Despite a period of sustained global growth, the world economy is now confronting an uncertain and difficult period threatened by rising food prices and even acute shortages in some countries. In the last few years, the prices of consumer goods especially food items have increased at a faster pace than headline inflation in the world economy. This article looks at the reasons for the rising food prices and the implications especially in Guyana.
Agricultural commodity prices began to rise sharply in 2006, the FAO food price index rose on average by 9 percent in 2006 followed by a massive increase of 23 percent in 2007. The surge in food prices has been most notable in dairy products which on average increased by nearly 80 percent followed by edible oil at 50 percent and grains at 42 percent respectively. The Economist (12/07/07) in an article entitled “Food prices: Cheap No More” stated that in September 2007 the world price of wheat rose to over US $400 a tonne, a record high when two months earlier it was around US$200, while the price of maize (corn) exceeded a record high US$175 a tonne, some 50 percent above the 2006 level. The Economist Food Price Index is now at its highest since it began in 1845 rising by over one third in the past year.
High commodity prices are nothing new and higher prices tend to be shorter lived when compared to lower prices. However, the recent trends in food prices may continue even after the present short term shocks have evaporated due to major structural changes. The reasons for the rising food prices have become a subject of much debate from policy makers, the media, the public, consumers and farmers. A confluence of different factors has impacted on the supply and demand forces for food that created this unique development.
On the supply side, food production has been intercepted by weather related production shortfall. The FAO reported that cereal production declined by 3.6% in 2005 and a further 6.9% in 2006 to 932.5 Mn tonnes, oil seed that include soybean declined by 5.8% in 2007. Apart from weather related problems world stock level for maize and cereal showed continuous decline and stocks are now at their lowest level. Last but not least is the rising cost of fuel and other major inputs such as fertilizers. High fuel price not only raises the cost of producing food but also of transporting it. Freight rates have more than doubled in 2007 leading to higher prices.
Apart from the supply side the demand side has been characterised by a changing structural pattern that looks more permanent than cyclical. The strong growth in emerging market economies namely China and India driven by their higher income patterns has certainly stimulated higher demand for food. China, for example, has accounted for over 40 percent of the increase in the global consumption of soybeans and meat over the past decade. Developments in the world energy market have also increased demand for agricultural produce in the biofuel drive. The World Bank reported that the US utilized over 20 percent of its maize production while the European Union used 68 percent of its vegetable oil production for biofuel, respectively. This change has reduced crops for food and increased its price. The redirection of animal feed to biofuel has also escalated poultry and dairy product prices that increased on average by 20 percent in 2007 alone. These are some of the factors underlying the current state of the world market for food.
Guyana and the Caricom Region as a whole have not escaped the wrath of higher prices for food. Most of the countries in the Caribbean experienced double digit headline inflation in 2007 including Trinidad and Tobago despite reaping bountiful fortunes from higher oil prices. In Guyana, the rise in the consumer price index (CPI) was estimated at 14 percent in 2007. However, food products that constituted the largest share of Guyana’s CPI basket increased at a faster pace with most of the increases recorded in the vegetable and fruit category. Both industrialized and developing countries have experienced a faster rise in food prices than the overall inflation level.
Rising food prices should present a major challenge to Guyana’s economy blessed with an abundance of factor endowment to make it a large agricultural producer. During the first Jagan administration in the early sixties three major Agricultural Projects, Tapacuma, MMA and the Black Bush Polder projects held the promise of transforming Guyana in to the bread basket of the Caribbean. The then Government also set up the Mon Repos Agricultural Research Station (1961) with the objective of increasing productivity. Higher productivity in agricultural has contributed to increased income of both consumers and producers. Consumers benefit from more products at lower cost while producers reap higher income from better yields. It is no accident that Guyana during that period enjoyed the second highest standard of living in the region. For reasons that are well known Guyana has declined from being the “bread basket of the Caribbean to a basket case.”
The rising food prices present a major challenge but has created opportunities that have already been captured by large food exporting nations such as Australia, Brazil, Argentina and Chile. The FAO (2008) pointed out that the appropriate policy response has to be long term that focuses on increased public investment, research, rural education and infrastructure to create an efficient market. Guyana’s ability to produce an adequate supply of food to meet both domestic and regional demand is well established. Tinkering with knee jerk policies by Caricom such as price controls, subsidies, manipulation of the Common External Tariff (CET) and some fly-by-night projects though politically attractive is very short term. Prices will only stabilise with an adequate supply response and not manipulation of the markets.
In conclusion, it is my view that food prices will remain high in the medium term given increased demand influenced by a weak US dollar and higher oil prices. However, Guyana is in the unique position to respond positively to the higher demand and buoyant prices with the right mix of policies that are sustainable in the long run.
(The views expressed in this article are that of the writer.)
