Rising Food Prices Require Political Response

By Saliem Fakir · 25 Feb 2011

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Picture: World Bank Photo Collection
Picture: World Bank Photo Collection

The world finds itself back where it was in mid-2008 when food prices skyrocketed causing untold harm to the vulnerable. In the last six months there has been a massive increase in prices for most essential food commodities.

Food and being able to eat properly is going to be the single biggest political issue in the next decade. None other than economist, Paul Krugman, noted this in an op-ed in the New York Times. His tone was one of alarm and grave concern.

Interestingly, Krugman pointed to global warming and climate change as the main causes disrupting food production.

However, climate variability is just one factor that acts on the system as a whole. It increases insecurity, but in the end, food security is an issue of political economy. And, the more one multiplies the unpredictable variables that determine food costs, the more volatile the food economy behaves.

That’s not good news for the poor.

Income and food are inter-related. When people are unemployed and dependent on irregular sources of income, food inflation hurts the most. And, when ordinary people hurt and have no recourse to escape the ravages of food inflation, they will take to the streets.

Indeed commentators have suggested that the true cause of the protests in Tunisia and Egypt spilling over in the streets and the rest of the Middle-East stems from a systemic crisis that is now the inheritance of the political economy related to food. 

In South Africa, what is often labelled, “service delivery protests,” are also reflective of a growing underlying problem that goes beyond whether councillors are doing their jobs or not. The costs of things are going up and there aren’t sufficient jobs going around either.

And, even if people do have jobs, their income levels never quite keep up with rising costs. Increasingly, access to food is becoming highly income dependent. And, as South Africa’s population becomes ever more urbanized, dependence on the “food system” as well as dependence on having an income will grow.

Thus, other than growing food oneself, one can only access what is in the food system through cash.

However, income in itself doesn’t guarantee that one eats properly either. The consequence of having no income or low-income growth is that the poor either starve and are under-nourished or just fill themselves with things that lead to long-term poor health.

The general measure of inflation is not a sufficient indicator of how food price inflation specifically affects the poor. As general inflation indicators are measured in terms of a broad basket of goods, they tend to be biased in their estimates in favour of regular income earners.

However, for the poor, food, energy and transport are the biggest cost items and any shift in food prices that is not gradual but depicts rapid and steep price hikes or lows (often in an unpredictable manner) is more disruptive for household economics.

If you live on US$2 or less per day you can imagine the impact. A 2008 estimate put the number of South African living on less than US$2 per day at 34%.

In general, in the last two years food price increases have gone up between 20-100%.  In 2011, food prices are expected to rise an average 20% globally. South African food inflation could hover anywhere between 5-10% by the end of the year.

Four things tend to affect food prices: the relative strength or weakness of a particular country’s currency, energy prices, the weather, which affects supply and demand due to disruption of production; and the political economy of the food production chain -- in other words, who has control over different aspects of the production chain.

But there is also something more unsettling within the current economic system that adds to this unpredictability and growing concerns for national governments: decisions that are made very far off in London and on Wall Street  - seemingly unrelated - in the purchase of commodities such as energy, key farming ingredients and even crops themselves, have an impact on food prices.

The more commodified the food trade is, the more scope there is for speculators and producers to milk margins. Consumers and farmers have less and less control over how rewards are apportioned within the food production system. 

For example, in America a farmer only gets 19% of every dollar that is spent by a US consumer. The rest goes to other parts of the value chain. And, the value chain is increasingly subject to market concentration. A handful of agribusiness and food retailers control the food market. Commodity traders, millers or food processors and retailers are the biggest winners.

If national governments themselves have no control over these forces and processes, you can bet those who have voted them into power have even less influence and ability to control the behaviour of transnational corporations and actors.

The food system is caught up between the dynamics of the real economy and the unpredictability of the financial economy.  

The system is so volatile that any radical shift in one predictable aspect only increases the volatility of the entire system towards more unpredictability. So, when speculators try to get their pound of flesh combined with the weather misbehaving or oil prices going up, the problem is only compounded.

The implications for the poor are dire. Their ability to save as well as their capacity to empower themselves by adapting their livelihood strategies can be impaired. They never really get out of the poverty trap. The dependency on the state grows. The ability of the state to be provider also diminishes over time. The virtuous cycle ends and so begins the vicious one, which we will all reap.

However, national governments can play a role to avert food insecurity and general instability associated with rising food costs. They are not entirely powerless.

They can act in concert with other governments to find ways to limit the impacts of speculation that is purely designed for rent seeking. But, this is better done at a global level than at the national level.

These are tough to achieve but increasing global food crises are more likely going to force governments to act more forcefully in the market than not. 

These measures could be applied for strategic crops, like Asia does by breaking global market monopolies on supply for rice exports and inputs such as potash (used in fertilizers). South Korea, specifically, is stockpiling inventories of wheat and maize.

Nationally, the government can run programmes that support poor households in urban and rural areas to grow some food even though all needs won’t be met. 

The South African government can also intervene in the market through the Competitions Commission by preventing food monopolies, punishing price fixing for essential foods and as it recently did, block a merger of seed companies that would have given the merged companies market advantage in the seed industry. 

In December, the Competitions Commission passed a ruling that prevented Grain SA from creating an export pool for surplus maize as it was viewed that such pooling would increase the likelihood of food insecurity and lead to higher prices for domestic maize.  

Governments can also find ways to delink the strong relation between food costs and the cost of oil. They should support farmers to access alternative fuels as well as lower crop and food production costs through better planning.

The vicious cycle can be prevented if governments act early and don’t totally rely on the markets to solve the problem.

Fakir is an independent writer based in Cape Town.

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Ronnie Padayachee
10 Mar

Food Pricing on the Run

As indicated by the writer on food price which is on the upwards, in some foods such as milk, South Africa allows cheap imports which impacts on our agriculture system.

Most European producers have subsidy assistance from local Govermentrs which alllows those producers to dump milk into this country, Some retailers in South Africa import milk that directly impacts on local manufactures.Variables will indicate that output cost increases as production volumes declines. This creates Job Losses and financial losses to the farmers. This also applies to Wheat, Sugar, canned foods etc.
Investment to the country is limited in the food sector due to the threats of cheap imports.
Job creation suffers

Private sector expansion becomes limited.

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