July 18, 2022 articles
Food Security: Assessing the Rising Food Prices Crisis
What value do you place on a bowl of rice? According to Numbeo.com, RM0.52 will buy you 100 grams of rice. What is the inherent value of this bowl of rice though and how would you quantify it? A single bowl of rice is good for a lunch or dinner meal, perhaps together with a nice meat dish such as chicken or fish and paired with a vegetable option like kangkong or bok choy. Imagine though, just for a second, that meat and vegetables were unavailable for some reason, perhaps due to a shortage caused by a freak weather incident, and that rice is the only available food option in the area where you live. Now imagine that instead of RM 0.52 for 100 grams of rice, the price is RM 5.20. A standard bowl of rice amounts to about 300 grams, making this bowl of rice RM 15.60. Would you pay RM15.60 for a bowl of rice?
As you are reading this, you are probably well aware that rising food prices are a major global economic concern at the moment with nations struggling to cope with inflationary pressures that are threatening to jeopardise global economic stability. In this article, we’ll look at some of the main causes of this present price hike, its effect on consumers, businesses and countries, the present trajectory of prices with all contributing factors considered and what might be some possible solutions for returning prices to relative stability.
To understand why prices have been steadily increasing, a simple understanding of supply and demand is necessary. In a free market system, when supply of a particular good falls below demand, the price of that good will increase in order to drive up supply by encouraging producers to produce more of the good in question. Similarly, when demand for a particular commodity falls below supply, prices fall to avoid surplus production and the market corrects itself to achieve the appropriate balance.
Food price inflation has occurred multiple times during global economic history and in those circumstances, the self-correcting nature of the free market always brought prices back to an acceptable equilibrium. In 2008, food prices rose by 5.8% due to the collapse of the subprime mortgage market in which commodity speculators, rising oil prices and massive demand from China and India caused prices to rise. The Avian flu of 2015 caused the price of food to rise by 1.9% as alternatives to poultry rose dramatically (beef and veal rose by 7.2% while egg prices rose by 17.8%).
According to FAO Food Price Index, which is the measure of the monthly change in food prices for a basket of food commodities, the FFPI averaged at 154.2 points in June 2022, down 3.7 points from May, making it the third consecutive month of decline. However the index value remains 29 points or 23.1% higher than its value from one year ago. The question remains as to what has been causing this steady increase in food prices over the last two to three years.
Source: FAOSTAT
The recent Covid pandemic and the lockdowns that occurred as a result of it caused a major disruption to all commercial activity, as companies were forced to roll back operations and practices to comply with stringent quarantine orders, the multiple nationwide lockdowns that took place in various countries, the closing of international borders to prevent viral spread, and the general disruption to productivity affecting all except designated essential services like healthcare and the food industry. The pandemic caused business disruptions on an unprecedented level and in a globalised world, the economic impact has been hard felt. Agricultural produce was left to sit and rot, goods were stuck in transit at ports around the world and factories were forced to shut down due to operational restrictions and the unavailability of labour.
As if to pour gasoline on a dying flame, just when the world seemed to have managed to get a firm hold over the pandemic crisis and commercial and social activities were returning to a relative state of normalcy, the Russian-Ukrainian conflict erupted on the 24th of February of this year, and has further exacerbated the supply chain dilemma. Russia is a major exporter of oil and fertiliser. In 2021, Russian exports of oil amounted to US $211.5 billion (43% of total exports) while exports of fertiliser amounted to US2.5 billion in 2021, constituting 2.5% of its total exports. The former Soviet nation of Ukraine, on the other hand, happens to be one of the world’s largest suppliers of wheat (US$ 11.8 billion or 18% of total exports in 2021).
Oil and gas are the fundamental building blocks of modern commercial activity. Oil is used in the production of everything from energy combustion to the production of food items and so its impact on the logistics, manufacturing, construction and agricultural industries, among others, during such a supply crisis is felt in all corners of the globe. Russia is the 8th largest producer of oil and the 4th larger producer of gas, responsible for 4.8% and 8% of global production respectively. With the war appearing only to further escalate in due course, access to Russian oil and gas resources is likely to become increasingly limited, driving international prices up. A rise in the price of oil and gas means a rise in the price of petrol, food packaging, household heating, airfares, fertiliser and even a loaf of bread.
Source: The Conversation
Fertiliser is a primary component of agricultural crop cultivation, providing nutrients which grow and nourish pastures and crops. In January of this year, Russian fertiliser exports were purchased by Brazil ($398 million), Finland ($126 million), Estonia ($110 million), the United States ($100 million), and China ($67.8 million). In 2020, Ukraine exported wheat to Egypt ($1.22 billion), Indonesia ($544 million), Pakistan ($496 million), Bangladesh ($295 million), and Lebanon ($239 million).
Wheat or cereal is an essential ingredient in the production of bread, noodles, pasta, sauces and confectionery and the war prevents Ukrainian farmers from working their fields to cultivate cereal. With respect to Russian fertiliser, while a number of countries have boldly attempted to boycott Russian products and opt for alternative sources, Russia has threatened to respond to sanctions imposed by the U.S. and other countries by holding its resources hostage and effectively placing a knife against the neck of global economic stability.
Other factors have also contributed to the present rise in food prices. A major contributor is the lack of labour that has resulted from the Covid pandemic which involves nuanced problems relating to immigration policy and the treatment of foreign workers. During the pandemic, large numbers of migrant workers returned to their home countries to be with family and loved ones due to workplace restrictions. This is notwithstanding the many who became ill and were simply unable to work. The forced change in working patterns in the form of remote working and working from home also caused a shift in mindset amongst employees. While many grappled with mental health related issues as a result of the drastic lifestyle that the pandemic forced upon them (two thirds of millennials cited mental health concerns as a reason for quitting their jobs in 2021), others experienced a shift in expectations with regards to how they wished to approach their work-lifestyle balance. Greater flexibility in working options including remote working, malleable schedules, and more paid time off have become primary negotiation points for many post pandemic employees.
In addition to the above, immigration complications have become another major disruptive factor to the supply of labour. Migrant workers constitute about 5% of the global workforce and countries like the United States, Saudi Arabia, the United Arab Emirates, Canada, Germany and the United Kingdom are heavily reliant on them to meet production targets. Even here in Malaysia, the services, construction and agriculture sectors in particular employ a large number of migrant workers. However, due to the health crisis, countries have imposed stricter policies on migration to control the spread of the virus, making it more difficult for migrant workers to obtain work visas in many countries. The United Kingdom has been particularly affected in this regard, having to face the dual impact of Brexit and Covid which caused immigration rates to fall by 90%. Simply put, there aren’t enough people working the fields or manning the conveyor belts and so, once again, supply chain disruptions have been compounded.
Other, more opaque factors have also contributed to supply complications and the corresponding rise in food prices. Climate change and rising global temperatures have impacted the weather in drastic ways, causing air temperatures to increase, rainfall to be infrequent, and erratic heavy rains to cause floods which spoil crops. Another contributing factor is food waste. The lost consumer surplus that arises from discarded excess food causes food prices to go up. Subsequently the increase in food prices means that lower income earning groups receive smaller quantities of food at higher prices, leading to malnutrition and other health related concerns. This then causes them to spend more on healthcare and become less productive due to malnutrition and food insecurity, an unfortunate domino effect that can create an ongoing negative feedback loop.
The question on everyone’s mind is whether food prices will continue to increase, remain roughly at the same level, or come down in the months to follow. This will depend on many of the factors mentioned above. With respect to Covid, while the latest Omicron variant is more infectious than the preceding Delta variant, it is also less deadly, and according to a study by Mckinsey and Company, if Omicron continues to remains as the dominant viral variant, then US hospitalisations are likely to remain low. Nevertheless, there is also a marginal possibility that a new variant may emerge and if this comes to pass, then we will likely see a repeat of economic and social disruptions resurface once again.
The Russo-Ukrainian conflict on the other hand poses a slightly more complex problem. While pundits agree the war is unlikely to be a long-term affair and that the most likely outcome would be that the two sides reach a reasonable compromise in the face of impossible-to-sustain costs, the general consensus is that an immediate ceasefire is almost completely out of the question. Russian forces continue to make gradual advances on Ukrainian territories, putting the pressure on Ukraine to sustain their defensive position for as long as possible or face losing crucial areas such as the Black Sea trading ports, the Donbas industrial and mining area, as well as important agricultural land based resources.
Furthermore, speculators have posited that Russia could in all likelihood apply a strategy of attrition in which it intermittently agrees to ceasefires and draws the conflict out into low intensity battles which slowly whittling Ukrainian resources down to nothing. Such a scenario would terminally wound hopes of achieving a peaceful compromise in that region and would be a persistent thorn in the side of global trade systems for some time to come.
Comparatively, however, it is the less overtly obvious effects of climate change that poses the greatest threat to global food security concerns. Projected trends suggest that temperatures will likely continue to increase over time and, unless aggressive greenhouse gas reduction practices are implemented, we will likely breach the 3 degree increment mark by the year 2100, which would have a devastating impact on global weather patterns and severely hinder productive agricultural practices on a level that could well be entirely irreversible.
Source: FAOSTAT
The World Bank estimates that food prices will likely rise by about 20% this year before easing in 2030. Global wheat supplies are expected to decline by 1.5% going into 2023 as a result of lower projected crop yields in Australia, Argentina and Ukraine. Similarly, Maize supplies are expected to fall due to the tightening of production capabilities in Ukraine and the United States.
Energy prices, particularly coal and natural gas, are expected to rise in 2022 and the subsequent impact on fertiliser prices will further exacerbate existing inflationary pressure. This, combined with the potential for Russia to weaponise its resources, could drive food prices up in 2023.
Domestic food price inflation perpetuates in most regions due to the above factors while the depreciation of certain currencies and the increase in production costs have contributed respectively to inflationary increments. The World Bank states that “the net effect is elevated food price inflation in several developing economies, especially in Sub-Saharan Africa (up 11% in 2022Q1 compared to earlier) and the Europe and Central Asia region (10%).
Source: The World Bank, FAOSTAT
While the above projections indicate that food prices are unlikely to stabilise in the near future, there are measures that can be put in place to prevent further rises in price and ensure better food security. Placing restrictions on food exports and setting limits on food prices is one option that is available. Such policies have been put in place by countries like Argentina, China, India, Indonesia, Venezuela and Vietnam. China has banned rice and maize exports, India has banned milk powder exports and Ethiopia has banned exports of major cereals. Another approach is to reduce restrictions on imports. Morocco has cut tariffs on wheat imports from 130% to 2.5% while Nigeria cut tariffs on wheat imports from 130% to just 2.7%.
It should be noted that although placing price ceilings and adjusting trade policies can reduce the financial burden on consumers in the short run, it can also have the effect of making international markets smaller and more volatile. Price controls can have the unwanted effect of disincentivising farmers, who may choose to produce less due to lower prospects of profitability. In order for food prices to come down, agricultural production will need to increase (recall that supply needs to meet demand), however a price ceiling means farmers will not be encouraged to produce more.
Price ceilings also unfairly benefit the wealthy who should be using their higher purchasing power to rebalance the economy. Such reactive trade policies can also damage the integrity of international markets. Farmers are again given the short end of the stick as their goods are prevented from reaching the wider marketplace while trade restrictions can be harmful to the economies of certain countries. Additionally, such policies can further compound existing imbalances in international trade which unfairly prejudice wealthier nations against poorer ones while also pitting developing nations against one another.
Effective policies which address the clear and present concerns brought about by increased food prices and corresponding food insecurity need to be applied. A policy brief by the International Food Policy Research Institute has put forward a number of short term and long term policy suggestions which seek to deal with the “causes and consequences of high food prices”.
It suggests that in the short term, social protection programs in the form of food or income transfers as well as nutrition programs focused on early childhood should be put in place by the governments of developing nations. Such programs will be aimed at alleviating the food security burden on the most vulnerable communities in both urban and rural areas who are directly and severely impacted by rising food prices as they are net food buyers who are generally poorly connected to markets. Countries like India and South Africa have such programs already in place and can simply extend them to a wider base while countries which do not will need to rapidly develop aid policies of this kind to have an immediate effect on present food prices.
The IFPRI brief also suggests that developed countries should remove their subsidies on domestically produced biofuel and open their markets to biofuel exporters like Brasil. Biofuel subsidies aimed at alleviating the burden of rising prices on local biofuel crop cultivators have distorted the world food market and also acted as an implicit tax on staple foods, which poorer consumers depend on the most. The IFPRI states that farmers should make decisions on what to cultivate based on international market prices for commodities and not based on which crops are subsidised.
Source: OECD
As mentioned above, trade barriers are another aspect that need to be addressed and the IFPRI believe that developed nations should remove them altogether. This would allow developing nations to compete under more equal market conditions and give farmers the nudge they need to produce agricultural crops which take advantage of the higher prices and profitability potential that come with the organic mechanisms of the free market.
Finally, the governments of developing nations should pour investments into the improvement of science, technology and infrastructure development in rural and agricultural communities. For too long, these communities have been neglected, having to make do with poorly constructed physical networks (roads, bridges, railways), energy resources and communications infrastructure.
Inadequate storage facilities, processing capabilities and access to science and technology innovations which could boost crop health and production yields have kept these stewards of global agriculture from achieving their full potential and claiming a reasonable share in the economics of their trade. It is high time that we feed the hands that feed the world and allow public investment and aid to reach these rural parts of developing countries.
Feeding the less fortunate members of society has always been part of our collective sociopolitical and socioeconomic narrative, however global economic shocks in the form of a pandemic, international warfare and climate change have brought the challenges of the marginalised to the doorstep of all members of the global community. While it may be possible for us to depend on the forces of the free market to adjust over time and bring food prices back down to normal levels, the risk of doing so could well be more than any country can bear, particularly those developing nations which face higher risks. Deliberate action must therefore be taken to put measures in place which protect those most affected by this food crisis while safeguarding the interests of all in the long term.
While the circumstances we are faced with at present may appear daunting, this writer finds it encouraging that members of the global food industry are continuing to make efforts to uncover innovative and sustainable ways for meeting the food and nutritional needs of our growing planetary population. At a recent summit on global food security and sustainability held in Singapore, scientists, business members and government representatives came together to consider solutions which could reshape food production in the years to come. Meats grown from plant based sources promise to wean us of our dependency on cattle, improving general human health while potentially impacting climate change in a major way by taking methane emissions out of the equation. A steadily growing insect market offers a more sustainable and nutritious feed stock option and could even become a viable food resource for human consumption in the not so distant future.
Perhaps most encouraging is that stakeholders at key levels of the supply chain are discussing practical means for improving rural agricultural practices using better approaches to technology transition, well planned incentive programs and a co-creation mindset that encourages transparency and cooperation. The message seems to be that although we live in a time of unprecedented challenges, we are an increasingly connected and increasingly globalising world that allows us to cooperate using technology in equally unprecedented ways.
By leveraging on our interconnectedness and ensuring that we take full advantage of collective information and resources, we can build the framework for a globally networked food system that is productive, healthy and resilient for all future generations to come.