I have been crawling closer to writing about food prices for a while. Originally I was going to only write about distributional issues, but now I’m going to write a little more.
A report released by NZIER yesterday afternoon suggested that New Zealand would be worse off, as a whole, if the relative price of commodities stayed high. In truth, this result seems like an unlikely counterfactual to me in the current situation (even in the long-term) but the difference would likely stem from some of our implicit assumptions regarding the drivers of higher food prices – and as a result the net income effect and the change in domestic capacity.
However, it is not just people within New Zealand that are concerned, both Matt Yglesias, VoxEU, and the Economist are bemoaning high food prices. To get an idea of the issues lets split ourselves into three sections: 1) short-term impact of current high food prices, 2) distributional impact of these prices in the short term (this is just for NZ, as it is an important point), 3) long-term impact of high food prices – and what it means if the relative price does stay higher.
The short-term leap
A mix of recovering world demand and poor growing conditions in many areas of the world has driven a jump in food prices. Here we have two factors – demand and supply – working together to push prices up.
Now, if we look at New Zealand we have had a touch of a drought here – volumes will be a stoke lower then they would have been under our best conditions. But, this is nothing like the situation we had at the start of 2008.
As a result, we are still on track to export much more food than we import.
The rest of the world suddenly values these things we are willing to sell a lot more then they did before. Partially this is the result of a growing middle class through Asia and rising demand for “protein” (read meat and dairy products). Also, this is partially the result of other places struggling to produce given adverse weather conditions. Both these factors increase demand for New Zealand products – and as a result up bumps the price of what we sell overseas.
In fact, people are willing to give us more flat screen TV’s, more vacuum cleaners, and more copies of Time magazine for the same number of commodities – this suggests that in “net” terms there will be more income in our economy.
But there are distributional issues
Of course, an economy isn’t the be all and end all. Inside an economy we have food importers and food exporters. I know for a fact that, given my dinner last night, I am a food importer. As a result, relatively higher food prices will likely sting me.
However, broadening the outlook, I know I provide services to groups who may be net food exporters – as a result, the underlying willingness to pay for my service may be higher, increasing my income.
Furthermore, a higher terms of trade pushes up the value of the New Zealand dollar – conveniently passing on some of the gains to us food importing types within the country.
In net terms, food exporters will benefit, while the impact for us food importers is more ambiguous – in fact, in the very short term many NZer’s will suffer from higher food prices.
The long-term: Food scarcity
So food prices stay relatively higher than the price of other goods in the long-term. In the long-term there is no real talk about demand, our focus is supply/capacity and/or scarcity relative to other goods and services.
If prices are staying relatively higher it is because the relative value people place on food compared to other goods is higher than it was. To understand how this impacts upon New Zealand we have to ask what is driving this, is it:
- Because the globe is becoming relatively better at producing non-food goods and services than food goods and services (productivity increase in non-food areas)
- Because societies ability to produce food per person is lower than it was (rising scarcity of food)
In the first case global incomes are rising and the relative value of food is rising – win-win for New Zealand. In this case our relative and absolute incomes are better off as a result of the long-term shock that drives relative food prices up!
In the second case things are not as clear.
Say that the population is steady, but the ability to make food fell in ALL countries (think of a jump in input costs, such as fuel and fertilizer – or a generic decline in global growing conditions). In this case, we can’t make as much and neither can anyone else – this scenario isn’t pretty. The negative “supply” shock on NZ would hurt, but if we remain a net exporter the fact that relative scarcity has risen overseas would help us out. As a small open economy, we could sell our residual at these higher prices helping to dull the pain.
If the negative shock fell outside of NZ, suddenly things aren’t as bad. We have the capacity to produce food, other people want said food. We are still the residual claimant in the market and so we sell off all the food we produce at these higher prices – which implies of course that we are getting more DVD’s for the same amount of milk powder. Much of the rest of the world is worse off, global income is lower, but given that “relative prices” of our exports are higher and our domestic capacity is completely unaffected we are better off in these terms.
However, we are only better off in absolute terms if the drop in income overseas doesn’t lead to an even greater drop in the relative price (and return) from the non-food things we sell – given our exposure to tourism this isn’t necessarily a given.
One thing we can conclude in this case is that we will do relatively better off in the face of “food scarcity”, but given that the global pie is smaller this doesn’t mean that we will be better off relative to the case where this elevated level of scarcity exists.
Given that I view capacity as the binding constraint on commodity exports, and given that I view part of the reason for higher long-term prices as productivity driven (and also part as the result of external scarcity), I see the increase in food prices as a net benefit for NZ.
Of course, there are distributional concerns that should be kept in mind.
And finally, I don’t believe the forecasts from the OECD et al that (relative) commodity prices will stay this high for a decade – I don’t believe the food scarcity argument at present.