The economics of food

Hello, I’m Steve McCorriston, professor of agriculture economics at Exeter. I’m going to explain how food prices behave, the role that governments play, and what this means for consumers. Food prices behave differently from the price of other goods that we consume. In the long run, there are underlying factors such as small increase in demand as income increases, and new technologies that improve productivity, that may cause a lot of prices for food to decline relative to the price of other goods that we– people consume. But there is much research in these issues. In the short run, if prices are left to themselves, they are highly changeable and subject to occasional spikes.

The events of 2007 to 2008, and 2011 on world markets, are a good example of this. In essence, prices increased sharply due to shortfalls in production. But multiple factors were involved in causing the spikes in world prices. This highlights how complex world food markets are. First, there were global production shortfalls due to droughts and other climate related crop failures. But this shortfalls on their own were not sufficient to explain the spikes. Second, owing to the relative price between food, food and fuel, a considerable proportion of agricultural land had been diverted to satisfy the demand for biofuels. High oil prices also mattered in this food fuel price trade off, and high oil prices also increased the cost of food production.

Through, for example, increasing the cost of fertilizer. Next, since agricultural commodities are storeable, at least for a short period, when stocks are high they could provide security against production shortfalls. But due to world prices being low over the 2000s, there was less incentive to hold stocks, and the buffer against shortfalls was not there. As if this is not bad enough, the linkages between commodity and financial markets cause concern. There is much research on whether financial markets caused the spike, or just responded to it. Finally, how governments responded to these world price spikes also mattered. Some leading exporting countries imposed export bans, and importing countries lowered the cost of imports. This is because the price of food is so politically sensitive.

Many countries in face of spikes in world prices in 2007 and ‘08, and 2011, experienced food riots and social unrest. Reflecting the political sensitivity around foods and the characteristics of food prices as noted earlier– they can decline over time but subject to short run volatility and spikes– food prices are also heavily influenced by government interventions. To generalize, governments in high income countries fix markets to ensure higher prices to farmers for the food they produce. This protects farmers from the volatility of world markets, with governments effectively subsidizing farmers when world market prices fall below guaranteed prices. A long standing example of this is the common agricultural policy in Europe, though many other developed countries have followed similar policies.

In low income countries, the reverse is more common. Governments drive down domestic food prices to try and ensure that poverty stricken consumers access affordable food. They also place heavy taxes on exports to world markets, providing a source of revenue for cash strapped governments. While maintaining high price in developed countries is often expensive, in lower income countries keeping prices low also has consequences. The government has to subsidize low food prices, and farmers have less incentive to produce. In some cases, maintaining low prices leads to shortages. A recent example was Venezuela. Food prices were cheap, but there was nothing on the supermarket shelves.

Given that food prices are so politically sensitive, with many governments responding to these concerns by getting involved in agriculture and food markets, but in different ways, these interventions have led to world trade in agriculture food products being the most distorted of all sectors in the world economy. And it’s a major reason why global trade liberalization in recent years has been so difficult. So you can see that world markets and governments are not operating sustainably, and that food securities suffers as a result. So what should be done to address these problems? Read the article that follows this video to find out more.