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Challenges posed by high food prices

by BuaNews Online
on 03 Jul 2008
BuaNews Online
BuaNews Online

While food prices have been stable or have fallen in relation to our incomes for much of the past thirty years, the past two years have indicated clearly that the era of cheap food is over. Rising food prices place a severe burden on the poor and government must intervene to support the needy in facing higher food prices. However, higher food prices also provide an opportunity to profit from producing more food for our people.

n this article, Finance Minister Trevor Manuel looks at the changes driving up food prices, interrogates some of the key trends in food prices in South Africa and concludes with a discussion of policy options that government could consider here at home.

There are six principle reasons for higher food prices:

* Agricultural subsidies in developed countries have kept prices too low, forcing many people especially in Africa to stop producing food and relying on cheap imported food. This practice has damaged the food supply chain.

* Partly due to global climate change, some key food producing regions and nations (notably Central Asia, Australia and New Zealand) are suffering from severe droughts.

* Rising incomes in China and India have resulted in more food being consumed and in particular, more meat. Meat production also uses feed stocks such as maize and soybeans which in turn push up the price of these products.

* To cope with rising oil prices, increased energy insecurity and the effect that burning fossil fuels have on the environment, the world has moved to produce an ever-growing proportion of fuels from agricultural products. In a perverse twist, in an attempt to save the planet, developed countries have sought to encourage the production of biofuels from agricultural crops, thereby forcing the poor to compete with cars for their food.

* High oil prices have pushed up the price of fuel and fertiliser which are critical inputs into the food production process. For example, about 36 per cent of the cost of producing a loaf of bread comes from the price of petrol.

* It is also evident that as it is the case with other products that can be traded electronically, speculators have added to the volatility of prices by betting that these commodities will continue rising.

All of these factors, both supply and demand, have contributed to the steepest rise in food prices since the 1970s. The economist food price index, which goes back to 1850 indicates that food prices were roughly stable in nominal terms from 1850 to 1970. In 1972, during the last oil price shock, when oil prices increased tenfold from US$3.50 a barrel to US$35, food prices increased sharply. Since the early 1970s following the oil price shock, food prices continued their downward trend, falling in real terms by about 75 per cent. Since 2004, food prices globally have increased by about 100% with most of that increase occurring in the past eight to twelve months.

Most of the world survives on three main staples - maize, wheat and rice. While the price of all three have increased, the price of rice has risen the most, followed by wheat with maize rising by a smaller factor. Dramatic steps taken by some countries to limit exports of rice and wheat have added further pressure to food prices, especially for countries that import these products. The shortage of rice has been one of the starkest indications yet of the global food crisis with Wal-Mart in the United States resorting to rationing for the first time since the Second World War.

Rising food prices do have benefits. They encourage food production and make it easier for African countries to produce and export more food. Countries where a high proportion of the poor live in rural areas may well benefit if they are able to increase production. Investment in the infrastructure, technology and support systems required to increase production are critical. In general, urban dwellers, including poor urbanites, are negatively affected by rising food prices.

In South Africa where the poor are not large producers of food, the big net gainers are not the poor (either in rural or urban areas). As a result of high levels of subsidies in developed countries and artificially low prices for decades, many African countries have seen their agricultural sectors decline and have become net importers. Now that food prices are rising, African countries either have to respond quickly to increase production or they face significant import bills.

South Africa has not been immune to these global developments. Food prices have increased rapidly here too. In the past year to January, the price of milk has gone up by 32%, brown bread 19%, mealie meal 22%, samp 23%, rice 24% and breakfast oats 27%. The food component of the consumer price index increased by 15% in the last year.

The poorest half of our population spends well over a quarter of their incomes on food. Food price increases of this magnitude have severe implications for the poor. As food prices rise, the proportion of income that the poor spend on food is likely to rise, squeezing out other spending. After solid progress in the past five years to roll back hunger and reduce poverty, these trends in food prices could potentially reverse these gains.

There is some positive news on the horizon for South Africans. Due to a poor rainfall season in 2006/07, the maize crop was particularly poor at about 7 million tons. We consume about 9 million tons a year. Due to improved rainfall in 2007/08 and higher prices, this season's crop is much better, at almost 11 millions tons. This surplus is helping to lower the price of some foods, while bread, milk and meat prices are still rising.

The maize story is a good case study for how agricultural markets work and provides some lessons for the country. In general, if we are a net exporter, we are less impacted upon by global price changes than if we are a net importer. The lesson is simply that if we produce more, prices are likely to fall or grow by less. It is a cause for concern that South Africa has become a net food importer for products such as wheat, rice and meat. For much of the past decade, too little policy attention has been focused on how we could increase agricultural production. This goes for both large-scale commercial farms and for small-scale subsistence farmers. Higher prices provide the opportunity for our country to feed our people and to earn export revenue by increasing production.

It is true that parts of our food supply chains are uncompetitive. The competition authorities have dealt with producers of bread and are investigating a number of other sectors including the dairy chain. It is important that our competition authorities take firm action against people and companies who distort prices for short term gain at the expense of the poor. Nevertheless, it is important to understand that while government must step up efforts to improve competition in the food industry, the reasons for the present increase in prices have little to do with poor competition in the industry.

Public policy responses to rising food prices should focus on two main areas - income support to the most vulnerable and efforts to increase production. The social relief of distress grant is a temporary social grant aimed at dealing with precisely these types of emergencies. Government could also increase the coverage of school feeding schemes and increase support to Non Governmental Organisations and Community Based Organisations that run soup kitchens and similar feeding schemes. Continuing efforts to broaden the social security net by raising the threshold on means tests and by extending the grant will further assist the poor to mitigate the effects of rising food prices.

On the production side, the legislative framework is in place for small-scale farmer co-ops to club together to procure services jointly, to purchase tractors or fertiliser and to get their products to markets. Government can do more in rural areas to support small scale farmers. Through the use of Community Development Workers, district municipalities can help organise farmers into such co-ops and these workers can assist in the distribution of starter packs (comprising of seed, some implements and fertiliser). Communities that are organised can actually benefit from rising prices by increasing production.

On the commercial side, while production has increased this season, it is concerning that investment over a long period in the commercial agricultural sector has fallen. It is important to get a better understanding of why farmers are not investing to boost production.

The two policy options that are not recommended at this point in time are price controls and direct food subsidies. Price controls are likely to work in the short term but they are likely to impact negatively on the supply response resulting in higher prices in the future. As the electricity experience shows us, when prices are kept artificially low, no one invests to expand production. Subsidising food is a feasible option but has a number of disadvantages including the likelihood that the subsidy is captured somewhere along the supply chain before the food reaches the consumer. Ensuring that the poor or the end user benefits from a subsidy is neither easy nor straightforward.

In conclusion, rising food prices pose an increased burden on the poor. It is correct that government acts to intervene in the interest of the poor to ensure that the poorest of the poor are able to survive. More importantly, it is also important for our communities to get organised, to produce some of their own food.

Policy interventions must be well targeted and appropriate, taking both short-term needs and longer term requirements of food security into account. Managed well, high food prices can be a boon for South Africa, but the impact on the poor must be a key feature of government policy.


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