Rising Global Food Prices a Cause for Concern But Less So In Developed World
Michael von Massow, Alfons Weersink, and Nicholas Bannon
Global food prices as tracked by United Nations Food and Agriculture Organization (FAO) are at their highest level since 2014. The increase in food prices raises concern about increased food insecurity and potential unrest in some areas of the world, similar to what occurred a decade ago when crop commodity last rose significantly. The impacts of rising prices for crops such as corn and wheat have disproportionate effects on those who tend to purchase raw farm goods and who spend a large share of their income on food. Since the farmer share of the food dollar is low and around 10% of income is spent on food, Canada and other countries in the developed world will be buffered from the swings in food price inflation spurred by higher crop prices in comparison to other countries.
Canadian retail food prices are far less volatile than those in the developing world as illustrated in Figure 1, which shows the food price index for the world generally (from the FAO) and for Canada specifically (from Statistics Canada). The indices show the relative price of a bundle of foods between years. The general trend of increase is similar between Canada and the rest of the world, but it is also clear that the world prices have been much more volatile. Canadian food prices have increased steadily with minimal variation. We don’t mean to say that food price increases don’t matter or contribute to food insecurity in Canada, rather that our experience is less dramatic than it is in some countries.
Figure 2 shows the same two food price indices but adds the farm gate price of wheat (a staple grain). The price of wheat (and likely several other staple grains) is strongly correlated to the global food price index from the FAO. This is because the value added beyond the farm gate in terms of processing or eating out is significant less for many consumers in developing countries. Since the farmer share of the food dollar is higher, food prices are much more closely tied to the farm price of the raw product. A recent FoodFocus post highlighted that in North America, roughly 4% of the price of bread is represented by the cost of the wheat in that bread. Even if wheat prices double, the price of wheat would only increase at most 4%. On the other hand, in cases where less processed, or unprocessed, grains are purchased for household consumption, a doubling in the price of a grain will have a huge impact on the costs of food for individual households.
The other advantage that North American consumers have is that they spend a lower proportion of their income on food (link to article on this). While consumers in the US and Canada spend approximately 6.5% and 9.1% of their income on food respectively, consumers in developing countries like Guatemala, Pakistan, the Philippines, and Nigeria spend over 40% of their income on food. If food prices in Canada go up significantly (which they are unlikely to do), most Canadians will not have to sacrifice on other household needs in order to continue to buy food.
With this being said, it is critical to highlight that there are Canadians who spend more than 9.1% of their income on food and that food price increases are more impactful in these situations. Food insecurity is exacerbated not just by price but by limited income which makes price changes more significant. In a household in a developing country where consumers pay more than 40% of their income to food, these huge price swings have an immense impact on food security and household wellbeing. As food prices go up (or for lower-income groups), consumers in developing countries often “trade down” and purchase less processed items or cheaper items. This means they don’t necessarily compromise as much on nutritional intake. If you are buying an unprocessed or minimally processed grain, there is no trading down and households can simply buy less.
It is worth noting that these impacts are acute in developing countries and swings in commodity price transfer problems between small producers and the urban poor. When prices are high, small producers can sell some of their surplus to purchase other household needs or pay for education. The urban poor are squeezed because they don’t produce, and their food budgets are strained due to increases. Investments in other important household items and education for children often suffers. The food riots occurred a decade ago in food importing countries with a relatively high concentration of poor consumers in urban areas (i.e. Egypt, Mexico, Pakistan). In contrast, other developing countries with a high proportion of poor as a small holder farmers benefited from the commodity price increase. When commodity prices decrease, small scale producers either need to sell more of their production (potentially causing hunger in those households) or have less disposable income to invest in other household needs. This vicious cycle of commodity price swings causes significant disruption in the developing world.
In Canada and the rest of the developing world, consumers are protected from these extreme swings but farmers continue to feel the commodity price volatility. It is easy to focus locally and complain on very real issues with respect to food prices, but it is worth looking more broadly to contextualize how lucky most Canadians are.
#keywords food, food prices, Canada, developing countries, farm prices, food security, farmer share of food dollar, food share of income
Recommended citation format: von Massow, Michael, A. Weersink, and N. Bannon. "Rising Global Food Prices a Cause for Concern but Less So In Developing World". Food Focus Guelph (110), Department of Food, Agricultural and Resource Economics, University of Guelph, DATE.