Alarmism about global food prices misses an important part of the story

I was surprised when I read this article in The Conversation this week, by Alastair Smith (University of Warwick):

Global food prices shot up nearly 33% in September 2021 compared with the same period the year before. That’s according to the UN Food and Agriculture Organisation (FAO)‘s monthly Food Price Index, which also found that global prices have risen by more than 3% since July, reaching levels not seen since 2011.

The Food Price Index is designed to capture the combined outcome of changes in a range of food commodities, including vegetable oils, cereals, meat and sugar, and compare them month to month. It converts actual prices to an index, relative to average price levels between 2002 and 2004. This is the standard source for tracking food prices – nominal prices, as they’re known, which means they’re not adjusted for inflation.

While nominal prices tell us the monetary cost of buying food in the market, prices adjusted for inflation (what economists call “real” prices) are much more relevant to food security – how easily people can access appropriate nutrition. The prices of all goods and services tend to rise faster than average incomes (though not always). Inflation means that not only do buyers need to pay more per unit for food (due to its nominal price increase), but they have proportionately less money to spend on it, given the parallel price increases of everything else, except their wages and other incomes.

Back in August, I analysed the FAO’s inflation-adjusted Food Price Index and found that real global food prices were actually higher than in 2011, when food riots contributed to the overthrow of governments in Libya and Egypt.

The idea that "the prices of all goods and services tend to rise faster than average incomes" is flat out wrong. If it were true, then real wages would be declining, and so would living standards. But they're not (see the figures on pages 31-32 of the latest ILO Global Wage report for data covering 2006-2019). It gets worse though. On his blog (which The Conversation article links to), Smith wrote (emphasis in the original):

Sadly, while more precise than previous accounts, this messaging still misses the simple statistical observation that obliterates the relevance of this coverage. Reviewing the “real” price of food over time – expressed as an index relative to a base year, rather than the nominal value in currency, which makes comparison harder due to inflation – the only relevant way to capture today’s status of global food prices is to say that:

‘It is on average harder to buy food today in 2021, than it has been since 2012, and in fact for most of the noughties, the entire decade of the 1990s, and the 1980s; most of the 1970s, and every year of the 1960s! Food is more expensive today than it has been for most of the modern recorded history’.

Not only is it wrong, it's alarmist and wrong. It doesn't even take much economic sense to see why it is wrong. Consumers' decisions about how much food to buy depend on three things: (1) food prices; (2) the consumers' incomes; and (3) the consumers' preferences. If consumers' preferences haven't changed, then the amount of food that consumers buy depends on prices and their income.

If food prices go up, then consumers will buy less food. This is essentially the argument that Smith makes. However, if consumer incomes go up, then consumers will buy more food (because food is what economists call a normal good - that's a good that, by definition, consumers buy more of when their income increases). So, if food prices go up and consumer incomes go up, then consumers may buy less food, or they might buy more food. It crucially depends on how much consumers respond to the change in price, and how much they respond to the change in income. I'll come back to this point using an economic model a little bit later in this post.

But first, on his blog Smith has a figure that demonstrates that the Global Food Index (which tracks the real price of food, and is available here) is about 16.7 percent higher in 2021 than it was in 1961. However, global real gross national income (GNI) per capita (a measure of income per person) more than doubled between 1971 and 2019 (see the World Bank data here). Here's a graph that compares both series (GNI per capita, and Global Food Index) in terms of increases relative to 1971 (when the GNI data series starts). It is clear that incomes have risen far more than food prices over that time. So, it's hard to see how the data supports a claim that "It is on average harder to buy food today in 2021, than it has been since 2012... most of the 1970s, and every year of the 1960s!". Such hyperbole is completely unwarranted.

The comparisons that are made do matter. Food prices in 2021 are 21 percent higher than the average of 2014-2016, but incomes haven't grown nearly as much over that time period (GNI per capita increased by 8.8 percent from 2014-2019, and won't have grown enough in the past two years to match the food price increase). That change over recent years might support Smith's rhetoric (although the alarmist tone is arguable), but his use of the longer time period clearly does not. However, it's not really global food prices that matter for the destabilisation of societies, but local food prices in those societies. Smith could have crafted a much more compelling story by focusing on local changes rather than global.

Anyway, now we come to the economic model I promised earlier (which is the consumer choice model, and useful for ECONS101 students). This model is illustrated in the diagram below, which shows food on the x-axis, and 'all other goods' on the y-axis. The consumer buys a bundle of goods that is made up of food, and all other goods. When the price of food is low (PF0), the black budget constraint applies. The optimising consumer's best affordable choice is the bundle of goods E0, since it is on the highest indifference curve the consumer can reach (I0), while remaining within their feasible set (on the budget constraint). The consumer is buying F0 food. When food prices increase (to PF1), the budget constraint pivots inwards to the blue line and becomes steeper. The consumer can no longer afford the bundle of goods E0 (it is outside of the feasible set), so their new best affordable choice is the bundle of goods E1, since it is on the highest indifference curve the consumer can now reach (I1), while remaining within their new feasible set (i.e. on the new budget constraint). The consumer is worse off, because they are now on a lower indifference curve (which means that they receive less utility, or satisfaction, from their consumption), and they buy less food (F1).

When the price of food increases, there are really two things going on for the consumer. First, there is a substitution effect. Food has become relatively more expensive than all other goods, so the consumer buys less food (and substitutes some of their consumption to all other goods instead, because they have become relatively cheaper). Second, there is an income effect. The consumer's real income (or purchasing power) has decreased - they can afford to buy less in total than they could before. Since food is a normal good, the consumer buys less of it (and since the composite 'all other goods' is also a normal good, they also buy less of all other goods as well - the income effect explains why the increase in the price of food causes the consumer to buy less of all other goods, as well as less food). [*]

However, we are not done. Remember that, in addition to increasing food prices, consumer incomes have increased. If we compare the 1970s with today, the increase in income is far larger than the increase in food prices. This is illustrated in the diagram below (which also shows the situation from the diagram above). The red budget constraint shows the combined effect of the increase in prices to PF1 (the budget constraint becomes steeper) and the increase in consumer income to M2 (the budget constraint moves outwards, parallel to the budget constraint with the new food price). The consumer could have kept buying the bundle of goods E0. They won't though, because they can now reach a higher indifference curve (I2), by buying the bundle of goods E2. The consumer is much better off than before, because they are on a higher indifference curve (which means that they receive more utility, or satisfaction, from their consumption), and notice that the net effect is no change in food purchases at all (the consumer still buys F0 food).

Now consider the change over the more recent period from 2014-2021. This is shown in the diagram below. The food price has increased and consumer income has increased, but the increase in consumer income is now much less (to M3). The consumer cannot continue to buy the bundle of goods E0, because it is outside of the feasible set. Their new best affordable choice is the bundle of goods E3, since it is on the highest indifference curve the consumer can now reach (I3), while remaining within their new feasible set (i.e. on the new budget constraint). Their utility has decreased, as they are now on a lower indifference curve than before, and they buy less food (F3) than before.

Changes in food prices do matter for consumer utility (or satisfaction), and a big decrease in utility will make consumers unhappy. Perhaps a big decrease in utility will make consumers unhappy enough to cause civil unrest. However, food prices are not the only thing that matters for consumer utility. Consumers' incomes matter as well, and if consumer incomes increase faster than (or at least keep pace with) food prices, then it is difficult to see why that would be problematic. Focusing on food prices alone misses an important part of the story.

*****

[*] We could show the income and substitution effects on the diagram, but it isn't necessary for us to do so in order to explain them.