Food Price Inflation and Demand Elasticity in the Developing World

A twitter conversation with @ajtarnas has sparked me to write this post.  The conversation started with this tweet, quoting and linking to an article by AFP:

@ajtarnas responded:

The conversation concluded with this exchange:

So, in response to the comment that there is no context provided on this issue, and that food price inflation only affects people making less than $2 a day, I offer the following quick analysis. First a brief primer on the concept of demand elasticity. Elastic demand is when the percentage change in the quantity demanded exceeds the percentage change in price. Inelastic demand is the opposite, that is when the percentage change in the quantity demanded is less than the percentage change in price. The case of food prices will help to clarify this concept.

In the United States, as @ajtarnas points out, demand for food is relatively inelastic. That is, a 4% change in prices will decrease demand by less than 4%. Consider, however, that in most developed countries less than 20% of household income is spent on food. As the percentage of household income spent on food increases, demand tends to become more elastic. In India, 56% of household income is spent on food, in Tanzania 62% of household income is spent on food. In these cases, a 4% increase in food prices may result in 5% or greater decrease in demand; not because people don’t need or want food, but simply because they can’t afford it.

This phenomenon does not only play out from country to country, but also from household to household. Under current market conditions, the primary factor that drives access to food is income. What seems like small price flucuations to households high on the global income ladder are huge price fluctations to those on the low rungs of the global income ladder. One can easily imagine a family in Tanzania with more than enough money to eat a healthy diet. The social safety net in the United States, in the form of food stamps and subsidized housing, helps to mitigate the more extreme examples of malnutrition and starvation that are commonly witnenssed in Africa and India.

Even in the United States, poor nutrition is typically associated with low income families. So while these families may not be starving in the same way as those in Somali refugee camps, they are more vulnerable to obesity and poor nutrition as they seek low-cost substitutes to healthy foods.

Volatile food markets have played a big role in social unrest over the past 7 years. The impacts of climate change, energy scarcity, unstable financial markets, and political corruption will continue to exacerbate an already precarious global food security environment. While global commodities like corn, rice, wheat, and soy, will likely remain fairly abudant and relatively cheap for many years to come, other key ingredient to a healthy diet, like meat, fruit, milk, and vegetables, may become more expensive, especially for those functioning in the difficult world of elastic food demand. Fortunately, these products are relatively simple to produce for oneself, thus the permaculture solution is a viable way to supplement global human nutrition.


Comments

Food Price Inflation and Demand Elasticity in the Developing World — 2 Comments

  1. It’s a very interesting issue. I haven’t seen any reliable journalism on this point — only extrapolation from economic principles. A large percentage of the poor farmers in the world grow a portion of their own food, so they don’t use cash to cover their whole annual food requirements. Many subsistence farmers, as well as many of the poor who do not grow food, live in countries where food is not a freely traded commodity, so the macroscopic price fluctuations that the World Bank and the CBOT condense into single datapoints for first-world media consumption are almost meaningless. Import-export protections, strange food aid arrangements, and regional food infrastructure inadequancies and price fixing are very common and not reflected in price “elasticity”.

    The AFP reprint of a World Bank press release that you first linked to only gives one single contextual datapoint: the commodity price of oil. What I want to know is: what is the price of 100lbs of rice in Dhaka? Bangkok? Accra? We need dozens if not hundreds of “basket of goods” anecdotes from local sample points around the world. If I’m not growing food and making less than $1k/yr in Bangkok, what is my food budget? What do I spend it on? What are the costs of staple foods in that place? If I’m a Bengali rice farmer whose rice is meant for local consumption, and who couldn’t get it to market if I wanted to, and therefore am only very tangentially part of the world commodity markets, what then are the prevailing costs to live there?

    There are not enough local data points, and too much doublespeak, in reporting on food prices. Glib economic principles are marshalled for emotional effect without context and we learn nothing. Here in the US, a statement regarding the poor like “they seek low-cost substitutes to healthy foods” is accepted as true, but is in reality nonsensical. Healthy foods are perfectly inexpensive — unhealthy foods generally cost more. (Some argue that is costs “time” to cook oatmeal or rice, bake bread, make burritos, brew beer, or eat fruit versus buying fast food and manufactured meals. Ha!)

    I can speak from my experience as one of the bottom 5% earners in America (making well under $10k/yr for the past six years), but certainly I am living in a totally different form of poverty than what prevails for a subsistence farmer or $2/day earner in a third world city. Frank, you’ve travelled internationally and clearly the “food cost inflation” narrative rings true to you. No doubt global piles of speculative money are sloshing around in landgrabs and commodities where they are causing real harm, especially in politically and environmentally marginal places. But I’m still left wanting more local context, starting with some anecdotal evidence for how exactly poor people around the world spend their money, and what food prices prevail in those local places.

    • All great, great points. You wrote:

      “We need dozens if not hundreds of ‘basket of goods’ anecdotes from local sample points around the world. If I’m not growing food and making less than $1k/yr in Bangkok, what is my food budget?”

      I almost want to laugh when you make this statement, because I know this data is collected by some powerful organizations and is kept under wraps. Take for example FDTA-Valles in Bolivia. (www.fdta-valles.org). They’ve been collecting this data for at least 12 years for all sorts of different food products, not just the internationally traded and exported commodities. If I were to walk in there tomorrow and ask for their data set, I wouldn’t be able to access any of it. I would likely be laughed at and treated poorly. And this an organization funded in large part by US taxpayer dollars.

      To be fair, they publicize prices via radio on a daily basis, which helps producers by providing good information. But acquiring multi-year data sets? Not gonna happen.

      Food price data is a powerful asset in and of itself. It allows for the creation of pretty powerful models based on seasonal flucutations, the impact of black market imports, weather effects, etc. With this information, an organization stands to make a lot of money by being able to predict the impact events will have on food prices. I wouldn’t be surprised if the Bolivian data is becoming part of a larger global database kept by the Pentagon or some other such megaorg.

      But I can tell you that the international futures prices of a lot of commodoties, esp. wheat, corn, soy, rice, are pretty good barometers of what the pressures on local people in a place like Bolivia. I was in Bolivia in 07-08 when food prices began to surge; you could feel the collective anxiety building for people. Then we saw it hit in a big way in 10-11, and the story went global.

      But economies also adjust to inflation. Producers and entpreneurs benefit provided the prices of inputs don’t surge too much, but people on fixed income really take it on the nose: nurses, teachers, police officers, other civil servants…they struggle to adjust because usually wages don’t increase at the same rate.

      Also, don’t be fooled into thinking that all these farmers are producing for their own needs. That remains true for a lot of people in different places, but as producers transition more and more to commodity agriculture, even small scale vegetable producers, less and less land and water is dedicated to produce subsistence crops. It’s bizzare to watch Bolivian farmers plant large extensions of onions, sell the onions, and use the money to buy huge bags of pasta and rice.

      In episode #120 of Agroinnovations Ellen Brown mentions that potatoes have largely been insulated from the volatility of global markets because they aren’t traded in the futures markets. So these types of subsistence crops are an excellent hedge against inflation for a lot of countries, it seems.

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