Two cheers for lower food prices: Good for poor consumers and not the real issue for farmers

Jonathan Brooks, Head of Agro-food Trade and Markets Division, OECD Trade and Agriculture Directorate

What’s the difference between a Mississippi mud pie and a Haitian mud cake? The answer is mud. The mud pie is a dessert containing vast amounts of chocolate. The mud cake is literally that, mud with some salt and margarine mixed in. At one time, only pregnant women in poor areas ate mud cakes, in the hope of getting some calcium or other minerals. But following the sudden rise in food prices in 2008, mud cakes became a staple for thousands of Haitians who couldn’t afford anything else. Haiti is one of the poorest countries on Earth, but its hungry were not alone in their misery. Food riots broke out in Africa, Asia, the Middle East and Latin America and the Caribbean.

International crop prices of crop started falling in 2012. The OECD-FAO Agricultural Outlook 2016-2025 projects that over the next ten years, real prices of most agricultural products will decline slightly, but remain higher than they were prior to the 2007-08 price spike. Fundamentally, supply growth is expected to keep pace with demand growth, as population growth slows and the per capita demand for food staples becomes increasingly saturated in many emerging economies.

These projections assume continuing low oil prices and a sluggish recovery of the global economy, with abundant global food stocks to keep markets relatively stable. But merely a repetition of historic variability in oil prices, economic growth, and yields may well lead to another price spike within ten years. In addition, the uncertainties associated with climate change are starting to mount.

A major question is whether lower prices are to be welcomed, in particular whether they will benefit the world’s poor and hungry. Even before the food price crisis, when real food prices were lower than ever before, about 900 million people were not getting enough to eat (FAO). The 2007-2008 crisis was projected to add significantly to these numbers, given that the poor spend a relatively large share of their budgets on food, while the poorest farmers in the world are typically net buyers of food.

Fortunately, the worst fears were not realised and the total number of undernourished has continued to decline, to below 800 million in 2015. The impact of international price shocks was cushioned by three factors. First, domestic food markets in the poorest countries are often only partially integrated with international markets because they don’t have the ports, roads, storage facilities and other infrastructure required. This ultimately impedes development, but provides some isolation from international shocks. Second, many countries implemented policies to protect the incomes of the poor. The use of cash transfers seems to have been particularly effective at sheltering the worst off from the impact of price rises. Third, the recession of 2008-09 resulted in only mild slowdowns in most developing countries, and many of the poor could still afford to buy food.

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There is an argument that while poor consumers suffer from food price rises in the short term, in the longer term farmer need higher prices for it to be profitable for them to engage with markets, while increased output generates further benefits in terms of increased employment and higher wages.  However, this line or argument misrepresents the development process by failing to take account of the pressures imposed by market competition.

In developed countries, farmers who can continually reduce their costs, essentially thanks to technology such as adopting new crop varieties or exploiting economies of scale, will make profits. These profits will persist until other farmers catch up and prices fall from the cumulative impact on supply. Farmers who cannot adapt will of course be unprofitable at lower prices. This is no more than the competitive dynamic that we see in other sectors.

In developing countries, competitive pressures are mild or non-existent for subsistence farmers who are only weakly integrated with markets, but they kick in as infrastructure and local markets become more developed. Of course, few would suggest that the best way of helping developing country farmers is by failing to build rural roads, yet tariff walls and price protection can have just the same effect.

As farmers become more integrated with markets, higher long term prices reflect little more than the costs of productive factors (land, labour and capital), which means that the opportunities for profit are still confined to innovative farmers.

For farmers in both developed and developing countries, prices are therefore not the real issue. What matters is productivity. Higher rates of productivity growth lower prices in a way that is simultaneously good for consumers and beneficial for those farmers who are driving the productivity gains. “Laggards”, as Willard Cochrane termed them in 1958, face the choice of either improving their competitiveness or shifting into other economic activities.

Focusing on prices as the route towards higher incomes is in fact distracting because prices ultimately need to reflect the scarcity of natural resources. In many countries, for example, there is no pricing of water. That keeps costs low and contributes to lower prices, but also fosters unsustainable farming practices that will harm both producer and consumers in the longer run.

Lower prices are welcome to the extent that they derive from sustainable productivity growth. But from the standpoint of farmers, and the sector as a whole, prices are the wrong variable to focus on. As Paul Krugman put it: “Productivity isn’t everything, but in the long run it is almost everything”.

Useful links

Food Security and the Sustainable Development Goals Jonathan Brooks on OECD Insights

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