The challenge of feeding the poor
Considering that food is so central to our survival and so critical to any concept of well-being, it is remarkable that food has scarcely featured on the agenda of global organisations from the United Nations to the World Bank. Food and food prices rarely featured in news reports or in editorials. The reason for this lack of prominence is simply that, except for localised problems such as famines or droughts or wars (which often coincide), the world has generally been able to feed itself.
At times, surpluses in some parts of the world have had to be diverted to cover shortages in another part of the world. Globalised food markets, better crop management, the agrarian revolution in India and agricultural reforms in China have generally meant that food production increased at least in line with population growth. Subsidies in developed countries meant that, generally, there was an overproduction of food with significant surpluses dumped onto the markets of poorer countries. The effect has been falling food prices for much of the past 50 years. Dramatic changes over the past few years have seen food prices rise considerably in real terms with the poorest of the poor battling to afford even the most basic sustenance. The era of cheap food is over.
This article looks at the reasons, causes and consequences of rising food prices globally, discusses 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 to help alleviate this burden facing our people.
There are both supply and demand reasons for the present rise in food prices. The supply disruptions to global food supply include severe droughts in Australia and Central Asia (two prominent food exporting regions), declining water quality in China and variable rainfall in many other parts of the world, partly explained by global climate change. While the localised droughts may abate, the latter two factors are likely to persist and could even possibly worsen in the decades ahead. Agricultural supply is also impacted upon by rising input costs. In particular, rising fuel and fertiliser prices have increased the costs of farming. Since transport costs are now a significant portion of the input price of basic food stuffs, higher oil prices have fed directly into either reducing production or increasing prices at the shop level.
Even though the world's population growth continues to fall, increased wealth and rising incomes, particularly in Asia, have resulted in increased consumption of food, and meat in particular. Meat requires feed-stocks, which are often the same products, or derivatives thereof, of the staple diets for most people in the world. Global demand for food is now increasing faster than population growth, and faster than in previous periods in our history.
To cope with rising oil prices, increased energy insecurity and the effect that burning fossil fuels has on the environment, the world has moved to produce an ever-growing proportion of our energy needs from agricultural products. Today cereals, sugarcane, soybeans and sunflower seeds are all used to make fuel to drive our cars and power our planes. In a perverse twist, 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. While in some countries, efforts to encourage biofuel production are responsible, focusing on fallow land and using crops that are not typically eaten, in general, incentives for biofuel production has meant that land that used to be used to produce food now produces fuel and food that used to be eaten is now refined into petrol and diesel.
Steepest price rise in decades
All of these factors, on both the supply and demand side of the equation, have contributed to the steepest rise in food prices seen 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%. 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 prices of all three have increased, the price of rice has risen the most, followed by wheat with maize rising by a smaller factor. Dramatics steps taken by some countries to limit exports of rice and wheat have added further pressure to countries that are generally importers of these products. For the first time since the Second World War, Wal-Mart in the US has resorted to rationing rice.
It is also evident that as with other markets that can be traded electronically, speculators have added to the volatility of prices by betting that these commodities will continue rising.
When the price of agricultural commodities increase, we see a distribution of resources away from food consumers towards food producers. In countries where the poor produce food or are direct beneficiaries of food production, this change in food prices has positive effects. Countries that are net food importers are generally losers in the global trade stakes. Within countries, rising food prices also display complex dynamics depending on whether the poor are food producers or food consumers. In general, urban dwellers, including poor urbanites, are most 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).
There is a theoretical debate about whether the present increase in food prices is likely to persist for a long period or whether it is simply another short term phenomenon similar to the one that occurred in the early 1970s in response to the previous oil shock. Analysts arguing that this is a temporary phenomenon point out that unlike oil, which is a non-renewable resource, food is a renewable resource and rising prices will lead to increased production to bring the price back into equilibrium. Prices may remain high, but they should stop rising rapidly. As production outstrips supply, food prices could even fall in real terms. They argue that many of the major agricultural exporters (Brazil, India, China, US, European Union and Australia) have spare capacity and could increase production in response to higher prices. They also argue that many African countries that have been net importers of food, partly due to the dumping of subsidised food, have large amounts of land that are under-utilised and which could be put to the plough. Improved crop technology is also likely to continue playing a role in improving yields.
The opponents of this argument argue that food prices generally track oil prices and oil prices are likely to remain high or continue rising for a long time to come as production drops and new fuels take time to develop. These people argue that global climate change is likely to make rainfall more variable and droughts more common. As Asians get richer and they eat more meat and chicken, demand for food is likely to grow exponentially. They also point out that declining water quality in China, the most populous country in the world, is likely to get worse rather than improve over the next two decades.
South Africa not immune
South Africa has not been immune to these global developments. Food prices have increased rapidly here too. In the 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 14% in the last year.
The poorest 60% of the population use well over a quarter of their incomes to consume food. Food price increases of this magnitude have severe implications for the poor. The latest Income and Expenditure Survey for 2005/06 released by Stats SA shows that while the poor still spend a large portion of their income on food, this figure is lower than in 2000. This is because of rising incomes for the poor and because of generally low food prices. As food prices rise, this figure will probably rise too.
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 seven million tons. Due to improved rainfall in 2007/08 and higher prices, this season's crop is much better, at almost 11 million tons. We consume about nine million tons a year.
In 2006, maize prices shifted to what is called the import parity price because we had to import maize due to the shortfall. Import parity prices are when the price shifts upwards to take account of the cost of transport and shipping, insurance and sometimes the hassle factors of importing.
Given that we are far away from major producers, importing food has implications for the cost of food. This season, we have a maize surplus so while prices are also affected by global price trends, the price of maize in South Africa has moved back to export parity price (which excludes the cost of transportation etc). Because maize is our main staple and due to this bumper maize crop, food prices in South Africa have increased by less than in the rest of the world. In fact maize prices have already started to fall.
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 (we will be less impacted on, but not completely immune to global price changes). The lesson is simply that if we produce more, prices are likely to fall or grow by less than if we produce too little. It is a cause of 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 authorities take firm action against people who distort prices for short term gains. However, it is also 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.
Policy options
Public policy responses to rising food prices should focus on two main areas - income support to the most vulnerable of our people 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 feedings schemes and increase support to NGOs and CBOs that run soup kitchens and similar feeding schemes. Continuing efforts to broaden the social security net by raising the threshold on means tests 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 cooperatives to club together to procure services jointly, to purchase tractors or fertiliser and to get their products to markets. Government can do more to in rural areas to support small scale farmers. On the commercial side, while production 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. 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 is neither easy nor straightforward.
In conclusion, rising food prices do 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 and get through this difficult period. These 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.
Trevor Manuel is a member of the ANC National Executive Committee and Minister of Finance. This article was originally published in the ANC's weekly online newsletter - ANC Today vol. 8, no. 17 May 2 2008
