Atanu Dey On India's Development

Food prices

“When you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up.” That’s what George W Bush said in a press conference on May 2nd. The NY Times reports:

In response to the president’s remarks, a ranking official in the commerce ministry, Jairam Ramesh, told the Press Trust of India, “George Bush has never been known for his knowledge of economics,” and the remarks proved again how “comprehensively wrong” he is.


I agree that GWB is not the sharpest knife in the drawer. But even a dull knife would do if all you are doing is spreading softened butter. Nothing that GWB said in this instance is contrary to reason or reality. Prices do move when demand and/or supply shift. Indeed, a change in price conveys absolutely essential information. Consumers get the signal that they have to make some changes in their demand pattern, and producers learn that they have to make changes in what they produce and how much.

The fact is that world demand for agricultural output has gone up. There are more people eating higher up on the food chain, and there are more uses for agricultural output such as for corn-based ethanol. If the supply does not expand sufficiently, the natural outcome is a rise in food prices. Apportioning blame for the rise in prices may make good political posturing but in the end it is pointless. It is like asking which straw broke the camel’s back: the last straw is as much to blame as the rest of it.

Once again, I am struck by the hypocrisy of the people decrying the rise in food prices. Bush (and people in the rich parts of the world) do consume a lot more than what would be considered their fair share if food were absolutely equally shared across the world. But why just stop at food? The rich do consume everything in above average quantities. So what else is new?

Indeed, you don’t even have to go all the way to the US to see that the rich have more of everything. Mr Kamal Nath, the commerce minister of India, surely consumes more of everything compared to the average Indian. So his (and other rich Indians’) outrage at Bush’s statement is also hypocritical. They should immediately reduce their own demand for goods and services to the average level in India and only then will they have to leg to stand on when complaining about Bush.

Here’s a bit from a World Bank site that sums up the causes of the food price hike:

While headline news about high food prices is a relatively recent phenomenon, the broader upswing in commodity prices began in 2001. Large structural shifts in the global economy—including growing demand in China and India—have been steadily reflected in commodity price increases, especially of metals and energy.

Food prices have increased in response to many factors: higher energy and fertilizer prices; increased demand for biofuels, especially in the U.S. and the European Union; and droughts in Australia and other countries. World grain stocks are at record lows and next year’s prices depend on the success of the next harvest in the northern hemisphere.

Wheat prices (US$) have increased by 200 percent, and overall food prices (US$) have risen by 75 percent since the turn of the century. Adjusting for exchange rates and domestic inflation reduces the price increases faced by developing countries—but these increases are still severe for millions of poor consumers.

“The increases in grain prices are not caused by short-term supply disruptions, as is the normal case, and it will likely take several years for supplies to increase to rebuild stocks and allow prices to fall,” said Don Mitchell, Lead Economist in the World Bank’s Development Prospects Group.

There is no arguing with the fact that India and China are large economies. Large economies can (and do) affect world prices. Saying that increased demand in large countries pushes up prices is not a moral statement. It is of course easy to take the moral high ground and tell the rich (countries or people) to consume less. But preaching to others exposes one to the danger of being preached to. The rich could turn around and say, “Why don’t you consider lowering your population? It is because there is an imbalance between the number of people you have and your ability to provide for them that causes poverty. You made your bed and so shut up and go lie in it. If you had any brains, you would have recognized decades ago that given the resources at your disposal, unrestrained population growth would the predictable consequence of a lot of hungry people.”

All this is not quantum mechanics. Years ago I had come to the conclusion that there is a very compelling reason why the rich do not have an incentive to see the poor becoming prosperous in a world with natural resource limits. Then simple logic pushed me to conclude that the rich nations would not like population reduction in the poor nations. A large population of very poor people uses less resources on aggregate than a much smaller population of very rich people.

So what is going to happen? Supply will respond to the increased demand but that response will be sluggish. That’s what markets do. But it is possible to mess with the market and make a bad situation worse by fixing prices and so on. It is absolutely predictable and certain that governments will try to stop the market from functioning. The governments will transform a minor tragedy into a major catastrophe. That’s just the way it is.

  • Amit

    There are more people eating higher up on the food chain, and there are more uses for agricultural output such as for corn-based ethanol.

    Wrt US and regarding more people eating higher up the food chain, when government policies under pressure from agri-and-meat industries, make the cost of meat at the supermarket much cheaper than the cost of grains/fruits/vegetables, that’s bound to happen. One has to wonder why meat is cheaper when more resources go into making it and it is also much more polluting. Where are those externalities going, and who is paying for them eventually? If meat really factored in the true cost of production, I very much doubt that this trend would be on the rise. I wouldn’t just let this trend go unquestioned.

    Besides, policies can be set that reward people for eating lower down the food chain, or at a minimum, factor in the externalities into the cost of buying higher-up-food-chain-food at the supermarket.

  • lurker

    “Wrt US and regarding more people eating higher up the food chain, when government policies under pressure from agri-and-meat industries, make the cost of meat at the supermarket much cheaper than the cost of grains/fruits/vegetables, that’s bound to happen.”

    That is not true.
    Grain Breads and most vegetables and fruits are still cheaper than most meats.

    But meat still cost more $/lbs than most grains, fruits and vegetables.
    Of course berries cost more than most meat, but then i can compare salmon and swordfish prices to chicken….

    Even at fast food places like Au bon pain where I often buy a fruit or two for snack, I pay $0.90 for an apple or a pear….
    Which is still cheaper than sandwitches and baked stuff that they sell.

    Even with the subsidy meat sells for more.
    People eat it b/c they like it…The cost of production is still reflected in the price

    All of agriculture in US is subsidized.
    And its also in India.
    India has less money and more farmers so its less subsidy per recepient.
    There is a 3rd element too.
    The %age of subsidy money that india looses to corruption and inefficiencies is higher than whats loss elsewhere(its not 0% anywhere)

    One thing that indians should be seriously mulling is to divert more people out of farming into something more productive.

    More productive people elsewhere means would result in more money to subsidize fewer farmers. It has a dual multiplier effect.

    Regarding food prices its not the meat that has shot up this but its oil price increase which has to do with speculative trading.

  • Amit

    lurker, thanks for correcting me. You are right that pricing of food in itself is not a major factor in what people choose to eat, and meat prices are not a factor in the current high price of food.

    I will clarify my statement that for an average family/person who buy groceries in a store, a meat-centric diet will be less expensive than a plant-centric diet. There may be exceptions to this based on where one lives (California will probably have fruits/veggies much cheaper than say, fruits/veggies in Maine; and cheaper than meat in California), and exceptions on comparing certain foods (apple vs. sandwich/baked goods – though that is not a valid comparison in terms of calories and nutrition, or a meal – “how many apples would one have to eat to get the same amount of calories as a sandwich?” would probably be a more valid comparison), or how healthy one wants to eat, but overall in the US, meat-centric diet is a lot cheaper (in terms of what one pays at the register). And subsidies play a big role in why it’s so, and the cost is definitely NOT reflected in it – lots of externalities associated with how it’s currently produced using CAFOs. :)

    If you live in the US, you’re welcome to try this experiment – try living on a plant-based diet for one month, and then on a meat-based/centric diet for the next and compare which one is less or more expensive.

    If you’re interested, Michael Pollan is one author who writes about the food issue in the US. The movie “King Corn” explores this issue in some detail.

  • http://neverfollow.blogspot.com devangm

    It’s not just a meat-centric diet that’s cheaper, processed foods are cheaper per calorie too. It was in the NYT.

    Even though I would love to bash Bush on this, he did do the right thing by vetoing the farm bill yesterday. Too bad it was filled with enough pork to override the veto today. Five more years of mind-boggling subsides ($280 billion over five years for those who might not have heard) without much to show for it except perhaps even more monopolistic behavior from agri-businesses.

    Nobody said the rich need to eat less, but surely they don’t need to be subsidized to this extent, and to bring up population control misses the point even more. The rich countries should also be able to supply enough food to make ethanol without impacting world supplies, or do they not have economists and planners that can predict such things? The steady increase in demand since 2001 doesn’t explain the sharp increase price rise in the last couple of years. Maybe the declining dollar has something to do with it, but the ethanol mandate has just as much to do with it than anything else.

    Some mention of this along with other reasons of increased demand might have made Bush’s statement defensible, but otherwise it is devoid of economic insight. Which makes me wonder (not the first time, admittedly) why I keep reading your blog.

  • lurker

    Amit,
    “but overall in the US, meat-centric diet is a lot cheaper”
    Thats not been my experience.
    I DO live on a MOSTLY plant based diet,
    you can try visiting frugal living websites for food tips and see what diet that results into

    My current food expense are around $45/week for 3 weeks out of 4 in a month.
    Once a month i do end up spending $40-$50 at a bar….
    (which has more to do with social situation of sorts and is usualy my most expensive meal and has chicken wings or steak with alcohol, even there Jalepeno poppers are cheaper, popcorns are further cheaper)
    O/W it would always be be in my regular range all month long.

    Till last year I lived in Rhode Island and my pattern hasnt changed at all. I am not sure if you have
    tried to optimize diets wrt multiple variables.

    In case you are wondering my diet includes frozen vegetables, Fruits and canned and dried beans along with bread and some variable meat. Meat is the most expensive part by weight and even by calories that i buy every week.
    I do take advantage of sales and coupons, and on ocaasion do hoard stuff(A desi habbit i guess…I have seen a few desis running back into shoprite to buy their grocerries in 2 lots to maximize coupons)
    I found out making my lunch sandwitch with sliced meat was more expensive than peanut butter sandwithc, and switched to it 3 years ago. I switched to other brand of peanut butter when i learned of transfat.
    1 boiled egg every morning along with some meat thats shredded in my dinner are the only poultry and meat in my regular diet.
    I’d say the most expensive ingridient in my diet by volume and by calories are powdered spices, followed by meat,
    and perhaps olive oil

    And me eating this way has to do not with religion or anything but with eating economicaly and something that tastes ok to eat daily, and is “healthy enough”(O/w I would be eating bread with salt only.)

  • http://jihadwatch.org/ Notsure

    “Which makes me wonder (not the first time, admittedly) why I keep reading your blog.”
    LMAO, Why do it and why on top of it comment about it :-)