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Are high food prices good or bad?

 

People normally think high food prices are bad, or at least bad to net consumers, although good to net producers. As many small holders and the poor are the net consumers, they are vulnerable to high food prices. The memory of 2008 food crisis is still fresh to many people: the high food prices exaggerated poverty and pushed more than 100 million people into hunger in 2008  (WFP, 2008).

In the recent south-south cooperation workshop in Beijing however, it was argued that high food prices were not always bad. When the prices go up, it hurts farmers, but farmers will quickly have coping strategy and produce more. They become producers and benefit from the high prices.

This opinion is likely to be consistent with Chinese government’s food prices policy. The objective of food price policy is to keep the food prices growing moderately. The rationale is to provide enough incentives for farming, and gradually increase farmers’ income, but not too radical to cause food crisis.

I think it seems a good blueprint but the question is how well for government to create an environment to allow the prices grow moderately? And if there is a pressure of volatility of food prices , how well could the government, the community, the producers and the consumers prevent and prepare for it?

Chinese government already has big state-owned enterprises (SOEs) to help smoothing market prices. The mechanism is not complicated: when the prices are low, SOEs buy food, and when the prices go up, they sell foods to the market. Through the adjustment of food supply in the market, the food prices can be partly smoothed. Now these SOEs focus on grain and pork which are the most important food for Chinese people.

Another prices intervention is to launch “minimum purchasing prices” ( MPP)mechanism. Essentially every year the government issues indicative prices for wheat and rice respectively. If the market prices are higher than the MPP, the transaction will be market based; otherwise government will buy wheat/rice by the MPP.  Some people argued that the MPP mechanism distorted the market. However, the MPP was never really launched/used because the market prices are always higher than the MPP. So I think so far this policy is effective in providing incentive and confidence for farmers and markets as the prices set seem lower than the equilibrium. But it is still important to have such a policy to hedge the loss of farmers.

 

Shall government have policies to prepare cash transfer for the most vulnerable people like urban poor, the retirees, the rural small holders and students when crisis comes?

Producers must be happy with the high food prices, but it is important to raise the awareness of market risks for them. Although the food prices index, which is composed by a basket of foods, are remaining high in the recent years, it is not always the case of specific food commodities. Market risks are always there. Agricultural risk management including agricultural insurance could be effective to transfer the risks out of the region and the country. I would like to highlight the importance of risk transfer out of the region/country as food prices are highly positively correlated.

Households and consumers shall have their coping strategies as well: savings, remittance, and livestock. Are there other coping strategies HHs shall be aware of and prepare?

In summary, high food prices could be good, as it guides agricultural investment not only from the government but also from private sectors, and provide incentives for farmers to produce more. But it shall be carefully monitored, and as importantly to improve the risk management capacity for government and households.

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