Seeking reasons for the food price rise

The euphoria about Mongolia becoming the Qatar of North Asia, about GDP rising three-fold in a decade and a half, about per capita income rising faster than in Shanghai, and many such predictions of overwhelming prosperity appear to have taken the mind of the people away from a threat more immediate. If the media have written about rising global food prices, I have missed it. To my mind, this is a matter of great concern for a country where wealth may very well be on its way, but the way is still long.

A UN report says the commodity price of key foods rose again in February, making it the eighth successive month of increases. The worst effects of the current spike in agriculture inflation also has the potential for civil unrest, observers say. The UN Food & Agriculture Organisation’s index of global food prices has risen 40 per cent since June and is 5 per cent higher than its June 2008 peak, during the height of a global food crisis that sparked riots in countries from Egypt to Bangladesh.  The ancient Romans were wise enough to name Mars as the god of both war and agriculture.
It is not always easy for a foreigner to predict market behaviour in Mongolia, or, at times, to understand it. One is not a consumer in the way an ordinary Mongolian is, and there are various Government practices that do not permit supply and demand to sort out things between themselves.  

There are two obvious effects in which increases in the cost of food affect poor consumers. First,  changes in the price of food relative to other goods will lead to a decrease in demand for food. Second, an increase in the price of food reduces the remaining budget available for purchases of all goods. This much is true for all consumers, rich and poor. (2003 data showed that Mongolian households typically devoted half of their total, monetary and nonmonetary, income to food). But then comes one of the oldest and most robust of empirical observations regarding consumer demand in economics: Engel’s Law, derived from a 19th-century analysis of household budgets of working-class Belgians.

Very simply put, the law says, “The poorer the family, the greater the proportion of its total
expenditure it must devote to the provision of food.” The size of the income will be larger for poor consumers than for rich ones. At very low levels of income, when a consumer is already eating just enough to survive, the threat of starvation (= annihilation) limits his ability to substitute away from food and so increases in food prices have a larger effect on poor households. In 1995, Mongolian households would use almost 50 percent of their monetary income to buy food, whereas in 2007, this share was down to 35 percent. This does not imply that food price increases have no impact on the household consumption basket; they do, and the urban poor bear most of the shock.

The World Bank in Mongolia produced some masterly analyses and reports on the 2008 inflation and its impact here and I hope policy makers have studied these. Before the bright day can dawn, there are the hours of the night to pass, and I hope increased domestic agricultural production and no constraints on the supply of meat will not make life too difficult here.  As the IMF report says, “Policymakers – particularly in emerging and developing economies – will likely have to continue confronting the challenges posed by food prices that are both higher and more volatile than the world has been used to.”

I would like to talk about something else in the report. It argues time and again that the main reason for the sharp rise in agricultural commodities prices is a structural shift in demand.
This line of thinking is not new. When the food price upsurge occurred in 2008, then US President George Bush attributed it to the improving living standards in India and China. As people become better off, their diet gets diversified away from the direct consumption of foodgrains towards animal products like chicken and meat. But since these products themselves use grains intensively as feed, the direct and indirect consumption of foodgrains per capita (including also as processed food) increases with per capita income. Bush’s argument was that the rapid growth in per capita incomes in India and China created excess demand pressures in the world foodgrains market, causing the price rise.

Nothing could be farther from the truth. Per capita foodgrain absorption, taking direct and indirect absorption together, has declined in India since the beginning of economic “liberalisation”, first gently and of late precipitously, so much so that the level in 2008 itself was lower than in any year after 1953. In China too, there was a sharp decline in per capita total absorption of foodgrains between 1996 and 2003. It improved thereafter but even by 2005 had not reached the 1996 level; it could not have jumped suddenly in 2008. Since the population growth in both these countries has come down substantially, even their absolute absorption in 2008 could not have been much higher than, say, in the mid-1990s. It is not the increase in their demand, therefore, that explains the 2008-11 food inflation.

Speculation can no doubt conjure up an inflationary upsurge out of thin air, but it typically operates on an underlying demand-supply imbalance, accentuating its consequences. We, therefore, have to look at the underlying output and demand trends; and here we come across two surprising facts.

First, per capita cereal output, and also foodgrains output, has declined significantly in absolute terms for the world as a whole since the 1980s. The average annual per capita cereal output for the quinquennium 1980-85 was 335 kg; for 2000-05 it was 310 kg. Since this decline in output has also meant decline in consumption, hunger in the world has been on the increase long before the price upsurge of 2008. Or, putting it differently, the world food crisis is a matter not of the last two years but of the last two decades or more.

The second fact is even more startling. Since per capita income in the world economy has been going up, and since, therefore, the demand for foodgrains in real terms should have been going up, the decline in per capita foodgrains output should have meant a rise in foodgrains price after the 1980s, relative, say, to the price of manufactured goods. But we find that cereal price relative to manufactured goods declined by 46 percent between 1980 and 2000. Indeed, between 1980 and 2008, the year of price upsurge, foodgrains prices in general fell relative to those of manufactured goods, even though per capita foodgrains output declined in absolute terms.

How could this happen? The answer is simple: a massive squeeze on the purchasing power imposed on the working population all over the world, and especially in the third world, by the universal pursuit of “neo-liberal” policies. These impose an income deflation not just on workers but on peasants, petty producers, and agricultural workers in several ways. The most significant of these are: through cuts in government expenditure on health, education and welfare (which forces them to access more expensive private facilities); through the unemployment generated by imports out-competing domestic production and by the changing demand-pattern of the increasingly affluent elite (that is, corporate retail outlets displacing petty traders); and through increasing corporate and multinational corporations’ control over the distribution of peasants’ and petty producers’ output (which reduces their share in the final price). Most of the Mongolian policy making elite appear to be committed to pursuing this policy, so things could get much worse for many before they do get better for some.