Rising Food Costs: Causes and Impacts
On the global platform the prices of basic food stuffs such as wheat, rice, grains and oilseed crops has continued to rise since early 2000. One of the contributing factors to this rise can be attributed to an increase in agricultural commodity prices. The cases of increased food prices are complex and involve a combination of mutually reinforcing factors, which include drought in major grain producing countries, increased use of land for alternative activities, rise in oil prices, and devaluation of strong currencies such as the US dollar (Seale et al, 2013). It is notable that the turmoil of heightened food prices is occurring against a backdrop of an unstable global economy. There is need to formulate polices aimed at streamlining different sectors of the economy to make food available and affordable to the population the main objective of this paper is to assess the causes, consequences and the solutions to the increased food prices form a global perspective.
Causes of rising food cost
The prevailing market condition since 2005 has been the leading causes of rise in food prices. This is because in the market prices often rise when the market is constricted. These market prices are often affected by the prevailing weather conditions that affect the yield of food crops. Between 2005 and 2007, the cost of food crops doubled because of the coinciding spell of unfavorable weather conditions in major food crop prodding regions such as the USA, which is leading exporter of maze and soybeans (OECD, 2008). The unpredictable climatic conditions pushed crop yield to below average increasing demand for the product while the supply was minimal (OECD, 2008).
Since 2005, the demand for food items such as wheat, vegetable oil, and coarse maize has experienced a double growth compared to the production levels. Increase in the demand for coarse grains such as maize can be attributes to their use in the production of biofuel for industrialization process. This has contributed to the scarcity of these food substances hence the relative increase in their cost to accommodate the demand and the prevailing conditions in the market (OECD, 2008).
Shortfall in production compared to the trend can also be considered as a major cause of the rising food cost. Inasmuch as under normal conditions existing food stock often buffer the market hence dampening the increase in prices, the stock level is already low and has been declining since 2007 due to unpredictable climatic conditions and relatively lower yields form exporting countries (Shapour & Rosen, 2008). Shortfalls in supply and the absence of sufficient buffer coupled by continued use of food substances in the production of fuel and animal feeds have all considered to make the rise in the cost of food exceptional.
In recent occasions, countries have made investment in agricultural derivative markets from non-traditional sources. Whether the investment were made for portfolio diversification or for conjecture, there is a high likelihood that these investments are major contributors to the short term rise of food prices in the market and can be perceived as additional factors to the to the current increase in spot market prices (Shapour & Rosen, 2008).
Oil is an essential element in the agricultural sector. This is because it provides energy for the mechanization of agricultural equipment. Rising and fluctuating oil prices are critical contributors to the rise in the cost of production of agricultural commodities and food items. Ultimately, any alteration in oil prices has a significant effect in the market prices of food. The permanence in oil price increase affects the price of food in the market (Seale et al, 2013).
The concept of price volatility in the food industry relates to the thinness of the market and the share of imports and at exports relative to the global rate of consumption and production. The current world population is approximately 7 billion people. The population is envisioned to increase especially in developing countries. This threatens the food security situation in the country considering that the demand for food will exceed the supply and the ability of the producing countries to satisfy these demands.
Logistic challenges have also been cited as major contributors to the rising cost of food. According to estimates from the World Bank, expense related to logistics accounts for 15% and 25% of Gross Domestic Product and between 17% and 31% of the value of the commodities (Seale et al, 2013). This is in the view of the World bank can be perceived as an indication that internal logistical challenges increases the cost of food commodities with a higher unit value of about 10% (Seale et al, 2013).. From a global perspective countries have entered into bilateral and unilateral trade agreements aimed at the reduction of custom dustiest. However, the prevailing economic conditions have led to doubling of fright charges and this translates into an increase in the final price of food commodities to the consumer (World Bank, 2014).
There has been a reduction in food supply when the grain reserves in different countries are declining. The available land and water for food production is in the verge of decline. The alterations in food supply and demand levels have been accompanied by unpredictable effects in terms of the prices and have further affected the rising cost of nonrenewable resources (World Bank, 2014). This is an indication that the current rise in the cost of food has generated a growing consensus that the increase is structural rather than a recurring spectacle. In addition, it is also an indication that such a problem can only be resolved using structural approaches with regard to the formulation of polices (World Bank, 2014).
Impact of rising cost of food
Increase in prices of food items will affect the strides that have been made by different economies on the global platform towards poverty mitigation and eradication. The most affected countries are developing countries, which have majority of their population living below the poverty line. This is an indication that rising food prices affects the poor both internally and externally (Seale et al, 2013). Majority the poor live in remote areas and for those who agriculture forms a percentage of their income, there may be underlying benefits from the high prices. This is however only considered a possibility on the assumption that higher international prices are transmitted to the remote areas and that the farming population has the ability of responding to the arising opportunities (USDA, 2008).
The transmission process is however highly dependent on the logistical factors affecting food and agriculture industry. For countries and regions isolated form the world market, who also comprise producers, a combination of high cost of transportation and an increase in food prices have the likelihood of stimulating supply response and he possibility of gaining higher incomes (World Bank., & International Monetary Fund, 2012). However, for those countries and farmers in potential surplus, the high cost of transporting their products to the domestic and international markets may be prohibitively high and this means that an income effect form the exorbitantly high world food prices may affect their ability to acquire higher incomes (World Bank, 2014).
At the household level, especially in developing countries of the major effect of increase in global food prices is that almost half of the budget will be spent on food. This is an indication that an increase in food prices leads to the reduction of income available for other responsibilities considering that a large portion of the available income spent on food. Furthermore., increase prices will not only led to an increase in budgetary allocation for food it will also contribute to a reduction in the consumption levels of these food products due to the income elasticity in relation to the prices of different food products (Seale et al, 2013).
Health related complication could also be considered as an effect of high food prices. This is because in both developing and developed countries a healthy population is considered as that which consumes a healthy diet. However, with an increase in food prices there is a high likelihood that households will seek comfort in cheaper and relatively unhealthy foods. Health related complications such as malnutrition and obesity may be perceived as some of the results of high food prices on the global platform (USDA, 2008).
High food prices also have a general effect on the economy at the state and on the international platform. One of the results is on the inflationary pressure form the high food costs and for countries which engage in the importation of larger amounts of food, they may face some rise in the import bills (Wiggins & Levy, 2013). This may affect the ability of the country to engage in economic development considering that a larger percentage of it gross domestic product will be channeled towards the acquisition of food items for its population. The most affected countries will be the developing countries, which have a large population dependent on the government for the provision of basic food commodities (Wiggins & Levy, 2013). Most of these countries with a large dependent population also form a large percentage of recipients of food aid for organizations such as the world food program, which must acquire additional finances for sustainability. In such countries, there is a high possibility of the reduction of food availability levels (World Bank, 2014).
Despite negative effects, high food costs have also been considered as an incentive to local production, which has the potential of boosting domestic agriculture. In developing countries, farming is considered as labor-intensive exercise and this could cushion the effects on the poor countries. In West African, countries prior to the rise of global food prices there were major shift in consumption patterns to bread rice and pasta. These were all based on imported food products (Wiggins & Levy, 2013). However, with the current rise in food cost there has been a reverse in consumption patterns since the country has reduced the amount of imports and it encourages the consumption of locally produced agricultural products such as yams, cassava, sorghum, and millet. Rise in food costs, which has resulted in this reverse of food consumption, is a major boost to the economic wellbeing of the local farmers in different developing countries especially with regard to the reduction of the amount of imported food (Wiggins & Levy, 2013).
Solutions to the problem of ring food cost
In the short term, a major policy objective would be the provsionof humanitarian aid. Prior to the recent increase in food prices, millions of people in different parts of the world were experiencing hunger and the consequence of malnutrition because they could not afford food (Seale et al, 2013). However, with higher prices the number of people suffering from extreme hunger related conditions has increased. Through organization such as the World Food Program, immediate and substantial humanitarian aid can be provided to the most vulnerable. Appropriate this aid can be administered in form of vouchers or cash as a way of strengthening instead of undermining domestic food markets in the recipient nations (Seale et al, 2013).
In terms of medium-term polices, there is need to improve the purchasing power of developing countries to enable them acquire food items even when prices are higher in the current and future markets. In some of these countries, part of the role of the government and international community would be the introduction of policies focusing on agricultural investment and research (Wiggins & Levy, 2013). In addition, more polies and investment can be directed towards extension and education on diversification of agriculture. Through such policy and investment initiatives, it will be possible for these governments to engage in poverty eradication strategies, which would also stimulate economic development (Wiggins & Levy, 2013). In some situations, agricultural investments may be helpful but they may also need to ensure the diversification of the economy to streamline agricultural activities with the prevailing economic conditions. Through this approach to economic development farmers will ensure that the cost incurred in the production of food crops is in accordance with the global standards hence reducing the possibility of incurring losses for agricultural activities (Seale et al, 2013).
Improving food security situation in the medium term may also require investments aimed at improving the environment in which agriculture operates. This would include an improvement in the governance systems, macroeconomic policies on agriculture, technology, and infrastructure (Von Braun, 2012). This is an indication that there is need for a tailored approach, which builds on the capacity and potential of individual nations other than a generalized approach to agricultural development. This approach towards improving the food situation in the world would focus on the development of policies that are country specific. Such policies will target food problem in one country by identify problems unique to that country and developing effective polices as solution to these problems (Von Braun, 2012).
There is need to reform agricultural trade polies because highly restrictive trade polices on imports and exports often lead to unintended impacts in the medium and long term. Price subsidies, which distort market prices, must also be developed with great consideration to the future of the markets to minimize the possibility of distortion. Through the reforms on agricultural trade polies, it will be realized that export embargoes often in the short-term act as an advantage to domestic consumers. However, they do not operate while distinguishing high from low-income consumers. In the long-term, export taxes impose a burden on domestic producers by limiting their supply response (Seale et al, 2013).
An additional element in agricultural trade policy that requires reforms are the export restrictions. This is because they contribute to high improbability levels in the global commodity market. This has the potential of driving the international market prices of food prices higher (Munier et al, 2012). On importation of food, the development of agricultural trade policies that protect domestic producers of agricultural goods through high prices and border protection often restrict growth opportunities for other producers on the international platform (World Bank., & International Monetary Fund, 2012). In addition, it imposes a burden on domestic consumers considering that they do not have the ability of acquiring alternative food items at relatively lower prices from other countries. Policy reform on import taxers charged on agricultural commodities must be focused on making substantial exploitation of the domestic and international food market as a way of balancing global supply and demand (Von Braun, 2012).
In the process of developing polies targeting solutions to the recent increase in food cost, it would be important to focus on the relationship between the production arte and the reduction in yield. In addition, it will also be important to focus on prevailing climatic conditions and their effects on agricultural production. This means that it would be necessary for country to invest in research and development in the agricultural sector to improve on productivity and output (Seale et al, 2013). Through research and development, countries could consider the incorporation of genetic modifications offers a potential for exploitation on how to improve on plant productivity. This is because through this approach to agricultural development it will be possible to improve productivity by enhancing the qualities of crops destined for food or nonfood purposes. This would contribute in enhancing their resilience against climatic stresses such as drought (World Bank, 2014).
When assessing the causes of the increase in food prices from the demand side it is notable that policies that focus on enhanced productivity and the use of biofuels require a scrutiny. This is based on the understanding h the energy, environmental and the economic advantages of biofuel production based on the usage of first generation agricultural commodity feed stock are modest but less likely to be realized through the current polices (Von Braun, 2012). There is need to embrace alternative approaches such as a reduction in demand for energy and greenhouse gas emissions. In addition, the provision free trade in biofuel and the introduction of second-generation production technologies that do not depend on first generation commodity feedstock would offer greater benefit without the probability of resulting in an increase in food prices (Von Braun, 2012).
An increase in the prices of agricultural commodities has an impact on substitute commodities such as fish. This contributes to additional pressure on already depleted fish stock in the oceans. There is need of the development of polices which ensure that the use of ocean resource is sustainable and responsible at the national and in the high seas. From a global perspective polices must focus on concerted effort of regulating illegal fishing and other unscrupulous deals affecting fish population (Seale et al, 2013).
The rise in food cost is a global issue considering that its causes, consequences, and solutions necessitate the need for a complex response at the international level. Prevailing development s in the global food market has a dramatic implication for food security situation in developing countries. Consequently, speculative factors and inward looking policy action have also attributed to nervousness and high-level volatility of the food market. Policy development on food pieces should be objective, effective, and coherent with the prevailing economic, political, and environmental conditions to minimize the possibility of worsening the food situation globally.
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