How do higher food prices affect the poor?

Posted at 05/08/2014 10:45 AM | Updated as of 05/08/2014 5:37 PM

MANILA, Philippines - Higher food prices, according to newly released inflation report, were the biggest factor behind the faster rate of increase in prices of consumer goods and services last month.

Prices of food last month rose by 6.5 percent on the year, helping drive up the overall inflation rate for April to 4.1 percent, an escalation from the previous month’s 3.9 percent as well as from the year-ago 2.6 percent. The rate of price increases in the food sector was nearly four times its pace in the same month last year, according to the government data.

If low supply was the reason for the rising food prices, then it can be expected that further increases will be seen in the coming months owing to the projected impact of harsh weather conditions on farm production.

There is concern that dry weather and a lack of rain in agriculture-based provinces in recent weeks would impact on local rice and corn crops. Government agencies are now resorting to cloud-seeding to induce rains and mitigate expected damage to farm output.

Worldwide, the United Nations’ Food and Agriculture Organization recently reported that crop damage in many countries due to drought has pushed world food prices to a ten-month high as of last March. This has sparked fears of a world food crisis.

Across Southeast Asia, prospects of prolonged El Niño weather conditions this year have also pushed up prices of such commodities as rice, sugar, cooking oil, wheat and other agricultural goods in anticipation of production slumps.

Amid this uncertainty, analysts are painting grim scenarios for the world’s poor. Indeed, the global food shortages that sent prices surging ahead in 2008-2009 left more than 1 billion of the world’s population without enough food to meet daily dietary requirements, according to a 2010 report by the FAO. Economists at the World Bank estimated at the time that price increases from June to December 2010 alone pushed 44 million people below the $1.25-per-day extreme poverty line, according to a BusinessWeek report late last month.

Those assumptions, the BusinessWeek article noted, relied on the fact that “although most of the world’s poorest people work in agriculture, they buy more than they grow on their own plots, so higher food prices surely would mean more hunger and poverty.”

But this view may now be flawed after all. Recent increases in food prices may have actually aided progress in reducing poverty, according to a new study cited by the BusinessWeek article written by Charles Kenny, a senior fellow at the US think-tank Center for Global Development.

A discussion paper authored by Derek Heady, a research fellow at the Washington-based International Food Policy Research Institute (IFPRI), looked at the rate of poverty reduction in developing countries and its relationship to changing food prices.

Heady’s paper concluded that “in the long run (one to five years) higher food prices reduce poverty and inequality.” The research findings, the paper said, “suggest that the recent increase in global food prices has significantly accelerated the rate of global poverty reduction.”

The paper said further: “The policy implications of these findings are therefore nuanced: short-run social protection is justified in the face of high food price volatility, but passing on higher prices to producers in the long run is an important means of reducing poverty in the poorest countries.”

Heady’s study, which has been met with skepticism from other analysts, used as a basic approach the net benefit ratio between the impact of farm wage adjustments to higher food prices.

In a brief reference to an earlier study on Philippine conditions, the IFPRI research fellow’s paper noted “stronger short-run” movements of agricultural incomes in relation higher food prices compared to levels in other Asian rice producers.

Could this be the explanation for the decline in the poverty incidence among Filipinos indicated in last week’s report by the Philippine Statistics Authority (PSA)?

In the first half of 2013, the statistics agency reported, poverty incidence among Filipino individuals was estimated at 24.9 percent, lower compared to the 27.9 percent recorded in the first half of 2012.

Subsistence incidence among Filipino individuals, or the proportion of the citizens whose income fell below the food threshold (this ratio is also referred to as representing “extreme or subsistence poverty”), was estimated at 10.7 percent in the first half of 2013, a drop from the year-before 13.4 percent, the PSA report said.

In estimating poverty incidence in the country, the PSA used for the first time as basis income data from its Annual Poverty Indicators Survey, whereas in previous years the estimates were based on the Family Income and Expenditure Survey conducted every three years.

Poverty among families—which PSA said was a crucial social indicator that guides policymakers in formulating poverty alleviation strategies—was estimated at 19.1 percent last year (based on APIS) compared to 22.3 percent in the preceding year (based on FIES), the statistics agency said.

The ratio of Filipino families in extreme poverty declined to 7.7 percent in the first half of 2013 from the year-ago 10 percent, according to the PSA estimates.

In nominal amounts, a Filipino family of five needed at least P5,590 on average to meet monthly basic food needs and at least P8,022 on average to meet monthly basic food and non-food needs, the PSA said. These amounts represent the monthly food threshold and monthly poverty threshold, respectively.

The PSA said the family food threshold increased by about 2.4 percent in 2013 while the poverty threshold grew by 2.6 percent.

Even if this improved poverty picture was the result of the change in the formula for computing the incidence rates, it would still be interesting to hear from the economic managers of the Aquino government whether they are happy with the apparent benefits from higher food prices derived by the poor in the provinces—never mind if these are hurting consumers in the cities.

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