Food Price Inflation - Who is suffering the most?

We have all been hearing about the rising price of food around the world and, fortunately, those of us who live in Canada and the United States have yet to experience food price changes that have been experienced by the rest of the world.

In mid-April, the World Bank released their Food Price Index, a measurement of global food prices, which showed a rise of 36 percent on a year-over-year basis.  Compared to a year ago, the price of maize is up 74 percent, wheat is up 69 percent, soybeans are up 36 percent and sugar is up 21 percent.  Unexpectedly, rice prices have remained stable overall; this price stability is important since the two largest nations on earth, China and India, rely heavily on rice as a staple of their diets.  The price of meat, fruit, vegetables and cooking oil have also risen.

The World Bank attributes higher food prices to several factors:

1.) Rising fuel prices: oil prices are up 36 percent year-over-year and are up 10.3 percent in March of 2011 alone.  A 10 percent increase in the price of crude oil is associated with a 2.7 percent increase in the World Bank Food Price Index.

2.) Severe and variable weather events: several grain exporting countries including Russia, Canada, Australia, Argentina and Kazakhstan have experienced weather events that have impacted grain yields.

3.) Biofuels: increased use of grains for biofuels is associated with higher oil prices.

4.) Supply and demand issues: global grain stock levels have been drawn to historical lows as food demand growth has outstripped production growth over the past decade.

5.) Increased agricultural commodity prices in 2010: this has led to an increase in competition for both agricultural inputs and land.

6.) Grain export restrictions: since the food price spike in 2008, export restrictions have resulted in higher prices.

Food price increases are strongly associated with oil and fuel price increases through three main channels.  First, higher oil prices lead to higher fertilizer and other input costs as well as higher costs for operating farm equipment including tractors, combines and irrigation equipment.  Second, higher oil prices push up the cost of transporting food goods to markets.  Third, higher oil costs encourage greater use of food products such as corn and sugar in the production of biofuels.  The United States Department of Agriculture estimates that in 2008 - 2009, 31 percent of total corn output was used for biofuels.  This is expected to rise to 40 percent in 2010 - 2011.  Additional strain on corn supplies is related to droughts in Argentina and the United States where corn stocks are at their lowest level in 30 years.

As I noted in the opening paragraph of this posting, Canada and the United States have, until recently, been largely immune from significant food price increases.  According to the World Bank, low- and lower-middle income countries suffer from higher food inflation rates when compared to middle- and high-income countries.  The gap between the two sets of countries averages around 5 percentage points. An explanation for this price disparity could be related to two factors:

1.) Food marketing in wealthier nations is undertaken by retailing companies that have larger margins in place.  This results in a smaller impact as food input costs rise since the price of the commodity forms a smaller part of the overall price of the final product.  In poorer nations, food is generally eaten in a less processed form and is generally marketed by smaller retailers with lower margins meaning that the food market is less able to absorb fluctuations in food commodity prices.

2.) Governments in poorer countries are unable to cushion their consumers from increases in food prices.

According to the World Bank's Food Price Watch Publication for April 2011, food price inflation varies greatly on a country-by-county basis, even within neighbouring nations.  For example, the Sudan has seen wheat prices rise by 87 percent over the past three months while neighbouring Ethiopia has seen wheat prices rise by only 18 percent.  Here is a table showing the countries experiencing the greatest food price volatility over the past three and twelve months:

Here is a bar graph showing year-over-year food price inflation for Europe and Central Asia from December to December:

As mentioned earlier, food price inflation impacts poorer nations to a greater extent than their wealthier counterparts.  There are 1.2 billion people living below the extreme poverty line of $1.25 per day.  It is these people that spend a very large portion of their daily income to feed themselves and their families.  As food prices increase, additional people are added to those who are extremely poor, in fact, the recent increase in food prices has added 44 million people to the global poor.  The World Bank estimates that a further Food Price Index increase of 10 percent will lead to an additional 10 million people falling below the extreme poverty line.  One issue that these extremely poor nations face is a lack of efficient infrastructure for food distribution; this can lead to major price differences between locales within the same nation as those that are further out from major settlements suffer from higher prices quite often because of a lack of availability of certain foods.  During my time in Africa, I can quite clearly recall seeing a complete lack of variety in local stores who were dependent on long-distance trucking for their supplies.  For a period of time, there would be a complete lack of cooking oil; this would push the price of available cooking oil higher.  A month later, the stores would be overwhelmed with cooking oil but another staple item might not be available.

The poorest 10 percent of the world's population spend a very high portion of their total household income on food.  For example, in Cameroon, households spend nearly 60 percent, in Peru and India, households spend just over 60 percent and in Indonesia, Sri Lanka and the Philippines, households spend nearly 70 percent of their total budget on food.

To compare, let’s look at a chart from the United States Department of Agriculture Economic Research Service showing a history of food expenditures as a percentage share of personal income from 1929 to 2009:

Notice that food expenditures ranged from a high of 22.7 percent of disposable income in 1929 and dropped steadily to a low of 11.2 percent in 2004.  When compared to the developing nations in the preceding paragraph, Americans are spending a very small fraction of their disposable income on feeding themselves.

The World Bank notes that there are actions that can be taken to reduce the impact of higher food prices on poor nations.  Actions could be taken to limit the production of biofuels once food prices reach a threshold level.  This will reduce the overall demand for food crops.  Affected countries could improve the targeting of their nutritional assistance programs and donor countries should change legislation to exempt humanitarian food aid from export bans.  As well, the increase in extreme weather-related crop failures suggests that efforts need to be made to address the issue of climate change and how changes in farming practices may be necessary to alleviate the possibility of crop failure.

In conclusion, now that we've seen just how extreme the problem of food price inflation is for many nations throughout the world, let's take a brief look at recent food price inflation in the United States, the United Kingdom, Canada and Australia.

1.) United States food price inflation: For March 2011, the Bureau of Labor Statistics calculates that food prices have risen 2.9 percent on a year-over-year basis with food at home prices rising by 3.6 percent and food away from home prices rising by 1.9 percent, both on a year-over-year basis.  The food index rose 0.8 percent in March and has risen 2.7 percent over the past three months.  Fresh vegetables rose 4.7 percent in March and 6.7 percent in February.  Meats, poultry, fish and eggs are up 7.9 percent over the past 12 months.  Cereals and bakery products are up 0.5 percent in March.

2.) United Kingdom food price inflation:  For March 2011, the Office for National Statistics reports that overall annual inflation stands at 4.0 percent, down from 4.4 percent in February, largely on declining food prices.  In the month of March alone, food prices dropped 1.4 percent with fruit prices falling by 4.7 percent and bread and cereal prices falling by 2.6 percent, the largest ever monthly fall.  Price drops were largely related to discount sales at supermarkets.  Over the 12 month period from March to March, food prices were up 4.5 percent with the largest increase from mineral waters, soft drinks and juices which were up 10.4 percent year-over-year and bread and cereals which were up 5.6 percent year-over-year.

3.) Canada food price inflation:  For February 2011, Statistics Canada reports that food prices rose 2.1 percent on a year-over-year basis with food purchased from stores rising 2.0 percent and food purchased from restaurants rising 2.6 percent.  For the month of February 2011, food prices rose 0.3 percent after a rise of 0.8 percent in January 2011.  The main contributors to food price increases were from fresh vegetables which were up 4.4 percent and bakery products which were up 2.1 percent for the month.

4.) Australia food price inflation: For the quarter ending December 2010, the Australian Bureau of Statistics reports that food prices rose by 2.2 percent and rose by 2.5 percent on a year-over-year basis.  In the quarter, fruit prices were up 15.5 percent, vegetables were up 11.4 percent as a result of seasonal factors and limited supply.  Over the 12 month period, sixteen out of twenty food categories rose with vegetables rising the most in the group with a 12.8 percent price increase.  Take-away and fast foods rose by 2.8 percent.

You can readily see that food price inflation in the United States, the United Kingdom, Canada and Australia does not appear to be statistically significant, particularly when compared to many other nations in the world.  While I actually believe that food price inflation is far higher than what is reported, in particular because of downsized packaging, for some reason, the higher inflation that we all feel every time we push our shopping carts through the checkout stand does not show up in government statistics.  I find that most baffling.