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22 Literature Review on effects of Rising oil and food prices Paper

Words: 1406, Paragraphs: 31, Pages: 5

Paper type: Review , Subject: Economics

2.2 Literature Review on effects of Rising oil and food prices on households

Different earlier studies have analyzed the price changes impact on welfare howeverthe methodologies used in these studies differ significantly. Some of the researchers concentrated on the country-level impacts while others focused at the household-level impacts. Moreover, some literatures focused on specific commodities, such as rice and maize, while others considered different major commodities. Most of the developing countries such as Tanzania are specifically vulnerable because of certain circumstances such as high levels of hunger and over dependence on imports of petroleum products and in some cases, on importation of important grains.

In examining the impact of the prices increases at the country level, the focus based on the impact in terms of the following: “(food import; (2) current account deficits; (3) transmission of international prices to domestic prices; and (4) consumer price index and per capita consumption of cereal” (FAO, 2009).

Based on the analysis, generally developing countries could experience a significant increase of about 33 percent in aggregate food import bills. The increase in food import bills could also be the catalyst for widening of the recent account deficit, particularly to the poor countries. As a result it could affect other macroeconomic variables, for instance exchange rate, the central bank reserve or indebtedness increase (FAO, 2009)

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Another studyconducted in Asia also evaluated the macroeconomic impacts of high and rising food prices and its impact on households through poverty and distribution analysis. By using the Oxford Economics global model, the sameexamined the impacts of sharp rising food and energyprices on developing economies in Asia particularly, including the Philippines, within two scenarios: firstlyassuming that the 57.5% raise in global food prices in the quarter one of the year 2008 is continued through end of the year, and secondlysupposing that the 66.5% rise global oil prices is addedto the food price increase. The outcomes were notpresented as projections but as just indicatorsof how countries could react to the unprecedented price shocks of food and fuel.Even so, four findings were acknowledgedincluding the expected impact of food and fuelincreases on the macroeconomic level, that is: higher domestic prices; fall in privateconsumption; higher interest rates; and significant fall in GDPbecause of fall in consumption and demand for investment(Asian Development Bank., 2008).

The analysis was also made on the impacts ofhigher food prices on poverty and inequality by usinghousehold statistics of the Philippinesand Pakistan. The results of the study shows that an increase in food prices in thePhilippines by 10%, 20%, and 30% threatens tocreate an additional 2.72 million, 5.65 million, and8.85 million poor people, respectively. It is important to be noted that the estimates were given byusing the national poverty line rather than the USD1/day poverty line as to factor out theinsensitivityof the USD 1/day poverty line to the head count ratio, and so theestimates are regarded only with the effect of price on consumers but not producers. Theincrease in food prices has a tendency to intensifyincome inequality in the Philippines. The resultsshows that increase in food prices by 10%, 20%,30% will raise the Gini index by 0.55%, 1.10%, and1.65% respectively. The findings include a reduction in the averagestandard of living of different income groups,particularly a 4.16% decline due to 10%increase in food prices. The findings also estimated howmuch would be required to protect the poorconsumers before the increases and people pressedinto poverty that were not poor before theincreases as result of the negative effects of high foodprices (Asian Development Bank., 2008).

To deal with the increase in food prices, thestudy suggested that export limits shouldbe discouraged, home markets should beunrestricted, government controls onprices andresource allocation should be avoided. To alleviatethe social impacts of that price shocks, thereally poor must be provided with well-targetedassistance in the form of cash transfers, food-forwork,feeding programs, and food stamps; both smalland marginal farmers must have equal access tocredit, fertilizer, improved seeds, pesticides,electricity, water and should be providedwith market access across the region and in the worldwidemarket. Also it was recommended that in thelong-run, there should be improvements in landand labor productivity in agricultural production through longterminvestments and technological advancements as well asintensifying research and development(R&D), and sustainable use of land(Asian Development Bank., 2008).

At the microeconomic level, the first important step in making the analysis is to determine the fractionof net seller and net buyer households and their indicatedcharacteristics. Thereafter, the second step would be to determine the welfare impact of a price change to the household types (FAO, 2009). Notably, the nature of impact among households differsdepending on prevailing consumption patterns and market positions of household as net buyers and net sellers. However, most of the recent studies, adopted nonparametric techniques in the analysis to allow convincing demonstration and presentation of results with minimum unnecessary assumptions (e.g., Deaton 1989; Budd 1993; Barrett &Dorosh1996; Minot &Goletti, 2000). These techniques help presentation of very useful graphical displays of which the policymakers can easily interpret the resulted.

3.0 Discussion and Analysis

3.1 The Global Context on Rising Food and Oil Prices

One of the important factors behind rising food prices is high prices of energy. Prices for energy and agricultural products have been increasing simultaneously while linked. As oil prices at an all time high and the government of the United States subsidizing farmers to grow crops for energy, US crops producers (farmers) have highly shifted their cultivation towards bio-fuel feedstock, particularly maize, very often at the expense of wheat and soyabean cultivation. Approximately 30% of United States maize production was used for ethano0l in 2008 rather as world food and feed markets. Rising energy prices have made agricultural production very expensive by raising the cost of mechanical cultivation, cost of inputs such as organic fertilizers, costs of pesticides, as well as transportation costs for both inputs and outputs (Felix A. Asante, 2008).

Among others, increase in the world population’s demand for food of different kinds, contributes to the current increases in price. Rabid economic growth in many developing countries including Tanzania has pushed up consumer purchasing power hence rising demand for food, and therefore shifted demand for food away from traditional local and traditional food stuff towards high-valued foods particularly meat and milk. This kind of shift leads to increased grains demand used to feed animals. Another reason is poor weather which has played a role to the rise of food prices, for instance, severe drought happened in Australia (one of the world’s largest producers of wheat) (Felix A. Asante, 2008).

Increasing food prices create different effects across countries and individual households. Countries which are not food exporters will benefit from terms of trade improved; however some of the countries are banning exports so as to protect consumers. Net food importers will struggle to meet the demand for domestic food. With the fact that, almost all African Countries good exporters of cereals, they will experience rising prices. At the level of the household, the burden for food prices will fall to poor and hence food insecure. Few poor households; net sellers of food will gain from higher prices.

Also, necessary nutrition for the population, particularly poor people, is at risk when they are not shielded from increase in price. Rising food prices lead poor people to limit their food Consumption and to shift toless balanced diets, with harmful effects on health in the short and long run.

3.2 Country Context on Rising Food and Oil Prices

During the financial year 2016/17, wholesale prices of all major food crops increased, save for rice. Maize and sorghum recorded the highest price increase relative to other crops (Table 2.). Price of maize as the main staple food in the Tanzania rose partly reflecting supply bottlenecks and high demand from the neighbouring countries such as Kenya, Rwanda and Burundi (Bank of Tanzania, 2017).

Table 2: National Average Wholesale Prices for Food Crops (TZS/100Kg

2012/13 2013/14 2014/15 2015/16 2016/17

Maize 61,976.2 52,041.0 41,685.4 59,777.8 80,861.5

Rice 164,246.1 125,296.6 140,948.7 168,320.5 158,726.0

Beans 129,274.7 134,769.6 140,948.7 168,320.5 158,726.0

Sorghum 73,159.8 77,377.6 63,558.9 83,240.3 104,310.1

Round potatoes 73,442.8 68,567.4 70,650.3 80,599.1 81,355.0

Finger millet 109,330.3 123,623.2 110,639.4 112,326.6 124,022.9

Source: Ministry of Industry and Trade

Prices of crude oil and white petroleum products, increased following agreement among oil producers, both OPEC and non-OPEC, to cut production from January 2017 (Bank of Tanzania, 2017).

See Table 3 below

Table 3: Outlook for World market Oil Prices

Actual Projections Percentage Change

Commodity Units 2013 2014 2015 2016 2017

Crude oil USD per barrel 104.1 96.2 50.8 42.8 55.0 28.5

Source: World Bank, Commodity Price Forecast, April 2017

This increase in oil and food prices will be analysed in the following part of the study

About the author

This sample is completed by Emma with Health Care as a major. She is a student at Emory University, Atlanta. All the content of this paper is her own research and point of view on 22 Literature Review on effects of Rising oil and food prices and can be used only as an alternative perspective.

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