarkets. The reason is that between the principal buyers and sellers who constitute and therefore determine the outcomes in global food markets and the proverbial corner shop lie a maze of labyrinthine connections, pathways and occurrences. More specifically, research in Caricom also reveals that the prices of imported food items at the point of final delivery to the importer (including full cost, insurance, freight, and local taxes) are substantially below the prices in local shops, after allowing for reasonable and accepted benchmark mark-ups. Between the importer’s price at delivery and the corner shop, a myriad of unacceptable practices occur: price gouging, consumer abuse, collusion, and the exercise of predatory monopoly practices in the markets for these items. Thus, while the prices of food items in global markets remain important markers, their connection to prices in local markets is neither straightforward nor linear.
Will rising prices last?
One question to which there is no clear and conclusive answer at this point in time is will spiralling increases in food prices in global markets last? In other words, is the present crisis temporary or long-lasting? At one extreme, some experts believe that in a year’s time or by the next regular or bumper crop when present shortages and marginal crop failures are relieved, bountiful supplies will return leading to price falls and the resumption of the long-run declining trend in food prices.
This long-run (secular) downward trend reveals that forces of supply and demand inexorably lead to a fall in the price index for food relative to other manufactured items and services.
I have alluded to this perspective in an earlier column. It is argued that if we examine the market forces affecting demand and supply no other conclusion is feasible.
Thus on the demand side, two inexorable forces are leading to the decline in relative expenditure on food. One is the empirically established fact that in all communities and cultures, as incomes rise, people spend a smaller and smaller proportion of their income on food items.
As economists would say, there is a low income elasticity of demand for food. The second is the spectacular rise in synthetic (that is mainly factory manufactured) substitutes for some food items. A good example of this is sugar, where synthetic non-caloric substitutes like Splenda and Equal thrive in retail outlets.
On the supply side they argue several factors are simultaneously leading to output rising rapidly in relation to demand.
One is technology which has brought agriculture more or less under the disciplines and productivity regimen of manufacturing processes. This is seen in cultivation, with the use of genetically modified foods, pesticides, weedicides, fertilizers, computer-aided planting regimens, improved plant variety and seeds, as well as improved land preparation practices. This list can go on and on. Another is management and organizational change, which has facilitated technology adaptation not only in cultivation, but harvesting and distribution processes. The use of refrigeration and faster transport have made the global reach of suppliers immensely effective and cheaper. So too has the spread of market information as IT applications become routine in marketing food.
net result of all this is great strides in yields per acre and output per unit of labour input. This has dramatically transformed the global output for food. For the first time in history the world does not face overall food shortages even though there are large pockets of hunger and food insecurity. The existence of these, however, is a distributional, not a production problem.
As we shall see next week, there are other experts who believe that there are recent factors which alter the demand side of the equation qualitatively and which can lead to a long-lasting crisis. And, on the supply side there is an ultimate limit to land supply, which ensures that diminishing returns occur and there is increased output only at increased cost.
