Governments must have the right to regulate markets to ensure a sufficient supply of food at reasonable prices for everyone, says Subramaniam Pillay.
Food prices have increased sharply in 2007 and 2008. The prices of many staple items such as rice, wheat flour, corn, cooking oil and milk powder have more than doubled globally. Malaysia has not escaped from this crisis. Prices here too have increased sharply. In addition to the above list of items, in Malaysia, other staples such as vegetables, eggs, fish and meat have much higher prices than two years ago. Though recently wholesale prices have come down to some extent at the global level, we are not seeing the positive impact of the reduced prices at the retail level here in Malaysia.
The price increase affects the poor more drastically as they spend a greater portion of their income on food. Globally, chronic hunger and malnutrition has increased sharply due to the food crisis. At the local level, not many Malaysians face extreme hunger in spite of the rise in food prices. However, on the margin, I am sure poorer Malaysians may be consuming less nutritious food, which may result in some degree of malnutrition.
In this paper, we will examine the main causes for the increase in the price of food; at the end of the paper, an outline of some possible remedies for the food crisis will be provided.
Is there a physical shortage of food?
Usually, a rise in price is an indication of a shortage of that particular product. However, in the case of food, there is sufficient food globally but there are regional/national shortages due to droughts and other weather problems. In many cases, even within countries there is enough food but the poor are unable to have sufficient access to food due to higher prices. This is true in many developing countries such as India and Brazil. The real crisis then is the affordability of food and not the lack of food.
So why have food prices gone up so much?
There are several reasons that have been put forward to explain the rise in food prices. Some have short-term effects while others have long-term effects. There is also much controversy over the degree of importance of the various factors. The list given below is not exhaustive and I am sure readers can come up with additional factors.
(i) Bad weather conditions
A reason often given is that we have unusually bad weather in many parts of the world occurring at the same time in 2007 and 2008. For example, the agriculturally important Murray-Darling river basin in Australia experienced one of its worst periods of drought in 2007. Australia is normally the second largest exporter of wheat in the world after the USA. So production and exports of wheat (and rice also) suffered, causing some impact on the price of these two staple food items.
The severe cyclone in Bangladesh that occurred in 2007 also cut down the production of rice – which meant that country had to import more rice than usual. China has had unusually severe floods, droughts and exceptionally cold winter this year which even disrupted the Chinese New Year holidays.
Due to this decrease in the supply of grains, world food stocks have dropped sharply sending a signal to the commodity markets to allow prices to rise. However, there are many other more important reasons for the price rise.
(ii) Food crops for use as fuel
A World Bank research paper has identified the use of food crops such as corn (maize) and palm oil as bio-fuel as the main reason behind the rise in price of food. This study argued that 75 per cent of the price increase could be attributed to this single cause. According to many estimates, about 5 per cent of grains is now diverted to the production of bio-fuel globally. In case you think 5 per cent is not a lot, it amounts to about 100 million tonnes of grains per year.
Many developed countries (e.g. the USA and the European Union) heavily subsidise the growing of food crops to produce ethanol which can be blended with petrol to fuel motor vehicles. The American government has given massive subsidies to farmers to produce corn for the bio-fuel industry. The claim is that this makes America less dependent on foreign supplies of energy. However, the subsidy for corn has reduced the land used for the production of other food crops such as wheat and soya. So world prices of all these crops have gone up sharply! This, in turn, has affected millions of poor people all over the world in terms of their ability to have access to affordable food.
According to an Oxfam report in June 2008, “rich countries spent up to $15 billion last year supporting bio-fuels while blocking cheaper Brazilian ethanol, which is far less damaging for global food security.”
However, rich countries are trying to blame the weather and other factors for the rise in price of food. According to a Wikipedia entry, “The German Chancellor, Angela Merkel said the rise in food prices is due to poor agricultural policies and changing eating habits in developing nations, not bio-fuels as some critics claim.” The Guardian (4 July 2008) has reported, “President Bush has linked higher food prices to higher demand from India and China.”
The use of food crops for fuel is both an economic and moral issue. For example, according to a Wikipedia entry filling a tank of an average American car with bio-fuel is depriving a poor African person of his or her annual supply of maize (corn), which is a main staple food there! Something is seriously wrong in terms of priorities here.
(iii) The changing diet in rapidly developing countries
In rapidly growing developing countries such as China, India and Brazil, a large new middle class is emerging. Though the vast majority of the population in these countries remain poor, the growth of the middle class has been impressive due to the sheer size of the population of these countries. Their eating habits are changing. With increasing affluence, they are consuming a bigger variety of food as well as substituting plant-based food with more meat and dairy products. For example, between 1990 and 2005, per capita meat consumption increased by 2.4 and 1.7 times in China and Brazil respectively. During this 15-year period, consumption of milk in China increased by three times. Eating habits in emerging countries are also influenced by the rapid spread of Western fast food chains such as McDonalds and KFC.
The problem with this change is that more grains are being used to feed animals, which is not a very efficient way of producing proteins. For example, it is reported that to produce 1 kg of chicken meat, 3 kg of maize has to be used while the amount of maize required to produce 1 kg of pork and beef is 5 kg and 8 kg respectively. These changes have a sustained long term impact on the demand for food.
(iv) Speculation by commodity and hedge funds
Futures markets in agricultural products have long been used by both producers and food processors to hedge against price instability. Though there have been speculative activities in the past in these commodity markets, it was limited. However, in the recent past, the low interest rate regime that was prevailing in the USA has encouraged mutual funds, hedge funds and even large pension funds to look for new places to invest to earn higher returns.
Many market participants believed that there is going to be a long-term increase in demand for most commodities due to the rapid economic growth of large countries such as India, China, and Brazil. There is some truth to this argument of a super bull market in commodities. With this belief firmly intact in their minds, these funds began to invest heavily in the futures markets which led to a sharp increase in the prices of major food and non-food commodities. Thus it became a self-fulfilling prophecy. As the price rose, more of these funds rushed into the market creating a huge bubble. The prices of some metals increased by more than five times in three years. At some point, the bubble had to burst as price increases were unsustainable given the actual demand and supply of these products.
One of the first bubbles to break was in the wheat market. After reaching a peak of $13.50 a bushel in February 2008, the price of soft red winter wheat on the Chicago Board of Trade (CBOT) is now about $5.30 per bushel. According to a BBC report, farmers responded to higher prices by planting more of the crop, which is expected to lead to a bumper harvest this year and next. The International Grains Council has projected a record world wheat crop of 645 million tonnes in 2008/9. Other commodities also have had similar downturns in the last few months. Closer to home, we have seen the dramatic drop in palm oil prices.
Thus, those who went in early made a lot of money in commodity speculation but those who joined the game late lost a lot. The sad thing is that these speculative activities have led to a sharp increase in food prices which has very little to do with real demand for food. As we shall see later, the recent drop in wholesale prices in food commodities has not been accompanied by a reduction at the level of the final consumer.
(v) Rise in price of crude petroleum
Another important reason for the increase in food prices is the hike in the price of crude petroleum. Because of this, the cost of production in the agriculture sector, especially, the cost of producing fertilisers has increased sharply. The petroleum industry is the key source of raw materials for producing the main type of fertilisers. An increase in the cost of petrol and diesel has also led to increases in the cost of storing and transporting food from producers to final consumers. It also has led to increases in the cost of processing the food. Indirectly, the increase in petroleum price also encouraged more switching of food crops for the production of ethanol and bio-diesel. All these together have had a substantial impact on food prices.
(vi) Impact of IMF/World Bank policies on supply of food in poor countries
When a country faces a severe financial crisis and it does not have sufficient financial reserves to cope with it, then it is forced to go to the IMF for financial aid. Before granting loans to the country, the IMF will insist on the implementation of a number of “free market” conditionalities one of which is the removal of subsidies for farmers in poor countries. This results in lower production of food crops and in some countries and an increase in non-food crops such as cut flowers and fibre crops. However, the poor in those countries cannot afford to buy the now higher-priced food resulting in extensive hunger and malnutrition. The irony is that the rich countries are still continuing to subsidise their already well-to-do farmers. This is a stark example of the hypocrisy and double standards that poorer countries face in international economic relationships.
(vii) Reduction in farmland acreage
Rapid urbanisation and industrialisation has led to the conversion of fertile farmland in many developing countries to be used for factories and housing. A local example is the conversion of vegetable gardening land in Tanjong Tokong in Penang Island to luxury apartments. In addition, many countries face a loss of soil fertility due to pollution from industrial activities, soil erosion and water depletion. Thus, total output of food declines just when the rising middle class tends to consume more food.
(ix) Lack of competition at the middle level of the food chain
Another important reason for the rise in food prices is the domination of the agribusiness industry by some large multinational firms. For example, three companies (Archer Daniels Midland, Cargill and Bunge) control the world’s grain trade! Monsanto has a 60 per cent share in the world seed market! Nestle, General Foods and Unilever dominate the downstream market in food products.
With the market power they have, these firms are able to pass on most if not all the increase in raw material prices to the consumer. However, when raw material prices drop, consumers do not benefit as these firms pocket the difference. They are able to do this because there is no real competition in the market place given their monopoly power. Lower food prices means lower profits for them, which they will resist! They can and do manipulate prices so that they can earn higher profits. For example, both Nestle and Unilever announced higher profits for the third quarter of this year. The reason given was higher selling prices of their products did not affect the volume of sales and thus profits increased handsomely. This is why with the recent drop in wholesale prices of commodities, we do not see a decrease in food prices at the retail level. For example, coffee beans price is down, but Nescafe price is still high! So coffee farmers get less income, but Nestle earns higher profit.
So what can be done?
We need to discuss and come up possible solutions to the food crisis both at the global and local level. Here are some observations to assist in this process..
(i) Bring down food prices
We can try to bring down the price of food by
• reducing the cost of production through subsidies for agricultural inputs.
• reducing the market power of global food companies.
• regulating commodity speculation.
• using other non-food crops on marginal land for bio-fuel.
• Encouraging and educating the public to consume less resource-intensive food
~ by eating more soya and dhal and less meat for protein.
~ by eating less processed food and substituting it with more natural food.
(ii) Increase the purchasing power of consumers
In the final analysis, a small country such as Malaysia cannot be self-sufficient in food. Therefore, it is important that citizens have the purchasing power to buy food. We can
• provide direct food aid to the poor.
• improve the human capital of and provide opportunities for every individual so that he or she can be economically more productive, and thus earn enough.
• ensure more equitable economic growth so that there is less disparity in income;
~ thus, even the less well off in such societies will have enough resources to buy food.
~ we cannot have the trickle-down economic growth model that leaves substantial number of people in many countries too poor to afford food for themselves.
(iii) Ensure that availability of adequately nutritious food is a basic human right
Food cannot be treated like any other commodity. It is one of the most basic needs for human existence. It is the responsibility of governments to ensure sufficient food for everyone. Thus, governments must have the right to regulate the appropriate markets to ensure a sufficient supply of food at reasonable prices.
Based on the discussion above, we can make the following conclusions:
• The food crisis has been caused by both structural and short-term factors.
• The right to food is a basic human right.
• The government has the important responsibility of ensuring an adequate supply of nutritious food for all citizens.
• Governments should have the right to regulate the players in the food industry.
• The public too must play a role by reducing their consumption of resource-intensive food.
Subra delivered the above as the keynote address at the Global Food Crisis: A Malaysian Response Forum.
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