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Category: Agriculture

Published January 15, 2011

Rising Food Prices vs. Food Price Volatility

This afternoon, the Overseas Development Institute (ODI) tweeted a link to a new post of theirs by Steve Wiggins that discussed how rising food prices are not necessarily bad news:

“Last Thursday The Guardian ran with the headline “World food prices enter ‘danger territory’ to reach record high”. Is this right?

Not quite: there’s a difference this time.

It is not just cereals prices, nor just food prices, that are rising, but almost all agricultural prices — including those of the main tropical exports: cocoa, coffee and tea; cotton; palm oil; sugar; and rubber. Most low income countries, leaving aside the few with minerals and oil, depend heavily on these for their export earnings. Often much of the production comes from small farmers. Higher prices mean windfall gains for them, gains that are likely to be spent on local goods and services, with strong multipliers in additional jobs and incomes for others on low incomes.”

The post goes on to explain that rising food prices may actually improve the trade balances of countries like Burkina Faso, Ghana, Indonesia, Kenya, and Nicaragua, which is good for those economies.

In the comments section of the ODI post above, however, Mike Warner writes:

“Isn’t the point that VOLATILITY is bad for everyone (except speculators)? (…) So, perhaps more useful to focus on helping poor people/nations find ways to cope with increasing price VOLATILITY (whoever the net gainers and losers might be in the short term)?”

This is a very good point, and one I have been working on with coauthors Chris Barrett and David Just over the last few years.  What we have found will most likely surprise you, but it is a bit technical, so I will put it under the fold.

Continue readingRising Food Prices vs. Food Price Volatility
Published January 3, 2011

Messing with Markets: Eggs in Québec

Danielle Landreville, an egg producer in Sainte-Mélanie, Québec was given a reminder by the Québec Ministry of Agriculture and the Québec Federation of Egg Producers that she would be fined C$2,250 ($2266) if she kept giving away some of her farm’s eggs to food banks during the holidays (article in French here).

The Ministry of Agriculture enforces a policy of supply management which aims at artificially raising the price of eggs on the market. The eggs produced by most of Mrs. Landreville’s 36,000 hens eventually hatch chickens. She gives away the eggs which she knows cannot hatch as consumption eggs.

According to GO5, a Québec “coalition for an equitable agricultural model: supply management,” there were 44 farms such as Mrs. Landreville’s in Québec in 2006, representing a total of about 200 million eggs — about 27 percent of the Canadian market — per year.

Consumers Pay Twice

Unless the demand for that commodity is perfectly elastic (which is unlikely for whole eggs, a commodity that has few substitutes), this means that the price of the commodity whose supply is managed increases. This price increase is borne by egg consumers. Because Mrs. Landreville’s “consumers” are the farms raising broiler chickens, part of the price increase is passed on to the consumer of broiler chickens.

There is another, more subtle way in which consumers end up paying more under supply management. Supply management of agricultural commodities is equivalent to giving agricultural producers a subsidy. Eventually, this subsidy leads to too many producers being on the market with respect to the number of producers who would be able to operate at a profit without such subsidies. Such subsidies are partly paid for by consumers via their tax bills, so that consumers end up paying twice for supply management policies.

In 2006, there were 44 farms in Québec producing broiler eggs, and there were 103 farms producing consumption eggs, all under a supply management scheme.

If I were a gambling man, I would bet a substantial fraction of my annual salary that there were more than 44 consumers of broiler chickens and more than 103 consumers of eggs in Québec in 2006.

(HT: @Liberte_Quebec)