Research & Ideas
Higher food prices mean downgrading that Turkey to a Chicken
Written by Gavin Chait
According to Stats SA the current inflation rate for vegetables is now 25.6%, and that of grain products – a staple for many – is 17.3%. And these rates of inflation are all increasing. These increases fall hardest on middle- to lower-income earners.
What is driving these price increases? No, not climate change ... not yet anyway. We have come out of a long period of declining food prices. The result is visibly apparent in any economic survey of agriculture. In the developed world agriculture is now only 2 – 3% of economic production. In South Africa agriculture is a "mere" 4% of total GDP.
This shrinking profitability has resulted in consolidation, the creation of super-sized farms, improved farming techniques and productivity, as well as falling employment in the sector. Farms are able to produce more but, after being caught short with oversupplies that rot in their warehouses, have reduced production. They are being caught unawares once more by changes in the nature of demand.
The long boom internationally has seen almost a billion people come out of poverty across Asia and Latin America over the past decade. As people become wealthier their diets change. For starters, they eat a lot more meat and protein. It takes 8 kg of grain to produce 1 kg of beef. This massive increase in demand for grain has fed through into higher prices.
The same is true of higher prices for fruits and green leafy vegetables which have become more popular as the wealthy battle something that the poor never worry about: obesity.
Higher food prices will translate into increased investment into agriculture and food prices will, eventually, stabilise and come down. There is a threat, though, that prevents this: subsidies to farmers.
The rise in food prices has also taken place against the backdrop of rising subsidies to farmers to sell their crops for the production of biofuels. Countries (such as the US) with large maize industries have promoted the conversion of corn-starch to sugar and, thence, to ethanol. The choice, mostly political, is for an incredibly inefficient way in which to produce biofuel.
Monsanto, in a peculiar statement, has declared that the government's decision to not include maize as feedstock for biofuels will hurt farmers and undermine the land reform process. Subsidies are overt protectionism for incumbents. It is spurious – in the middle of a boom for farmers – to declare that a lack of subsidies will derail investment.
Subsidies pervert the normal process of supply and demand. Since larger farms earn larger subsidies, and certain types of products earn larger subsidies still, this encourages consolidation and the over-production of products that may not necessarily have a market. Producing maize for biofuels, when sugar is infinitely better, is one such distortion.
Paying farmers a premium if they use their products for biofuels will have the perverse result of increasing food prices. Using tax-payers' money to inflate prices is hardly sound economic policy.
Government, as far as biofuels is concerned, has made the right decision by excluding maize. If biofuels become a lucrative market then agricultural investment will ensure the supply of sufficient feedstock for processing, as well as for food. Price rises usually result in investment; it is price plunges that are bad for job creation.
Subsidies and protectionist legislation run the risk of deflating a tremendous opportunity for the poor as rising prices stimulate renewed agricultural investment and, with it, large numbers of new jobs.
If subsidies are required then they should be short-term and targeted directly at the poor through food vouchers. These, too, have their consequences. The subsidised "free" electricity given to all is another reason that energy demand has outstripped supply.
The result, as we all experience, is regular shortages.
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