Impact Of Rising Food And Fuel Prices Economics Essay
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In general, we consume food and fuel every day but do you know in detail about changing food and fuel price? In recent decades, food and fuel prices have fluctuated. General trends of all kind of food and fuel prices have increased since 1990 followed with drop in the last few years. It indicates some interesting issues. The price of food which is the essential thing in daily live is continues increasing in the past years. Rising of food prices might be both advantages and disadvantages. These topic review reports narrow this topic down in impact in developing or low-income countries. Firstly, this report will show the fact of food and fuel price now. The second part is the literature review about this topic. Next, the report will discuss about the reason of this issue in order to understand cause and the way to prospect in the future from many articles. Finally, the impact of rising food and fuel prices will be summarized. After understanding cause and impact of rising food and fuel prices, we can prospect a trend and prepare for future plan. It not only concern in home country but also concern about manufacture, competitor and customer countries. Even though, your business is not in food or fuel but it also affect your business because there is the first priority of spending money in everyday live. It can affect the way that customers spend their money to other things. Moreover, understanding of changing food prices enable investor to set up a new business or invest in the companies.
The Food and Agriculture Organization of the United Nations has been established since 1945 in order to help both developed and developing countries. Its main purposes are to improve agriculture and focused special attention on developing rural areas, home to 70 percent of the world's poor and hungry people. FAO website (2009) According to the data from FAO website, the graph below shows six indexes of price -- food, meat, dairy, cereals, oil and sugar -- from 1990 to 2009 with base at 2002-2004 as 100.
Source: FAO website (2009)
It can be seen from the graph that all price indexes increase at the end of this period especially for sugar price index. The food price index, which contains all kinds of food, reached a peak at 211 in 2008 and dropped to 168 at the end of this period.
In the present situation, the food prices can be affected by many factors such as quality, the way to produce and brand. The example is organic food. According to BBC website about organic food, it said that "Crops grown organically are more vulnerable to pests and disease. It is also more labor intensive and farmers pay more for organic animal feed". Thus, the price of organic food can be set to be higher than traditional food.
Source: BP Company Website (2009)
Fuel price is another issue that will be accounted in this report. The figure from BP Company Website shows the crude oil prices from 1861 to 2008. It can be seen in the last decade that fuel price rockets from around 30 to nearly 100 in only ten years. In more detail, the U.S. Energy Information Administration line graph below shows all formulations retail gasoline prices in U.S. in the last five years. U.S. Energy Information Administration (2009) In 2009, the price plummeted in the early and slightly increase after that. On December 28 2009, the all formulations retail gasoline prices in U.S. located at 266 cents per gallon.
Source: U.S. Energy Information Administration (2009)
Nowadays, there are many new kinds of energy such as nuclear, wind and solar cell. New sources of energy might affect the price of old fuel. Green energy is also a new issue that people concern about environment. New Energy Movement states on its website that green energy is "Clean, safe, abundant, inexpensive energy for all" New Energy Movement website (2009) Due to rising of fuel prices, people awake in research and development about new kind of energy in order to reduce cost of production. If fuel price is high, the investment for the new kind of energy might reduce payback period in a huge amount of investment. It is another advantage factor of increasing of fuel prices.
The literature review
These are examples of article about rising food prices. There are many articles that discuss about rising food prices, global food crisis and impact of rising food prices.
In Overseas Development Institute article about rising food prices: a global crisis (2008), it mentions about causes of rising food prices come demand and supply. The article says that prediction for the next decade continuing increase price. On supply side, rising fuel price effects cost of produce such as fertilizers, machine, operations and transportation. Unfortunately, fuel prices as well as other production cost have risen faster than food. On demand side, growing incomes or GDP in countries means increasing demand on food while producing food is still at the same level so the price automatically increases follow increasing on demand.
According to this article, the author divides impact into three ways. First is impact on the poor. The article said that "Rising food prices affect the poor directly, as producers and consumers, and indirectly, through the impact on their economies." The poor normally spends money on food so if food prices rise, the poor has to spend more for food. Impact on farming is another one. Rising food prices can raise farmers' incomes if farmers gain all higher prices from selling food. Unfortunately, cost of goods sold also raise too. Farmers have to pay more for producing and distribution. In the short term, when fuel price rises up, farmers have to sale food in the same price before rising price effective. Farmers have to bear high transport costs. The article said that "Experience suggests that farmers may lack the credit and inputs needed to respond in the short term. But they could benefit in the medium and long term, as in the Asian green revolutions and in many African countries in the recent past." The last but not least is impact on low-income countries. Rising food and fuel prices lead inflation. Low-income countries have to face inflation which means they have to pay a bigger amount of money when they import. The World Food Program (WFP) which helps low-income countries solve poverty has to pay more if it wants the same volume of food. But in the real world, as this food support is programmed by budget, not volume of food; rising prices depress the volume of food. That means low-income receive less food from the program, increasing poverty in those countries.
The next article is "Rising Food Prices: Drivers and Implications for Development" by Alex Evans (2008). This article gives results about drivers of increasing food prices. The main drivers are the increasing on demand. From the projection of the World Bank, food's production will grow up 50 per cent by 2030 in order to fulfill demand. It demands on food that effect food price. Some kinds of agricultural are used to be biofuels or bioenergy such as ethanol. Since fuel price increases dramatically in recent years, people tried to find new kind of energy in order to reduce cost of production. The more proportion of agricultural for biofuels or bioenergy means fewer amounts of foods and it leads to lack of supply for population need. Next driver is the rising of cost of agricultural inputs, especially energy. It effects both direct such as production, transportation and distribution and indirect such as fertilizers, soil and electricity. Limited of national resource such as water is another driver for increasing food price. World demand on water has risen in the last five decades. A lot of people in some countries in the world are facing short of water problem. Agriculture consumes a lot of water so water scarcity becomes a more pressure in this situation. Land is another limited resource in the world. Rising world population means more required space for population so space is a restrict resource. Not only world population but also energy plants have been grown. The next driver of rising food price is climate change. Flood, changing temperature and disaster are results of global warming that destroy agricultural and livestock.
In this article, the author suggests about how to solve this problem in two ranges of time; in short-term and long-term. In the short-term, both the volume and the quality of food and living are the first priority for assistance organization. According to Javier Blas and Gillian Tett (2008) about "High food prices may force aid rationing", they raise that "the agency would have to look at 'cutting the food rations or even the number of people reached' if the additional funding were not forthcoming" and it should improve in aid quality as well. In the long-term, increasing the supply of food in order to reach the demand of food in the future is the next challenge. In order to achieve this goal, we need an innovation and a massive investment for producing food.
The next article is "Food price increases and net food importing countries: lessons from the recent past" by Francis Ng and M. Ataman Aksoy (2008). Starting with recent rising food and commodity prices, an issue of poor countries in rising food prices has highlighted a concern. The authors want to find out the question if governments should get involved to lower food prices, or they should allow higher food prices to give better output from their farmers. So they have to solve the real impact of rising food prices in order to understand result of this situation. A consensus believes that rising food prices give negative effect for the poor because a large number of poor countries are food importers and higher price means higher bill. Higher food price obstructs the international institutions in raising funds for humanitarian food aid. Unfortunately, we do not have enough information to estimate the net effect in rising food price for vulnerable countries.
The authors discover a little deterioration in food trade balances of poor or low-income countries and an improvement in developing or middle-income countries. In the low-incomes countries, the value of food imports increase faster than food exports. In the opposite way, the middle-incomes countries exports food more than imports so they gain good opportunity from rising food prices. According to the article, the percentage of imports and their GDP in low-incomes countries is higher than in the middle-incomes countries. That means higher import bill impact people in low-income countries more than in middle-incomes countries. The article notes that "These results suggest that food vulnerability in low-income countries is closely associated with agricultural production relative to demand, rather than trade". The results suggest that it should improve the agricultural performance and providing small amounts of food aid can ease the crisis. This study is just a first step in understanding the impact of rising food prices on developing countries. It should have further work to research by using more specific price data from all commodities and quality should be take an account in the study.
Now I would like to review in detail in the specific case of developing countries. In Agricultural Economics (2008), it has topic about "World food prices and poverty incidence in a food exporting country: a multi household general equilibrium analysis for Thailand". This article aims to find out the relationship between world food prices and poverty rate in Thailand which is the world's biggest exporter of rice and a considerable exporter of several other agricultural commodities. The author thought that the relationship is not straightforward and it has double-edged sword. His assumption is that rising in global food prices moves up poverty in agricultural exporting countries like Thailand or not.
The impact of rising food prices harms poor consumers who spend high proportion of their money on food. On the other hand, they may give benefit to poor farmers who earn money from selling food. In developing countries, the majority population lives in rural area and mostly be a farmer which is directly depending on agriculture or producer of food. At the simplest level of analysis, higher food prices would boost poverty among households which are net consumers of food but reduce it among households that are net producers. But in this case, Thailand has large number of poor farmers and proportion of food exporter. The author find out that is true for Thailand or not.
In this research, the researcher indicates in both import and export in Thailand. International prices of Thailand's food export and import commodities were accounted for in this research and compare with GDP or income of households and land rental. The author has to take account for rental because, in Thailand, a high majority of farmers have to lend land from lender. In conclusion, this article disagrees that increasing in global food prices raises more poverty even though in food exporter countries like Thailand. It might give positive effect for an economic of that country but might not directly positive for the poor. From the result of the article, it said that the increasing in poverty is significant but not dramatic. The main benefit of the increasing food prices are not to the poor but it straight to the owners of agricultural land. In this situation, rising food price might increase wages of unskilled workers or farmers but this effect is not strong enough to outweigh the negative effect on the poor farmers. Even though, Thailand, a large agricultural exporter, faces a negative effect with rising food prices, an example of countries where gain an advantage from this situation is very hard to find.
Reasons of rising food prices
According to all articles, the reason or causes of changing food prices in recent years can be summarized. First driver is decreasing in supply. There are many factors that cause decreasing in supply. Disaster and climate change such as tsunami, flood, and temperature increasing in many area of the world are the first factor. In the Philippines, typhoons have devastated crops. Next year El Nino is expected to disrupt rice production across Asia, the main area of agricultural. The Economist Newspaper Limited (2009) Bioenergy is also another factor that takes some of food grown area. The role of biofuels as a source of demand for grain has also been a significant element of recent food price rises. Rising Food Prices (2008) Increasing in fuel price encourages people to find new way of energy, and biofuels are one of the ways. So food cultivated areas are changed on to energy cultivated areas. It means decreasing in volume of food production. In the Agricultural Economics about Global Scenarios for Biofuels: Impacts and Implications, it notes that "Biofuel production is only part of the change in the world food balance". Limited of national resource such as clear water and land is another reason for lower food production. "A particular worry is depletion of limited groundwater resources, on which some parts of the world" Rising Food Prices (2008) More world populations and degraded land decrease the area of agricultural. The FAO estimates that there is at most 12 per cent more land available that is not already forested or subject to erosion or desertification, and that 16 per cent of arable land is already degraded. Rising Food Prices (2008) Large amounts of new land or using up lots more water (in parts of the world, water supplies are stretched to their limit or beyond) are used in agricultural. The Economist "How to feed the world" (2009)
Increasing in demand is another driver in rising food prices. Growing incomes in countries such as China and India means rising demand for meat. Overseas Development Institute in Rising food prices 2008
Another driver is speculation on food and fuel. It leads unstable of changing price. Speculation on food prices has played the decisive role in the price bubble in 2007/2008. Peter Wahl 2008
Impact of rising food prices
Specific in developing countries, the most important impact is increasing in poverty. In the low-income countries, the majorities of population are poor and spend most of their money on food. Increasing food prices means higher food bill. Even though in the export countries such as Thailand, the world's biggest exporter of rice and a considerable exporter of several other agricultural commodities, farmers did not gain advantage on rising food prices because there are other factor that reduces net profit from selling food product such as higher price of fuel, increasing in fertilizer and cost of distribution. From the Overseas Development Institute (2008), the article notes that "Rising food prices affect the poor directly, as producers and consumers, and indirectly, through the impact on their economies." Article about Food price increases and net food importing countries: lessons from the recent past (2008) gives a result that it gives a little deterioration in food trade balances of poor or low-income countries. Agricultural Economics (2008) says that "The impact of rising food prices harms poor consumers who spend high proportion of their money on food". In short term, when the cost of production increase faster than selling price get higher, the farmers have to bear higher cost before gain higher income so they may face cash flow problem. Overseas Development Institute (2008)
Next impact is obstructing international organization in food aid for poor countries. The aid food program is allocated by budget not volume of food so rising food price effect decreasing in amount of food. Overseas Development Institute (2008)
Last but not least, inflation is another impact from rising food prices. The inflation is calculated by the Bureau of Labor Statistics (BLS) who surveys prices and generates the current Consumer Price Index (CPI) every month. InflationData.com (2009) It is clear that increasing in food prices drives inflation up. From Overseas Development Institute (2008), it says that rising food and fuel prices lead inflation. Low-income countries have to face inflation which means they have to pay a bigger amount of money when they import.
On the other hand, it might be a positive impact in some cases. The middle-income countries that export food more than import gain a good opportunity when food prices rise. That mean they receive more money when selling food. It can boost countries' economic. Looking in to the individual population in those countries, people have to pay more when buying food as well. Higher food and fuel prices are cause of inflation and it likes cycle. Farmer gain more money from selling food but they also pay more in cost of goods sold and living cost.
Rising in food and fuel prices impacts the economic and human being. The effect increases poverty in developing countries due to increasing in fundamental needs. On the one hand, in agricultural countries, rising in food prices increases income for farmers. Unfortunately, in the real situation, there are other factors that impact farmers' net profit. One is the rising cost in producing such as fertilizer and distribute cost is faster than rising selling price. Another one is most of poor farmers lends the land for growing their product so they have to pay for their rent to the landlords who gain an advantage from this situation. Inflation is another impact from increasing food and fuel prices because both of food and fuel are the main index for calculating inflation.
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