These days you hear a lot about the issue of food prices. Over the past few weeks the prices of rice, wheat and chickens meat have doubled or tripled.
How did this happen?
The answer is a combination of the impacts of emerging economies and bad policy. Let's start with the impacts of the growing number of people in emerging economies, i.e. China and India, who are, for the first time, rich enough to start eating more food like people in others developed country.
Increase in demand for food, means that production of foods by farmers in these emerging economies has to be increases. Increase in production, means increase in demand for oil. Modern farming is highly energy-intensive, a lot of energy goes into producing fertilizer, running tractors and, not least, transporting farm products to consumers. However, supply of oil is limited, especially after the invasion of Iraq which reduced oil supplies below what they would have been otherwise. The impact is that the price of oil increase.
With oil persistently above US$130 per barrel, energy costs have become a major factor driving up agricultural costs. Directly and indirectly, these rising economic powers of China and India are competing with the rest of us for scarce resources, including oil and other farm inputs, driving up prices for raw materials of all sorts.
Second, is the implementation of a bad policy. Like the Malaysia case, governments that have a policy like to control the market bear some responsibility for food shortages. I would like to discuss about chicken meat industry in Malaysia.
Besides taxing and subsidizing the production or sale of various goods, another way government can interfering the market is by controlling prices of certain goods and services. When government fixes the prices of a good or services, the free forces of market demand and supply no longer determine its price. The price is determined by government regulation.
At the equilibrium price, there will be no shortage or surplus. The equilibrium price, however, may not be the most desirable price. The government, therefore, may prefer to keep prices above or below the equilibrium price. If the government set a maximum price, this mean that the price is not allowed to rise above this level (although it is allowed to fall below it).
Government sets a maximum price to prevent the market price of product or services from rising above a certain level. This will normally be done for reasons of fairness. During inflation or festive seasons, the government may set maximum prices for basic goods so that poor people can afford to buy them. Maximum price is advantageous to the consumers because they can get the good at a lower price now. But is has some disadvantages. For example, the maximum prices reduce the quantity produced of an already scarce commodity. Artificially ceiling price of chicken is likely to reduce chicken supplies: if not immediately, then at the next harvest, because of less being produced by chicken growers/livestock farmers.
Some of the livestock farmers will left the industry if they find out that the ceiling price is much lower than the production cost. The cost of production can be escalated due to the global grain shortage, then increases the price of grain. We have experienced the situation like this in year 2000. When the government start to set a maximum price of chicken at RM5.40 per kg, many livestock farmers complained that the chicken price set by the government was too low. Many small livestock farmers left the industry. There are only 2,600 livestock farmers in year 2000, compare to 4,900 livestock farmers in 1994. Most of the livestock farmers that remain in the industry have their own grain factory, chick’s breeders and modern farming systems.
We should realized that cheap food, like cheap oil, may be a thing of the past.