Why Do Food Prices Remain So High?

By Glenn Ashton · 5 Feb 2009

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Picture credit: ralphbijker
Picture credit: ralphbijker

Major retailers like Pick n Pay have asked suppliers for explanations as to why the food costs have remained high, while transport and input costs have fallen. This is indicative of fundamental problems in the food marketplace.

The cynical world view of many, that food producers are all too quick to raise prices when margins are threatened but loath to reduce them when increased profits are locked in, appears valid.

There is usually a lag for input costs to affect prices of grocery items; the same holds true when input costs fall. We have already seen a small drop in the prices of most staple commodity crops and their derivatives. The question is when this decrease will be proportionately reflected on our grocery till slips.

The two primary causes for food inflation were first, the rapid and unprecedented rise in the cost of fuel and secondly, a similar rise in food commodity prices. Both of these peaked in mid-2008. The price of oil has consequently fallen off its peak by around two thirds.

This fall has been echoed in the value of food commodities. The International Monetary Fund shows a drop in its food commodities index from a peak of nearly 180 in June last year to around 120 by year end. Maize has dropped by almost half, as have wheat and oilseeds like soy bean and rapeseed (canola). Rice, sunflower oil and other commodities have fallen slightly less.

While these are international open market prices, other important factors have affected us in South Africa. For instance, our currency devalued by nearly 40% in the last half of 2008. Accordingly, the price we pay for commodities like oil on international markets has not dropped by two thirds but only by about half. Inflationary costs such as electrical power have risen by nearly a third. High local interest rates have affected purchasing patterns.

Even against these scenarios the real costs of energy and commodities have dropped by far more than is properly reflected in our grocery bills. Logic dictates that the precipitous fall in fuel prices would allow traders, processors, wholesalers and retailers to pass on savings and spread their competitive advantages to customers. However our closed and concentrated markets, with ineffective competition between major players, have conspired against the best interests of the public. Profit - not pubic interest - is the primary driver in the food market. By way of explanation, free marketeers would tell us that capitalism is not philanthropy. But then, are our markets so free and open?

Our agricultural supply chain provides some insight into the weak competitive activity evident amongst grain traders, millers and food oil refiners. Accusations and proof of collusion, price fixing and anti competitive practices continue amongst these market oligopolies. These are not the fundamentals of a free and open market.

Against the collective sigh of relief from consumers at Pick and Pay's announcement to haul its major suppliers over the carpet, realistic scepticism remains about both the motives and outcomes. Mouthing platitudes at business partners is, after all, an intrinsic part of the game. Will action follow?

The call from unions, both labour and consumer, to stir apathetic local consumers from their comfort zone into taking action, is perhaps a more tangible and effective tactic. Targeted boycotts, protest actions and other shows of citizen power can be used to good effect. It is surely more prudent to channel public frustration about food costs into co-ordinated action than to let the situation evolve to where spontaneous and unpredictable venting of frustration like food riots and other social unrest can result.

Yet even co-ordinated, targeted action must be tempered by realism. Consider for instance that several cost increases in the factors of production are at a remove from direct action. Fertiliser is a prime example. It is dependent on fossil fuel and mining for its raw materials and has a lag time for any drop in those to reflect on crop prices. This seasons wheat, maize and vegetables used expensive fertilisers. Only after the next growing season will lower costs be reflected. Unfortunately the dismal state of competition within the local fertiliser market will make any drop in prices tardy and keep them to an absolute minimum. So too with pesticides, chemicals and other farm inputs.

On the other hand the costs of animal feed have dropped sharply. Given the 30 day growing period for a chicken, the average price should have dropped by a lot more than it has. But again, this is an industry reliant on an extremely limited number of feed suppliers and major poultry producers.

A convincing argument can be made that one of the primary spurs of inflation is inherent in the very nature of the dominant market model. Corporate led capitalism has, as its primary aim, the maximisation of profit for shareholders. Everything else is secondary. CEO's know their investment rating and corporate creditworthiness will plummet if profits are not continuously produced to exceed inflation rates by hook or by crook.

Never mind the well-recognised inflationary evil of compound interest; the direct cost of shareholder profit is leveraged from our purses and wallets. This is one of the most overlooked primary drivers of inflation, neatly sidestepped in corporate owned economic media comment.

The advent of the global credit crunch, the market meltdown, the capital crisis, call it what you will, may provide a window of opportunity to not only fix a mashed-up system, but to open up other opportunities of making business more accountable and prone to act in the public interest.

While the present market ills emanate from within the banking sector, they reflect upon the world at large. Shipping rates have plummeted as capital markets have dried up. Mineral commodity prices have dropped, further reducing input costs. On the other hand, mortgages, upon which wealth is leveraged, are impossible to acquire for all but those with realisable assets.

The 'lala land' of derivatives, junk bonds, suicidal shorting and broken empires of ponzi schemes urgently needs proper regulation. First should be the banks. There is a strong call to nationalise banks that have been propped up by Governments spending billions of dollars of public money. Sweden, a leading progressive socialist state, has done just that. Nationalising banks makes sense and would at least render markets far more democratically accountable.

If people – instead of unaccountable central and private banks – have an active collective stake in banking and the money trade, opportunities will naturally emerge to get the banking system back under public control. There will always be those, including some very powerful players, who will do everything possible to deny this chance of collective redemption that aims to shift away from fiat money and worthless speculative schemes. Returning the control of national and international finance to public interest will not be easy but it is something that must be done. A fair and equitable financial system must make capital subject to its shareholders. These must include the public, not only those burdened by obscene wealth.

Once capital becomes democratically accountable and is freed-up (and perhaps repatriated from offshore tax free havens, another loophole for unaccountable wealth accumulation) key aspects of food production will in turn become subject to public scrutiny. The public, in concert with the states (that will increasingly come to recognise the strategic correlation between food security and national security) can hold the supply chain accountable. Not so much the farmers, subject as they are to the vagaries of capricious nature and changing climate, but the rest of the supply chain has lots of space for reform.

Important food commodities should be more closely regulated. We simply cannot afford to have the short term traders of Chicago, Wall Street or Johannesburg gambling with food security in the name of profit. The very perversity of the concept should render it illegal. Certainly we need instruments to protect farmers but have instead created a casino of food futures markets. Would it not be wiser to return to state-backed insurance schemes?

The ills that beset local food markets are but a microcosmic reflection of the global financial macrocosm. The system is broken and it must be fixed. Nobody knows precisely how but there is awareness that pain will be felt. Let it not be the continued pain of the poor majority; it is time for the lords of global financial empire to share in the collective hurt. And this does not mean simply letting the villa in the south of France go.

The rise in the cost of food is global phenomenon that, like the shadows in Plato's cave, reflect the ills that beset us. There is a window of opportunity amongst the chaos of the market woes to change things for the better. Through collective efforts of both individuals and institutions, change can happen.

Ashton is a writer and researcher working in civil society. Some of his work can be viewed at www.ekogaia.org.

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