Food prices: winners and losers

With food price Index increasing 33 percent over the previous year and stock-to-use ratios of major food commodities reaching alarming lows, the recent World Banks Food Price Watch has come as consternation to the world. Global food prices in July 2011 remained significantly higher than in July 2010 owing to the price hike in chief crops; maize, sugar, wheat and soybean. To add to the woes, prices for crude oil and fertilizer also heightened substantially leading to food and fuel inflation. Despite the notoriety of food price crises, one needs to understand the distributive nature of it before devising any policy measure. Food price increases affect different segments of the population differently. The net consumers that belong to the lower middle and middle class are most affected, whereas, quite surprisingly it is the net producer who often emerges unscathed. Recent World Bank research on rising food prices and household welfare in Brazil shows that 25 percent of the initial increase in extreme poverty can be reversed by the benefits of higher food prices. It further postulates that if agricultural wages rose in the same proportion as food prices, this would lead to falling poverty in rural areas. While there are adverse impacts of price increase on expenditure, the favorable income effect can not be ignored. In times of food inflation, net producers gain as their margins increase. This may result in misallocation of resources as farmers are motivated to cultivate more profitable crops while a wage-price spiral also sets in, increasing their gains. Needless to say, price increases result in a favourable trade balance for net food-exporting countries and hence; an aggregate income gain for those in the business. On the other hand, the only respite available for net consumers to mitigate the impact of high prices is brought about by reverting to cheaper substitutes, the extent of which will vary amongst consumers and depend on the permanency of price volatility as stated by World Bank report. The only recourse available to that segment of net consumers which fall below the poverty level (40 percent in Pakistan as of 2009-10, quoted by World Bank) is the governments social security net. The Rs50 billion allotted to Benazir Income Support Program this fiscal year promises to provide relief to the poor against food inflation of 17.6 percent in July 11 over July 10. BISP itself has attracted much criticism. Lack of transparency, inadequate monetary support and limited reach have rendered the programme insignificant compared to inflation. As part of its poverty relief programme, the government has also opened utility stores which will continue to be exploited by the privileged class unless the authorities introduce ration card schemes to provide targeted subsidies to the poverty-stricken.