Raising food prices to end hunger

The doctrine that food prices should be kept as low as possible to end hunger is wrong, says former FAO agricultural economist Andrew MacMillan.

Author: Andrew MacMillan. Source: Global Food Security

Most governments prefer to keep food prices “affordable” for their people. Many subsidise their farmers’ incomes to let them make a decent living while they sell their output for little more than it costs them to produce it. Countries justify these measures and relatively low taxes on foods as means of preventing poor people from suffering from hunger.

When international food prices rose sharply from 2007-08 onwards, the United Nations braced themselves for a big jump in hunger, predicting a record 1.02 billion hungry in 2009. Food riots took place in the cities of many developing countries. But as time went by, revised estimates showed a steady fall in the number of hungry in spite of the jump in prices.

In practice, policies that keep consumer food prices low, especially when combined with further downward pressure on prices from supermarkets as they compete for customers, may raise the incidence of hunger and malnutrition in the medium- to long-term.

This is mainly because over 70% of the 842 million people now suffering from chronic hunger live in rural areas. Food production is usually the dominant economic activity. Two factors determine the health of such rural economies – the volume of farm output and the farm-gate prices of the main products. Even if production remains steady, falling prices have a disastrous effect, putting downward pressure on wages, cutting employment opportunities and discouraging new investment on farms and in rural infrastructure and services.

Why work so hard for next to nothing?

When food prices fell in real terms over more than 20 years up to 2007-08, farming became less and less attractive and rural-urban migration accelerated in many developing countries. Even in industrialised countries farm labourers and people working in the food industry, whether in processing, retailing or fast-food restaurants are amongst the lowest income earners.

With this in mind, I have been trying to argue that a deliberate rise in consumer food prices, passed back up the value chain in line with fair trade principles, would offer one of the best means of cutting the incidence of hunger by creating greater rural economic prosperity. I have recently found good evidence for this: Derek Headey of the International Food Policy Research Institute (IFPRI) shows that, contrary to expectations, the recent food price rises have significantly reduced poverty and inequality in the long run!

Most consumers in industrialised and emerging economies typically spend less than 20% of their disposable income on food. They could easily absorb a substantial rise in food costs – even if they might complain loudly! Rising prices will also discourage food over-consumption, cutting future health costs from the overweight and obesity epidemic now affecting more than 1.5 billion people.

Higher food prices will also reduce the 20-30% of food wasted in industrial countries at household level. This will take pressures off natural resources while making a win-win cut in the greenhouse gas emissions that drive climate change processes – once in growing the discarded food and then in disposing of it in landfills.

Subsidies in the right place

Rather than continue to effectively subsidise all consumers and indirectly perpetuate rural poverty, it seems better to promote higher food prices. However, until the economic benefits start to show up in hunger reduction, policies must ensure that all poor families can eat adequately by providing them with income supplements, indexed to local food prices.

In recent years, many developing countries from Brazil to Ethiopia and Vietnam, are showing that they can put in place increasingly reliable social protection programmes that do just this.

Sceptics will claim that social protection on this scale is unaffordable. But this too is nonsense.

I surprised myself when I calculated how much extra food is needed to close the hunger gap globally. The average food gap between what chronically hungry people are now eating and the hunger threshold is around 300 kcals per person per day. This is equivalent to about 75g of wheat or rice, or roughly 30kg of grain per year. Closing the calorie gap for 1 billion people would need no more than 30 million tons of grain per year – well below 2% of global cereal output.

Even if you triple it and diversify the diet, it’s no big deal. It would still cost less than about 10% of the OECD countries’ farm subsidies for which taxpayers coughed up US$415 billion in 2012!

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