By Dr Clive Thomas
As I pointed out last week, one distinctive feature of the skyrocketing of global food prices has been its suddenness. When this year’s G8 Summit and the earlier United Nations Food Summit were being planned last year this item was not a priority for their global agenda. In point of fact the United Nations Food Summit had originally targeted the impact of bio-fuels and global warming on global hunger, food availability and food security as the main agenda topics. Indeed, global experts and organisations, which are dedicated to the study of issues centering on the global demand and supply for food items, had reported no inkling of the threat of worldwide skyrocketing food prices.
As we also discussed last week, there are several experts who believe the recently emerged threat of rising food prices will not endure for much beyond another year, if that long. They firmly expect the inexorable long-run tendencies for food prices to decline relative to those for other economic items, to re-assert themselves. They would, however, admit to great surprise that what they interpret as relatively minor and temporary mismatches between demand and supply for some food items, could have produced such substantial price increases over such a short period of time.
Shift in global demand and supply
At the same time, however, there are other experts who expect from recent events a deeper and more durable increase in food prices. They claim that the long decline in food prices relative to other prices as we have known it in the past, has come to an end. Like those on the other side of this debate, they too utilize a supply-demand analysis to support their predictions.
There is agreement on both sides that as a rule, when the prices of food items fall, generally more is demanded, and that this fall in food prices would simultaneously discourage supply increases. However, they urge that from time to time market forces arise which qualitatively alter the nature of these demand and supply functions, leading to substantial differences in the quantities produced and bought at any given price, compared to that which previously existed.
How does this apply? On the demand side, they indicate at least two technical considerations vital to an understanding of the pattern of demand for food and at least two others, which show that there has been a structural shift in the demand function for food.
Technical considerations
The first technical issue on the demand side is the need to draw a distinction between the market prices of food items and their real prices. The latter (real prices) are market prices adjusted for inflation. Thus, if the market price for a particular food item rises by 20 per cent and the general price level (inflation) rises by 10 per cent, the increase in the real price of that item is 10 per cent. Seen from this perspective readers may be surprised to learn that the present recent skyrocketing price increases, shocking as they are, remain below peak levels of food prices, going as far back as previous global spikes in food prices in the 1970s and 1980s!
The second technical issue is the continuing depreciation of the US dollar exchange rate against other currencies. Most food prices are traditionally quoted in US dollars on the global food exchange markets. When the US dollar therefore depreciates, this cushions the impact of food price rises in those countries against which the US dollar is depreciating. This cushion sustains demand, so that the full impact of rising food prices on demand does not pass through to final consumers.
However, since the Guyana dollar is pegged to the US dollar, we in Guyana do not benefit from this reprieve.
Structural consideration
The two structural shifts in the demand function are firstly, the unprecedentedly rapid growth of the emerging economies, particularly China and India and their impact on the global demand for food. As these economies have emerged out of desperate hunger, poverty and under-development situations over the past two decades, their appetite for food has grown commensurably. As we noted, as a rule, at lower levels of income, relative expenditure on food out of income is greater than at higher levels ― particularly for basic foods like wheat, maize (corn), rice, and vegetable oils. The unprecedented growth of these countries has added in turn to the unprecedented growth in the demand for food globally. As economists would say the global demand schedule for food has shifted outward significantly, indicating that at any given price for a food item, significantly more of it is demanded.
The second structural shift in the demand for food has been occasioned by the increased demand for key food items used as inputs into the supply of energy. Thus for example, the surge in the world demand for bio-fuels has diverted food away (especially corn) from household consumption to industrial uses.
The supply side of the equation
On the supply side, the argument is that a host of other factors reveal also a structural shift in the cost of supplying food. Some of these will be considered next week including the effect of 1) rising crude oil prices and energy costs on food supplies 2) the consequential switch from carbon-based fuels to bio-fuels 3) the effect of subsidies paid to farmers in the US and Europe on food output from developing countries 4) the greater use of meat protein in food consumption and the effect of this on the supply of basic foods and 5) climate change.
