The Wall Street Journal-20080204-The Unsavory Cost of Capping Food Prices
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The Unsavory Cost of Capping Food Prices
Full Text (941 words)As food prices soar, more nations are falling back on an old -- and potentially hazardous -- response: price controls.
Last month, China said it would require producers of pork, eggs and other farm goods to seek government permission before raising prices. When producers do seek permission, it is denied, market participants say. Thailand is taking similar steps on instant noodles and cooking oil, while Russia is trying to cap prices on certain types of bread, eggs and milk.
Elsewhere, Mexico is trying to control the price of tortillas, and Venezuela is capping prices on staples including milk and sugar. Malaysia is setting up a National Price Council to monitor food costs and is planning stockpiles of major foods, as well as a 24-hour hot line for consumers to vent about spiraling food costs.
These measures reflect the mounting pressure on developing economies as food costs rise sharply. Food-price inflation is running at an 11% annual rate in major developing countries, up from about 4.5% in 2006, according to Bank of America Corp. The price rises partly reflect increased demand from emerging markets and higher oil prices, which drive up the cost of growing and transporting food.
In Singapore, inflation accelerated to a 25-year high in December, partly because of food. In Mexico, Malaysia, Pakistan and Indonesia, food-price increases or shortages have triggered protests. Late last year, three Chinese shoppers were trampled to death in a supermarket scuffle over cooking oil. In poor Caribbean nations like Haiti, the situation is especially dire.
State controls have often been imposed sporadically in the past to damp prices. But their current popularity has the potential to create big problems for the countries that are using them and, if they spread, for the rest of the world.
Economists warn that price controls encourage hoarding and can lead to supply shortfalls, fueling unrest. Faced with persistent food shortages, the government of Venezuela last week warned it could "expropriate" any food company necessary to ensure the nation's "food security and sovereignty."
Perhaps the biggest disadvantage of price controls, however, is that they short-circuit potential changes in behavior by producers and consumers that might damp the underlying causes of inflation. If price controls are kept in place too long, economists say, odds increase for a precipitous and destabilizing jump in prices later on.
Price pressures on food are mounting for two big reasons. Farmers are diverting some of their crops to make biofuels, leaving less available for the table. In addition, diets are improving rapidly in fast-growing countries like China and India.
Chinese demand for soybeans, for instance, has shot up to about 47 million metric tons from 11 million metric tons in 1990. Dan Basse, president of AgResource Co., a Chicago research firm, and others say the problem with price controls is that they encourage consumers to keep buying more products they wouldn't be able to afford if prices were allowed to go higher. That keeps demand artificially high. Price controls also could keep farmers from increasing output because they can't be guaranteed a realistic price in stores -- though that problem hasn't emerged on a wide scale.
With price controls, "you're actually exacerbating the inflationary pressures" that prompted them in the first place, says Bruce Scherr, chief of Informa Economics, a Memphis, Tenn., agriculture-research firm.
That's roughly what happened in the 1970s, when President Richard Nixon tried price controls on a wide scale in the U.S. While the controls seemed to help at first, they turned out to be unsustainable, and eventually were lifted. Inflation returned with a vengeance, exceeding 10% in 1974.
Price interventions also appear to have played a role in keeping international oil prices high in recent years. Many countries in Asia and the Middle East subsidize or otherwise restrain the price of fuel, which encourages consumers to use more. That has helped keep oil supplies tight even as the price of a barrel of oil has skyrocketed.
It is possible the latest bout of food-price inflation will pass soon, especially if global growth slows significantly because of a possible recession in the U.S. If that happens, China and other governments might be able to quietly dismantle their price controls.
But many economists believe the forces driving food prices higher -- including shortages of land and water in China and elsewhere -- could be around for a long time.
Officials in China and other developing nations insist their price tinkering is temporary and won't cause long-term problems. The latest government intervention in China is "not a price freeze," Chinese officials said in a statement last month, but rather a short-term measure to prevent individual companies from making "inappropriate" price increases or gouging customers. Some analysts have speculated the controls could be relaxed after the Lunar New Year holiday that starts this week. The government also is providing subsidies to some farmers to increase output.
In Thailand, officials also are playing down their initiatives. The country has long capped the price of sugar and has required food producers and distributors to ask permission to charge more for other goods, including dairy products. In recent months, Thailand has more than doubled the number of goods subject to such oversight to 15 from six, including yogurt and instant noodles.
For developing nations, where many live in poverty, the calculus is clear: Food-price increases can cause immense hardship. Chinese officials, for instance, worry that out-of-control food inflation could foment trouble in the rural hinterlands, leading to more challenges for Beijing. The result: It might be harder for developing nations to abandon price controls as quickly as they hope, increasing the chance of distortions in global agricultural markets.
