ON Thursday (Nov. 8), the United Nations Food and Agriculture Organization (FAO) released an important report on food prices worldwide. It registered a 1 percent price decline during the month of October, continuing a downward trend since the autumn of 2011. So far, according to the FAO report, food prices have gone down 8 percent during the first 10 months of 2012, compared to the same period in 2011.
This is of course good news to consumers worldwide. But does this news filter down at the national level everywhere? Not necessarily, not in places where retailers and producers can corner local markets and prevent reduced international prices from being passed on to consumers.
Take Saudi Arabia or GCC countries in general for that matter, where food prices have in fact risen during 2012, bucking the international trend recorded by the FAO. According to the Central Department of Statistics and Information (CDSI), the cost of food in Saudi Arabia has increased during 2012, not decreased. CDSI tracks monthly and quarterly price changes in major consumption groups. According to CDSI tracking, during 2012 food prices have so far increased in Saudi Arabia at an annualized rate of 4.53 percent, instead of the decline worldwide of 8 percent, which was documented by the FAO.
This is in fact part of a pattern. Local retailers and producers are usually quick to take advantage of any price increases worldwide, no matter how slight. They may exaggerate modest price rises elsewhere to justify raising local prices significantly. Other times, they may claim international price rises when they do not exist. Because of inadequate monitoring of such claims, they continue and may get credibility by careless reporting of the local press.
Last year, there was a concerted effort by local clothing retailers and wholesalers to create the impression that clothing prices had to be raised because international prices of cotton were going up. In fact, at the time international cotton prices were declining dramatically, not rising, as I pointed out in detail in an essay published at the time, contrary to claims by those merchants. I wrote that piece, in part, in response to a report by a leading newspaper that tried to lend credibility to merchants’ claims about an imaginary international price hike, which they tried to use it to justify exorbitant local price hikes of their own.
The FAO food price index (FPI) is usually a reliable index. It consists of the average of five commodity price indices (meat, dairy, cereals, oils and fats, sugar), weighted by their shares in food exports. In all, 55 commodity quotations are considered by FAO commodity specialists as representing international prices of the food commodities included in the overall FPI. As such it is a scientifically designed index that tracks actual price movements worldwide, certainly more reliable than local merchants’ anecdotal accounts, which are self-interested and tend to exaggerate effects of localized shortages or natural disasters, or invent them if they did not exist.
The FAO also issues a biannual Food Outlook, which was also put out this week. It notes that lower international prices and freight rates, together with lower cereal purchases, have pushed down the world food import bill in 2012 to an estimated $ 1.14 trillion for 2012, 10 per cent lower than last year’s record level of $ 1.27 trillion.
The FAO report credits a set of conditions for stopping the runaway growth in food prices worldwide, despite tight markets. As we recall, food prices spiraled out of control during 2007-2010. However, improved international coordination and G20’s effort toward more agricultural price transparency have helped. The G20 has set up the Agricultural Market Information System (AMIS) to collect and publish food price data. According to FAO’s Director General José Graziano da Silva: “AMIS has helped prevent panic and stop the worst drought in decades turning into a food price crisis as has happened in the past… Droughts or floods are not what causes crises, it’s lack of governance. In a globalized world, we cannot have food security in only one country or in one region. We need to strengthen the global governance of food security.”
Food purchases constitute an important part of any household’s budget, but represent a larger share of poor households’ budget. As such, any rise in food prices disproportionately affects consumers of limited means. This condition highlights the need for government to monitor food prices locally to prevent retailers from taking advantage of consumers’ ignorance of international price movements. They should especially monitor international price movements to make sure that reductions in worldwide prices are passed on to local consumers.
Price controls are out of the question, of course, but increased competition and reduction of tariff and non-tariff trade barriers are among the effective tools available to policymakers to deal with this situation.
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