Can Governments Control Food Prices??
The rhetoric around inflation generally and food prices specifically is growing louder. It is a point of emphasis for politicians, particularly those in opposition. Most central banks have a mandate to control inflation and we are seeing interest rates rising in an effort to moderate inflation. It begs the question as to whether governments can (and as importantly should) take steps to reduce food prices. This is not to say that food inflation doesn't matter. There are clear impacts on food security in North America and across the world.
The truth is, despite protestations and promises from politicians, that there is little that governments can realistically do directly to effectively reduce food prices. There are also issues around the secondary impacts of policy around food prices.
The most obvious one (and one I have seen raised in the media) is the regulation of food prices. In this scenario the government would establish price ceilings for food products. This is virtually unheard of in North America but has happened in other jurisdictions, primarily in developing countries. The first question that arises is where is the price limit set? Is it set at the farm level, at the retail level, or somewhere in between.
On first blush this might seem like a good way to curtail food price increases. The focus could be on staples. The problem arises that this takes money out of the system. If the money isn't replaced (i.e. through a subsidy from the government), products will likely find other markets. That means products will become unavailable. While that does buffer against higher costs for those items, it clearly doesn't achieve cost relief on those products. If these are imported items, they will go to other markets. If they are domestically produced, they will likely leave the country for higher returns. There are some products, like dairy and poultry, that have domestic production controls. Farm prices are set based on a cost of production model (which is contentious for some) so if grocery prices were capped, retailers and processor would have margins squeezed. Milk is already a loss leader in the grocery store. Yogurt and cheese are staples in many households. At the very least, specials would disappear, but it would be much more likely that less product would be available on shelves. This type of regulation is impractical and is unlikely to achieve much. If prices go down it will be at the expense of farmers, processors, or retailers. In the long run that will reduce access to those products and stifle innovation and research investment. If governments make up the difference through a direct subsidy it becomes very expensive.
In some countries, governments have chosen to limit exports as a way of reducing domestic food prices. Argentina did it this year when wheat prices went very high due to the war in Ukraine. the Argentinian government has done it before when commodity prices increased. This means that all domestic production must be sold domestically and this forces prices down. This is great for domestic consumers, especially the urban poor, but it puts a burden on domestic farmers who lose returns and may stop or reduce production in favour of unregulated products.
Some jurisdictions tax food and are now waiving the tax on food. In Canada, most retail food items are not taxed so this is not an option. The Government of Alberta has introduced fuel tax relief as an effort to buffer the rising cost of gasoline. This is an effective way of reducing the cost of transportation. This can't be used for most food products. There are some criticisms of this approach too. The benefits of the tax relief accrue more to those who spend more. Providing tax relief on purchases will provide relief but will provide the greatest benefit to those that spend the most rather than those that need it most.
Another option that pundits highlight is to deal with the root causes of the inflationary pressure. The truth, however, is that many of those factors are beyond the control of our politicians. The war in the Ukraine is causing significant disruptions to world wheat, fertilizer, and fuel trade which will lead to increases in prices. Drought in Western North America and other extreme weather events are putting upward pressure on farm commodity prices which is also inflationary at the consumer level. Renewed COVID related lockdowns in China are worsening already significant supply chain disruptions. All of these are beyond the control of national, provincial, or state governments. Interest rate hikes will not make it easier for prairie farmers to buy expensive fertilizer, grow grass for cattle, or to achieve normal yields in the face of extreme dry conditions. There are some activities designed to achieve other policy objectives which could be making food price inflation worse. Activities at the US/Mexico border, particularly in Texas, that are designed to catch illegal immigrants and other smuggling are slowing border crossings. This leads to lower transportation capacity (each trip takes more time) and also transportation losses (perishable products) which increases costs. The Government of Texas is prioritizing the immigration activity over food cost.
While there are not a lot of things governments can do specifically relative to food prices, there may be some things they can do to provide broader relief. The truth is that those with the lowest incomes will feel the pinch of inflation more than others. They are being squeezed not only by food price increases but by rent increases and fuel price increases. Relieving any of this pressure is helpful. Income support for those with lowest incomes could go a long way to reducing the burden of rising food prices and other costs of living. Broader tax relief could also take the pressure off for the middle class (tax relief is less effective for low income earners). Politicians who criticize incumbent government for rising food prices should be challenged to provide real proposals that would differentiate them. This is not an easy fix and we shouldn't be pretending it is.
Recommended citation format: von Massow, Michael. "Can Governments Control Food Prices?". Food Focus Guelph (126), Department of Food, Agricultural and Resource Economics, University of Guelph, April 20, 2022.