Economics Q&A: What are some of the benefits and drawbacks of a period of rising world food prices

A sustained rise in the global prices of foodstuffs is called agflation. As our chart below shows, the Economist’s index of global food prices has shown high volatility in recent years, there have been two sizeable and steep increases in food prices and a downturn in the wake of the 2009 global recession. And now the United Nations Index of Food Prices has now risen back above levels last seen in 2008 at a record high.

A period of rising food prices affects both the demand and supply-side of an economy. And the impact will depend on many factors including:

(i) The patterns of trade for one or more countries e.g. whether a country is a net exporter or importer of food (ii) The importance of food production and exports in economic activity e.g. the share of value added contributed by farming, food processing and other food-related industries (iii) Average incomes for a given country / region and the percentage of incomes that must be spent on food to ensure a modest but adequate lifestyle (iv) Possible effects of rising food prices on variables such as inflation, interest rates and the exchange rate

Benefits of rising prices

(i) Rising food prices will tend to help farmers and rural areas where a high share of income and employment are linked to prices and profits in the food industry. Higher prices will stimulate food production although the price elasticity of supply for any one foodstuff is likely to be low at least in the short term - poorer farmers may lack the access to fresh credit and inputs needed to respond in the short term to the incentive of higher prices

(ii) Higher food prices are incentives to produce more local food - seed and fertilizer companies will do well

(iii) The search for higher food yields may also benefit multinational agricultural biotechnology corporations such as Monsanto and producers of farming capital equipment

(iv) An increase in food prices helps those countries which export food because (ceteris paribus) it causes a movement in the terms of trade in their favour. A given volume of exports sold internationally will now buy more imports - and for many lower-income countries this provides an opportunity to export food and import essential raw materials, components and technology.

(v) A sustained period of higher prices may also cause socially beneficial changes in consumer behaviour in richer advanced countries. Cheap food over a lengthy period of time can result in an over-consumption of food and drink, especially unhealthy food and alcohol with adverse impacts on health and well-being. Over-consumption can also be damaging to the environment through rising mountains of food waste and greenhouse gas emissions from the farming sector

Costs / dangers from high food prices

(i) Expensive food has a direct cost to lower income earners many of whom are unable to increase their wages to offset the rising cost of living. This can lead to reduction in real incomes, a worsening of diets and growing problems of malnutrition.

(ii) Food importers and food processors will see a rise in their variable costs - for countries that are large food importers and this will bring about an inward shift of the short run aggregate supply curve and contribute to inflationary pressure.

(iii) The poorest subsistence farmers who buy additional food at higher prices will be hurt - most rural households are net consumers of food who have to pay high food prices

(iv) Poor people, especially in urban areas, suffer due to rising food prices - this can be seen in many countries around the world both rich and poor. In the United States millions of low income families are now partially reliant on food stamps

(v) The World Bank has claimed that high food prices have caused a sharp rise in relative poverty for millions of poor families across the world. This leads to an increase in the cost of government welfare programmes designed to mitigate the effects - for example school feeding programmes and emergency food aid schemes. In 2008 the aid agency Oxfam said, more than 900 million people faced starvation because of soaring prices

(vi) To ensure better domestic supplies for their own population, many food exporters have opted to impose export taxes, minimum prices, quotas and outright bans on exports of rice and wheat

(vii) Higher food prices do not necessarily lead to stronger revenues and profits for the world’s poorest farmers. Much of the gains flows to multinational food businesses with huge monopsony power in their chosen markets. And for others, the gains of higher prices have been eroded by increased costs of diesel fuel, fertilizer, pesticides, herbicides, seeds, transportation, increased volatility from flooding, drought and decreased yields from soil degradation

Essay questions asking you to analyses and then evaluate the impact of rising food prices can be approached in different ways. In my planned answer above there seems to be skew of arguments that food prices have greater drawbacks than benefits. Is this the conventional wisdom among economists, policy-makers, charities and international organisations? Should it be challenged?

Remember to make use of whatever stimulus material that appears with the question - for example some supporting data from charts and tables.

Most of all allow enough time to write a meaningful conclusion at the end, avoiding repetition of what has already been included in the answer. Try to say something fresh; look for a strong evaluative conclusion. Perhaps mention short run and long run effects? Or emphasise the importance of higher global prices for food transmitting themselves to local markets to benefit local farmers and people employed in farming communities.

BBC news video on global food prices

Guardian: World food prices enter ‘danger territory’ to reach record high