Food prices and poverty

A question from Yahoo! Answers:

Will higher food prices reduce poverty?

It depends on two things, (1) where in the food supply chain prices increase, and (2) what the poor in question do for a living.

If food prices increased because the prices of agricultural commodities rose, it could help poor farmers, who would be selling their crops at higher prices. However, if food prices increased because of higher transportation or processing costs, this would have no positive impact on farmers, as their sale prices would remain unchanged.

As to the poor living in cities, they would be affected adversely regardless of where in the supply chain the price increase takes place.

Original poster’s reply

I think higher grain prices will help out poor farmers in the developing world. I just am concerned with the long term implications. Will it slow development if farming is the one job that earns a living?

I think you are mistaken in your assumptions. Many developing countries are net importers of grains. Take a look at world trade patterns in wheat, for example:

As you can see, U.S., Canada, Australia, and EU produce the vast majority of exportable wheat. The developing world as a whole is a wheat importer.

The situation in corn trade is very similar — developed countries (in this case, mostly the U.S.) export, developing countries import :

So any increase in agricultural commodity prices will result in a wealth transfer away from developing countries to developed countries. The only possible exception is the rice market, where the the U.S.’ share of exports is relatively small (the U.S. exports less rice than Thailand, Vietnam, or India, and a little more than Pakistan), while Japan, South Korea, and Taiwan are all net importers. However, sub-Saharan Africa, the world’s poorest region, is also high on the importers’ list…

Your concern about long-term implications is, in my opinion, justified. As a country develops, the percentage of population involved in farming decreases (along with agriculture’s share of GDP), both because other occupations become more attractive and because agriculture itself becomes more advanced (machines, fertilizers, high-quality seeds, etc.) Additionally, the institutional structure of agriculture tends to change; there is usually a shift away from the family farm toward a situation where most of the people involved in farming are hired help, rather than farm owners and their family members…

To summarize, the best policy is not to “help farmers”; it is to encourage shifting away from farming. Look at the corn imports chart again: the largest corn importers are the poster boys for accelerated development: Japan, South Korea, and Taiwan…

2 thoughts on “Food prices and poverty

  1. Is it 5 yet

    Interesting. But why are the developing countries net importers of grain? I hear all the time that it is because it is cheaper to import than to farm themselves (in part due to subsidies). So if grain prices increase as they are doing, it becomes more economical to produce domestically, increasing income for poor farmers in developing nations and reducing imports.

    Reducing imported grain means foreign reserves available for other purposes, increasing farm production means more jobs, more income.

    But, of course, higher production levels of grain worldwide will push down prices again, so the investment in modern farming in the developed nations and a permanent reduction in subsidies in the developed world is necessary.

  2. NC Post author

    It is indeed cheaper to farm in developed countries, but the reasons for that have relatively little to do with subsidies. Developed countries have a working system of recording and enforcing land ownership, which makes it relatively easy to mortgage land to buy equipment, fertilizers, and high-quality seeds. In most developing countries (with notable exception of Argentina), farming operations lack access to capital required to farm on an industrial scale, so agriculture remains a labor-intensive, rather than capital-intensive, business.

    As to foreign exchange reserves, the best way of increasing them is not through decreased food imports, but rather, through increased exports of manufactures or labor-intensive agricultural products such as fruit or coffee… But even then, the land ownership issue may bite. Zimbabwe, for example, used to have a thriving fruit export industry, until the Mugabe government started the policy of land confiscations…

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