High-Hanging Fruit: How Governments Can Respond to High Food Prices

On January 31, the Agricultural Market Information System (AMIS) released its latest food price index report, showing that food prices have trended upward since July 2020. The primary agricultural commodities — soybeans, wheat, and other cereals, corn, rice, and meat — are trading at the highest levels in a decade. The high liquidity in the market and depreciation of the dollar are some of the main factors behind this phenomenon. Another important explanation is Southeast Asia’s rapid economic recovery from the pandemic, driven significantly by China’s local demand. This scenario added to spiked fears of inflation, especially after a 3.9% increase in U.S. food prices from December 2019 to December 2020.

How should governments respond to high food prices during an economic downturn when hunger needs are immediate? These decisions must be made carefully, as interventions always carry the short-term risks of affecting producers and decreasing food output. Government policy ultimately depends on the food security needs of the population. Whether a country is a net importer or net exporter of food can tell us a lot about those needs. 

Net food importers have immediate food security needs, particularly during the COVID-19 incurred recession. These countries respond with different kinds of direct assistance, such as food stamps, financial support, and direct subsidies for economically vulnerable families that need help now. The desperate situation leads these countries to accept high prices in the international food market, demanding their citizens’ resilience. Anticipating this situation, these countries usually maintain emergency food stocks and social safety nets before a crisis hits. 

Net food exporters face a different dilemma: cash in on high international demand, or tax and restrict exports to keep local prices low for citizens at home? This problem is not new, as net exporters faced a similar set of choices in the last high price cycle for commodities between 2008 and 2011. Important players in the agricultural commodities market have adopted different approaches in the current scenario. Russia introduced an export tax on wheat, floating on wheat’s price of over $200 per ton. Argentina, which already taxes soybean exports up to 33% of the price, has considered increasing these taxes in similar terms for other agricultural products. Indonesia and Malaysia, the world’s biggest palm oil producers, have increased the export tax for crude and produced oil amid an incredible price spike since last year. Applying a different strategy, Ukraine began restricting quantities of corn exports in 2020 to secure local supply. 

It is worth noting that local taxes on exports will not increase importers’ prices because of the high competition in the international commodities market. Instead, these taxes take rents from producers and create artificially low prices for the local market. 

These measures have different consequences in the short and long run. Try to keep domestic food prices low, which may chill producer activity, leading to a food shortage shortly . Worse yet, research suggests these policies might not even succeed in their intended goal. In a recent paper, economists showed that restricting exports can decrease the total output of the restricted product while not affecting its domestic price. Another study shows that these practices can result in price inflation if applied by countries with significant market power. So why do countries keep implementing these policies when international commodity prices are high? 

One answer is that households’ urgent needs demand a rapid response by governments, mainly to avoid social and political repercussions. Short-term political stability, and not market efficiency, may be the real motivator for prioritizing domestic food supply. Long-term market efficiency is something governments can leave to the second stage of their policy agenda when the domestic situation is at the brink of instability. 

Additionally, in a context of extraordinary gains, collective action in an atomized sector, such as agriculture, is challenging as the government has more power to negotiate its demands. Farmers and producers struggle to organize and take full advantage of the benefits of high commodity prices. Governments aware of this are willing to extract rents from business activity with export taxes, especially in the face of enormous deficit spending to mitigate recessions. 

In 2012, Liefert et al. analyzed different policy alternatives that could solve this tradeoff between local consumer welfare and producer surplus, considering the use of quantitative restrictions quotas complemented with export licenses. Simultaneously, the Food and Agriculture Organization (FAO) suggested targeted safety net mechanisms to advance these volatile situations. Perhaps it is time for governments to start planning for the lean times before it is too late, or at least before the next commodities supercycle.