The Impact of Rising Food and Fuel Prices - Essay Example

Literature review The impact of rising food and fuel prices The tremendous increase in food prices has affected even resource-rich countries such as Venezuela and Russia. Venezuela had a short supply of staple food in 2008. Russia also had a food shortage prior to its parliamentary election. Both governments responded to the price increases by imposing controls on food prices. This policy response put an end to cheap food. The world price of wheat rose to over $400 a tonne in September 2008. This is a big jump from $200 during the summer months. The price of maize (corn) exceeded $175 a tonne. Its current price represents an increase of 50% compared to its cost in 2007. The rising trend in international food prices persisted and accelerated in 2008. U.S. wheat export prices skyrocketed from $375/ton in January to $440/ton in March. Thai rice export prices chalked up from $365/ton to $562/ton. The governments of the developed and developing countries adopted various mitigation measures. Specific policy interventions were applied in three broad categories: (i) interventions to assure household food security by establishing food safety nets; (ii) interventions to lessen domestic food prices by way of penalty or administrative action, and (iii) interventions to develop supplies and production of longer-term food supply. Given the three categories of policies there are preferred options that are more reliable and equitable. The best options to address food insecurity is the targeted cash transfers to vulnerable groups. Cash transfers increase the purchasing power of the poor without changing the chain of incentives that are available to produce more food and without reducing the incomes of poor food sellers. The depth, targeting efficiency and value of the transfer programs depends on the country's level of development. Another set of best options to decrease domestic prices cover the lowering of tariffs and other government taxes on key staples. Many countries impose tariffs on food imports so as to foster domestic production and produce reliable revenues. During a period of increasing prices, the consequent reductions in tariffs and taxes presents a measure of relief to existing consumers at a limited fiscal cost. The subsequent revenue loss arising from the reduction of the tariffs is very important and the fiscal result of implementing this with extra social protection expenditures can require cutbacks in less priority areas. Approximately twenty-four out of fifty-eight countries under study have recently reduced import duties and Value Added Taxes in the phenomenon of rising food prices. Others developing countries, such as the Philippines, implemented a regime of high tariffs to protect domestic food producers and manufacturers. Other countries utilize a policy of implementing a bread or grain subsidies specifically targeted to the poor to handle household food insecurity. In some cases, the introduction of consumer subsidies for staples after the recent rise in food prices. The Government of Yemen provided wheat in public markets at subsidized rates following a rise in food prices. In 2008, the Government of Pakistan implemented a ration card system to distribute subsidized wheat. These measures can be made permanent given the persistent food increase which results in high fiscal costs. Moreover, if the application of all the consumer subsidies are countered by specific measures to keep producer prices low, this can be counterproductive in the end. The one exception to this situation is when price controls are introduced as a temporary measure and are deemed important in terms of a higher social goal. In these exceptional cases, the risks of entrenchment will be minimized. For countries that are grain exporters, there exist political exigencies to ban or tax grain exports in high price years. Some of these countries have fullly applied these methods. These policies tend to have a limited impact on domestic price levels and a relatively negative effect on earnings for most of the domestic producers and food exporters. However, short-run policy options can limit further scope for implementing long-term solutions. There are some policy responses that seek to impact on various markets through higher grain prices, more export restrictions, procurement, or government intervention in marketing related activities are likely to lower the food supply response in the next few year. In contrast, alternative measures such as the implementation of market-based risk management tools in Malawi, and the improvement of highly accessible market information systems in India and Mali, will improve the flow of new resources in the private sector to lower various marketing and promotions costs and improve the level of efficiency of existing grain markets in developing countries. It is important to note that not all of the developing countries have the capability to apply and implement an adequate measure of safety net and food policy spending. According to the World Bank's Country Policy and Institutional Assessment indicators, developing countries can be grouped into four categories, depending on the levels of their respective balance of payments sheets: (1) those in which initially weak public finances and fiscal management capacity has been further undermined by adverse terms-of-trade shocks such as Burundi, Eritrea, Grenada, Haiti, Jamaica, and Nepal; (2) those with comfortable initial positions which have been affected by external shocks such as Burkina Faso, Ethiopia, and Honduras and hounded by political problems such as Kenya ; (3) those in which there is weak capability to execute the food policy spending given positive terms-of-trade movements;and (4) those with stronger initial fiscal and balance of payment indicators, in which there are higher possibilities for minimizing the impact of rising food prices such as Indonesia, Mexico, and Tunisia. Main points There are many numerous impacts of rising food and fuel prices. The first impact of spiraling food prices are the slashing of food programs by private charities and relief agencies. The resource capacities of international humanitarian agencies which were organized to meet humanitarian needs struggle with the promised funding which has not yet materialized. For instance, the U.N. World Food Program, which fed 88 million people in 2007, has issued an emergency appeal for US$775 million just to continue existing programs. Food stocks have run out due to less aid. The second impact of rising prices for agricultural commodities and foods is increased malnutrition. The third impact of rising food prices is the occurrence of food price-related riots. Burkina Faso had experienced public demonstrations to show dismay in food shortages. Cameroon's political rallies concern public protests over food and fuel prices. Niger has experienced food-price-related riots. Indonesian citizens have also protested against soybean shortages. Other African countries such as Guinea, Haiti, Mauritania, Mexico, Morocco, Nepal, Senegal, Uzbekistan and Yemen have also experienced food riots which can have a serious impact on their political stability. The fourth impact of rising food prices is hunger and starvation. The shift to the promotion of biofuels will also impact cereals and corn demand in developing countries. Josette Sheeran, executive director of the UN World Food Programme (WFP) has seen that food in other countries are priced at fuel levels since increasing quantities of food are being bought by energy markets for biofuels. The fifth impact of high food prices is the consequent effect on the country's inflation rate. The International Monetary Fund has estimated that food price hikes are responsible for almost 70 percent of 2007 headline inflation in emerging economies around the world. The International Food Policy Research Institute (IFPRI) and the Food and Agricultural Organization (FAO) had stated that food prices will remain high for the next 10 years. Those projections are due to three elements. First, it the demand for biofuels will rise rapidly, due to persistent high oil prices. According to the International Energy Agency (IEA) the share of the world's arable land devoted to the growing of biomass for liquid biofuels is projected to increase for two decades. Second, developing country economic growth is expected hit 6 percent a year resulting in increased food demand. Third, ongoing climate-change risks which is experienced by many countries will have negative impacts on food production. Rising fuel prices have a negative impact on all countries both the developed and the developing countries. The first impact of rising fuel prices is the increase in the cost of food, as fossil fuels are important in agricultural production, from tractor diesel to fertilizer production. The second impact of high fuel prices is high transport and mobility costs. Future individual mobility is hampered due to high transportation costs. This presents a serious problem since mobility is a basic need for human beings and the foundation for economic development. Developing countries that are on the path of intensified industrialization will need fuel to continue production. The third impact of high fuel prices is the loss of competitiveness of local US firms. Henderson, the head of a US transportation organization, had said that if the fuel price exceeds the current levels and their cargo rates go up higher, then the company's competitiveness will be diminished. Tim Wilford also pointed out that remaining profitable has become difficult with the rise in fuel prices. The US construction sector accounts for approximately five (5%) percent of the country's gross domestic product (GDP) and the same proportion can be said of total employment. The recent slowdown of the economy has negative impact on all aspects of the nation's construction industry. There is a 3% decline in construction spending, making it the fifth straight monthly decline in our industry. Contractors are exploring various ways to trim their overhead costs. These efforts are even more difficult with the steady increase in gas prices with which contractors have to contend with. Further increments in oil prices will be really unreasonable. All sectors in the economy that depend upon refined petroleum products for transport are losing revenues. Contractors build buildings on the basis of projected overhead costs for a project. However, if the price goes above what they have estimated, they are forced to absorb the cost. This results in a tremendous financial strain. To deal with high prices, the US contractors have reduced their contributions to their employees' retirement accounts, increased the amount that employees pay for their health insurance, and reduced other employee benefits. This does not augur well for the industry where technical talent is limited. The fourth impact of high fuel prices is the production of hybrid cars. Hybrids cars are said to be twice as efficient as conventional vehicles. These cars are 50%-100% cleaner than the other vehicles on the road. In general, most hybrids get 30%-60% longer mileage than other cars. The fifth impact of high fuel prices are the decrease in mobility rural residents, particularly that of the Native American Indians. Rising fuel prices have a stronger impact on rural residents, based on the assumption that rural incomes are lower than urban incomes. Rural residents also travel more miles using a personal vehicle every year compared to city dwellers. Given the fact that many Indian reservations are very remote and have the lowest income levels in the nation, it is easy to assume that Native Americans in rural areas negatively affected by rising fuel prices. These households consumed a total of 29.6% of their income on fuel, compared to urban section averages of as low as 2.6% in other parts of the country. The sixth impact of high fuel prices is the increase in transit ridership since four years ago. Most of the transit systems in the Atlanta, Dallas, Los Angeles, San Francisco and Washington DC have experienced ridership growth since early 2004. Thus, high prices had encouraged transit use in historically automobile-oriented cities. The seventh impact of high fuel prices is that the urban poor spend more of their income on gas. The estimated number is understated, since one assumes exactly the same gas mileage for commuters in the two groups. Lower-income people have older, less well-maintained and less fuel-efficient cars, thus they will have lower gas mileage. Gaps or inconsistencies in the literature The literature on gas and food prices has these specific gaps: there is a lack of government studies to remedy the high fuel prices and very limited set of impact assessment studies on the increase in the urban and rural poor arising from the higher prices. Describe the nature of these problems Soaring food and gas prices is a combination of demand and supply concerns. On average, the US gasoline prices have increased by more than 60 percent from 2007-2008 and cost an average of $0.67 more a gallon compared to 2007. However, the price of gas may still increase in the coming months with the OPEC reducing their production output. The main concern for most countries during a period of high prices is the inflationary impact. Inflation is defined as an increase in the money supply. The money supply is controlled by the Central Bank or the Federal Reserve Bank, and responds to the deficits which the government creates. When the government deficits increase, the Central Bank or the Fed prints new money to buy government Treasury bills and keep interest rates really low. But when new money is created without a corresponding value, the money already in circulation loses value. Then prices rise. All types of government subsidies and special benefits to private companies should be stopped. Moreover, taxes on gasoline and gas-related products must be removed. Oil prices are presently at a level where all the consumers can reduce consumption. The market will seek its own level. References High food prices: Impact and recommendations. Paper prepared by FAO, IFAD and WFP for the meeting of the Chief Executives Board for Coordination on 28-29 April 2008, Berne, Switzerland. Hanson, Jessica. Rise in Grain Prices Crimps U.S. Food Donations. World Watch. Volume: 21. Issue: 1. January-February 2008. Page Number: 5. Carr-Rufino, Norma and John Acheson. 2007. The Hybrid Phenomenon: High Gas Prices and Shifting Consumer Sentiment Point to Bright Prospects for Hybrid Cars. The Futurist. Volume: 41. Issue: 4. Publication Date: July-August 2007. Page Number: 16+ Mielke, Jon, Jeremy Mattson and David Ripplinger. 2008. Assessing Impacts of Rising Fuel Prices on Rural Native Americans. Upper Great Plains Transportation Institute. North Dakota University. Kowal, J., Antonio Lombardozzi, William Snyders and Jonathan Weinhagen. 2006. Price Highlights 2005: Higher Energy Prices Again Dominate Producer Prices Prices for Finished Goods as a Whole Rose at Their Fastest Rate since 1990, with Large Price Increases for Energy Goods Accompanied by Small Advances for Goods Other Than Foods and Energy. Monthly Labor Review. Volume: 129. Issue: 7. Page Number: 3. Lynas, Mark. April 21, 2008. Food Crisis: How the Rich Starved the World; World Cereal Stocks Are at an All-Time Low, Food-Aid Programmes Have Run out of Money and Millions Face Starvation. Yet Wealthy Countries Persist with Plans to Use Grain for Petrol. New Statesman. Volume: 137. Issue: 4893. Page Number: 24+. Rising Food Prices Strain Relief Agencies; U.N. Scrambles to Buoy Programs That Aid Millions of World's Poor. The Washington Times. April 30, 2008. Page Number: A11. Wilford, Tim. Testimony Before The UNITED STATES HOUSE OF REPRESENTATIVES HOUSE SMALL BUSINESS COMMITTEE SUBCOMMITTEE ON INVESTIGATIONS AND OVERSIGHT. April9, 2008. Read More