Higher food prices net loss to economy

Higher food prices pose risk to global recovery. Photo by Linda Robertson.
Higher food prices pose risk to global recovery. Photo by Linda Robertson.
High food prices will harm the New Zealand economy, New Zealand Institute of Economic Research principal economist Shamubeel Eaqub says.

"Our modelling suggests that these ongoing high prices could reduce New Zealand's economic welfare by $3.3 billion, or 2%, of GDP."

Higher prices reduced the purchasing power of New Zealand consumers.

The results of the NZIER research showed that New Zealand household's spending fell 2.9% following the price increases.

The flow-on effects from that reduced purchasing power was felt across all sectors, not just food products, he said.

A larger share of people's income was needed to buy the same amount of food, leaving less discretionary income for everything else.

In that case, everything else included manufactured products as well as textiles and clothing, and services.

High world prices also had an impact on exports. Agriculture products, including food, represented more than half of New Zealand's exports, Mr Eaqub said.

Receiving higher prices for those products should help to offset the consumption loss.

"The value of New Zealand exports does increase 2.9%, but it is not enough to offset the consumption loss, resulting in an aggregate welfare decline."

The increase in export values was not dramatic because the buyers of New Zealand products - foreign consumers and firms - were facing the same price as New Zealand consumers and were reacting in the same way, he said.

Their income had effectively fallen, forcing them to purchase less food but at a higher price.

That was best reflected in the changes in volume and value of New Zealand's meat and dairy exports.

The fall in volumes were 29.3% and 25.8% respectively, while the increase in values were 16.5% and 21.3%, Mr Eaqub said.

NZIER research showed no region gained from high food prices.

Countries like Australia and the United States were the least affected while India and other countries in South Asia were the most affected.

That was most likely due to the high share of food in household expenditure in those South Asian countries.

"The global scale of the impacts are daunting. While the United States is modelled as one of the least affected, its losses are greater than the size of the entire New Zealand economy.

"The uncertainty of how the world will react to these high prices creates risks to the global economic recovery and to meeting the ongoing food security challenge."

During the food crisis of 2008, countries including Argentina, China, India, the Ukraine and Vietnam imposed export taxes or restrictions with the aim of protecting their consumers from surging prices, he said.

Those polices did moderate consumer prices but they also removed large amounts of supply from the global market.

The removal increased the price further for the rest of the world.

Additionally, in the face of higher taxes and lower returns, producers might reduce their production for future seasons.

That reduced supply threatened food security and was likely to increase prices for the following seasons, making the policies self-defeating, Mr Eaqub said.

The research results highlighted that food prices were a global issue and there needed to be a global solution.

While higher prices might encourage additional investment in food production, market solutions were unlikely to suffice, he said. Knee-jerk reactions were to be avoided. High food prices should be seen as more than just a bonanza for New Zealand exporters. The effect on all New Zealanders needed to be considered.

"Our modelling shows that the negative impact on households outweighs the benefits to exporters, causing a net welfare loss for New Zealand.

"The rural economy tends to employ a fairly small proportion of New Zealand while everybody has to buy food at the supermarket."

No-one in the world won from higher food prices, Mr Eaqub said.

While the prices might induce more investment in food production, international organisations would also focus on the need to increase productive agricultural investment and remove barriers to food trade, Mr Eaqub said.

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