Measuring Who Wins and Who Loses from High Food Prices

Anecdotally, one would be tempted to infer the existence of a strong positive relationship between higher food prices and poverty. After all, it is the poor who spend a higher share of their food on basic staples and have the least means to buy food with their meager income. And several studies using the available, imperfect data tend to confirm that relationship.

This is despite the fact that three quarters of poor people live in rural areas and the majority of them earn their living from farming. Some poor farmers produce more food than they consume and hence benefit from higher prices, but many others are net buyers of food and hence lose out when food prices rise. But identifying which households gain and which lose, and hence the overall impact on poverty, requires knowledge of this relationship for all vulnerable households. A major problem is that we still lack the data for accurately gauging who, for a given level of production and pattern of food consumption and purchases, is more likely to be negatively impacted by higher food prices.

From a post by Gero Carletto over at the Development Impact blog.

This is a point that is too often forgotten by nonexperts when discussing the effects of high food prices: that rising food prices (much like food price volatility) generates winners and losers.

In other words, if your household is a net seller of food, an increase in food prices is actually good for you, because if everything else remains constant, your farm profits increase, which means your overall welfare increases as well since your subsistence is ensured by what you produce.

It is only if your household is a net buyer of food that an increase in food prices is bad for you, because if everything else remains constant, this means that you can buy strictly less food with your income. And for those households who are neither net buyers nor net sellers (more often as a consequence of high transactions costs rather than of their sales of food exactly offsetting their purchases of food), food price increases will have no direct welfare impact.

Generally speaking, Gero is making the point, frequently buried by the rhetoric surrounding modern policy debates, that almost nothing in economics generates only winners or only losers, because there are always people on either side — supply or demand — of the market.

Indeed, according to this great Foreign Affairs article by Runge and Runge, in the 1950s, people worried that food prices were too low. Likewise, according to another article, in 2002:

Food was cheaper by half than it is now, and there was no world crisis, only local misery. Bankrupted peasants abandoned Chinese villages for urban slums. Twenty thousand Punjabi farmers committed suicide. Sugar workers clashed with police in Mexico, and Nebraska farmers took jobs at Wal-Mart to stave off foreclosure.

Far from me the idea of making the hackneyed statement that people have short attention spans, but for many changes in economic circumstances, any honest discussion will eventually acknowledge the distributional impacts of that change.