Last updated on February 6, 2011
Over the past few weeks, I have written extensively about the twin issues of rising food prices and food price volatility.
It all began with this post, in which I explained the difference between rising food prices and food price volatility and which came as a result of people frequently misusing the concept of food price volatility in the media, both mainstream and social.
That first post came about because food price volatility has been on my mind for two important reasons since the last few weeks of 2010. First and foremost, food prices have definitely been on the rise as they have never been this high since the Food and Agriculture Organization (FAO) of the United Nations began recording food price information in 1990, but the FAO has also noted recently that food price volatility has been increasing. Second, and on a more personal level, I have been working on a paper (along with Chris Barrett and David Just) on the impacts of food price volatility on welfare. So when I finished revising that paper a few weeks ago, I wrote a post about it to discuss our main result.
After reading about speculation and arbitrage on food markets on Aid Thoughts, I wrote a short post discussing the topic. Launching a dialogue on food prices, my friend Ed Carr then commented in a post on his blog in which he discussed the convergence of my (quantitative) approach and his (qualitative) approach. I commented in a post of my own about how we really need to be careful about differentiating the issue of rising food prices from that of food price volatility when discussing food prices.
In the most recent installment of my dialogue with Ed on food prices, he writes in a post on his blog that:
Urban populations are generally much more dependent on markets for their food supply than those living in rural areas (though this is not always true), and therefore price instability does create significant livelihoods uncertainty that is very difficult to manage, especially for the urban poor. I therefore stand by my argument that we need to be keeping a close eye on the relative impact of price volatility on urban and rural populations, as the impacts of such volatility is likely to have very different impacts on these groups.
I completely agree that urban households are almost all net buyers of all food commodities given that urban or peri-urban agriculture remains a relatively marginal phenomenon. Rural households, on the other hand, are characterized by a great deal of heterogeneity in their market position: for each commodity, some households will be net buyers, others will be net sellers, and yet others will remain autarkic (i.e., they will neither buy nor sell) with respect to the market for that commodity.
This heterogeneity in market positions — which was the subject of my very first paper — is the reason why agricultural policies have often had perverse effects on the welfare of rural populations. For example, a price support policy for maize, whose aim would be to keep the price of maize above a specific price floor, would benefit households who are net sellers of maize, it would hurt households who are net buyers of maize, and it would leave unaffected households who are autarkic with respect to maize. Ed is thus right when he intuits that rising food prices will hurt urban households, since those households are almost all net buyers of food.
Where I am not so sure, however, is when Ed writes that food price volatility may hurt urban households. Now, I have not done the empirical work on the welfare impacts of price volatility on urban households, so what follows is both speculation based on microeconomic theory as well as extrapolation from my empirical results for rural households, but my hunch is that urban households also tend to benefit from food price volatility. In what follows, I explain my technical reasoning and then offer some intuition for it.
Urban households are almost all net buyers of food, which makes them pure consumers of food. Since the 1970s, however, microeconomic theorists have known that consumers actually benefit from price volatility (or price uncertainty, since the two are equivalent). The best treatment of the topic can be found in Turnovsky et al. (1980), but the technical argument relies on the quasiconvexity of the consumer’s indirect utility function. That is the part of my argument that is speculative and based on microeconomic theory.
Urban households being almost all net buyers of food, they have more in common with the poorest than the wealthier rural households since the former are likely net buyers of almost all commodities while the latter are likely net sellers of almost all commodities. But in my paper with Chris Barrett and David Just, however, the main empirical result was that the rural poor actually benefit modestly from food price volatility while wealthier rural households are considerably hurt by it. Since urban households, much like poor rural households, are net buyers of almost all commodities, I also expect them to benefit modestly from food price volatility, although there is no doubt in my mind that they are hurt by rising food prices. This is the part of my argument that extrapolates from my empirical results for rural households.
So in a way, I agree with Ed when he writes that the welfare impacts of food price volatility are likely to be very different between rural and urban households, but the reason really stems from the heterogeneity within rural households as much as from the heterogeneity between rural and urban households. In other words, when it comes to the welfare impacts of food price volatility, urban households have a lot more in common with poor rural households than they do with wealthier rural households.
In terms of political economy, it is thus not surprising that agricultural producers can constitute a powerful interest group. Agricultural producers constitute a fairly homogeneous population of like-minded individuals. Urban households and poor rural households, however, have little contact with one another, so that it is difficult for them to coalesce into a cohesive interest group. The end result is that as countries grow wealthier, agricultural policies are geared more and more toward agricultural producers than they are toward consumers of agricultural commodities.