Food Prices and Food Security in Trinidad and Tobago Christian Romer Løvendal, Kristian Thor Jakobsen and Andrew Jacque esa working Paper No. 07-27
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3 Links between food prices and food security Research on the linkages between food price changes and food security has focused mainly on low-income/poor countries, looking mainly at national food security or household food security. Work has evolved around three major themes, namely the impact of prices on nutrition and labour supply, the cost of food price instability to households caused by increased risk and uncertainty, and thirdly, how food demand and real income are affected by food price changes. For a mid-income net food importing small island economy like Trinidad and Tobago, the question of how changing prices influence income and consumption and thereby food security is of particular importance. However, the question of impact of increased risk is also of relevance, in particular to the agricultural sector.
8 Increased food price instability/risk can lead agricultural producers to adopt risk-reducing strategies such as shifting towards more stable and lower value crops, reducing investments in new technologies or reduce use of purchased inputs. Such strategies can lead to inefficient levels of investments and/or resource allocation and can also reduce competitiveness of the agricultural sector in Trinidad and Tobago. It is also argued that food price fluctuations can lead to macroeconomic fluctuations, which may dampen investments and reduce economic growth. While the costs are difficult to measure directly, Timmer (2002) estimates that rice price stabilization contributed a half to one percentage point to the overall growth of the Indonesian economy in the 1970s. In an attempt to translate the gain of price stability into the welfare cost of price instability, Myers (2006) estimates that given the effect of price stability on economic growth, the welfare cost of price instability would be around 5-11% of economy-wide income per year in the case of Indonesia. This is a significant amount, but it should be noted that other studies have not been able to find any significant link between food price instability and economic growth (Kannapiran, 2000). In standard welfare analysis it is assumed that households choose between various combinations of food and other consumption goods. For non-poor households this implies trading off preferences for food against other types of consumption goods. On the other hand, poor and/or food insecure households face a significant risk of food consumption falling below a critical level in regards to health and survival. The existence of such a level can be considered to imply discontinuous preferences because malnutrition and in the worst case starvation is a state any household will avoid at any cost. However, standard welfare analysis assumes continuous preferences and will therefore not be able to measure the true costs of price instability if the probability of survival is reduced by a price increase. Myers (2006) estimates10 that if higher food prices reduce the probability of survival by one percent, the households would need to have their incomes compensated by five percent in order for them to be as well of as they would have been, had they faced a one percent higher probability of survival. The relative nature of this result illustrate the problem: can one expect that a household living on the margin of survival would demand 5 percent of their income in order to have their chance of survival further reduced? The result is also strictly theoretical and assumes a certain risk aversion in order to hold11. As premature death is the most severe outcome of inadequate calorie intake it is argued that the costs of food price instability could be high for very poor households because very high food prices worsen the nutritional status to a level where labour productivity is seriously affected (World Bank, 2005). In a study of the impact of structural adjustment policies in Jamaica in the early 1990’s, Handa and King (2003) look at the connection between food prices and food security, in particular in terms of the nutritional status of children. The study uses cross sectional data sets collected during the period where Jamaica liberalized its exchange rate and therefore experienced a significant devaluation leading to lower purchasing power, general inflation and higher food prices. They find that both the exchange rate and food price inflation had a significant effect on the short-term nutritional status of children, but that the effects seem to fade away over the longer term. The study on Jamaica also conclude that rural children were 10 Using an expected utility function that incorporates the value of life. 11 The result is based on the equation: ms = m + (π*- π)/ (π(1-R)) where m is the income needed, π* and π are the probabilities of surviving with and without price stabilization and R is the household’s relative risk aversion. 9 less affected than children living in urban areas probably due to better access to home grown food. What happens to food consumption at household level when food prices change depends on the commodity type and can be analysed by looking at demand elasticities for food in relation to changes in income and prices. Studies of this typically find that the own-price elasticities12 for basic food items, such as cereals, are quite low because they cannot be substituted by other food items. In contrast, the price elasticities for other food items, such as meat, are usually high, meaning that households make substantial shifts between expensive and cheaper food items when prices increase. In general, price increases for some food groups can lead to real income falls for poor households because price increases for inelastic food items will lead to higher relative spending on these items13. This can in some circumstances result in a drop in calorie intake for households spending a large share of their income on food and with limited ability to smoothen consumption. This is typical for households spending high shares of their income on food and is seen e.g. Abdulai and Aubert (2004), where caloric consumption in Tanzania dropped when the price of either maize or rice went up. Still, a price increase for an inelastic food item does not necessarily need to cause a drop in calorie intake if the household responds by maintaining consumption of an (energy-intensive) inelastic good at the cost of some more elastic food items such as meat, vegetables and fruit. Thus, overall calorie intake may be maintained, but at the expense of the dietary diversion, which can mean less access to important nutrients, vitamins etc. and thus affect nutritional status. In conclusion, how changing food prices affect food security depends on the characteristics of the country, the commodity and the particulars of its economy and food system. Whilst it is difficult to measure the exact costs of food price instability, it has been argued that the total macroeconomic costs are likely to be quite small for countries that are diversified in its production and food consumption (World Bank, 2005), which would be the case for Trinidad and Tobago. Studies done at the national level conclude for the most part that on average, calorie consumption is generally not affected by changes in food prices as households are able to smooth consumption over time. However, some household level studies suggest that for poorer households, the level of food prices can affect nutritional outcomes (Block et al, 2004). 4 The Food Market Systems in Trinidad and Tobago and Implications for Food Prices As earlier shown, retail food prices have consistently grown faster than the cost of other consumables in Trinidad and Tobago since the mid-nineties and increasingly so over the past few years. In search for reasons therefore, we first look at main international commodity prices as well as price development in the nearest comparable country, Barbados. In the absence of an international price index with a composition similar to the CPI for food for Trinidad and Tobago, we look at the development in international export prices for four major food commodities, i.e wheat and milk powder, which are fully imported, soybean oil, which is partly imported, partly domestically produced, and a major domestic production Defined as the percentage change in consumption of a commodity in the case of a 1 percent change in its price. As households cannot substitute to less expensive commodities. 10 commodity, poultry14. As seen from Figure 7, retail food prices in Trinidad and Tobago have consistently grown faster than the international export prices of these four main commodities. Figure 7: Development in Trinidad & Tobago’s Food Retail Price Index and international export prices for selected commodities, 1995-2007 500
450 - ■Trinidad & Tobago (food) ■ Wheat (U.S. Gulf) 400 350 - — —Soybean Oil (Dutch Ports) Poultry (U.S. (Georgia))
■ Whole Milk Powder (Oceania indicative export prices) 300
 250 --
100 - 200 50
Jan-95 Jan-96
Jan-97 Jan-98
Jan-99 Jan-00
Jan-01 Jan-02
Jan-03 Jan-04
Jan-05 Jan-06
Jan-07 Source: Central Bank of Trinidad & Tobago Data Centre, IMF and FAO To see if the price changes are of more regional nature, food price developments in Trinidad and Tobago and Barbados are compared, given the similarity of the two countries in terms of economic development and (high) levels of food import dependency. As clearly indicated by Figure 8, whilst retail food prices have risen more than 350% in Trinidad and Tobago since 1995, the increase in Barbados has been a more modest 68% in the same period15. 14 These commodities made up around half of the total energy per capita/day in 2003/05. 15 Part of this may have been catching up with the Barbados price level. 11
500 450 400 350 300 250 200 150 100 50 Figure 8: Comparison of retail price index (food) for Barbados and Trinidad & Tobago, 1995-2007 
■Trinidad & Tobago ■Barbados 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Year Source: Central Bank of Trinidad & Tobago Data Centre and Barbados Statistical Service Structure of the food marketing systems in Trinidad and Tobago To better understand potential domestic causes of retail food price increases, this section looks at the national food marketing systems. The food marketing systems in Trinidad and Tobago is comprised of an interrelated set of systems and actors that involve farmers, processors and importers at one end, consumers and food service businesses at the other end, and wholesalers, distributors and packing houses in the middle. The systems provide consumers and other end-users with a range of fresh, frozen and processed foods while simultaneously providing farmers, processors, importers and others with avenues to dispose of supplies. The structure of the specific commodity marketing system varies depending on the characteristics of the domestic production system (export versus domestic commodities), characteristics of the product (fresh versus frozen and processed) and origin of the product (imported versus domestic). Trinidad and Tobago is a net food importing country with a high level of import dependence. As seen from Table 4, which shows import dependence for a range of food commodities, high dependency include most of the staple food items – cereals, rice, oils, roots, tubers, pulses – as well as certain vegetables. Trinidad and Tobago also has high import dependence in meats (beef, mutton, turkey etc.) and in temperate fruits. The country has low import dependence values in certain vegetables (tomatoes, cabbage, cauliflower etc), in tropical fruits and in chicken meat, and to some extent pig meat. 12
Source: Calculations from FAOSTAT and COMTRADE database Note: Import dependence is calculated as ((Import-export)/consumption)*100 13 Looking at this from the importing side, Table 5 presents the structure of Trinidad and Tobago’s food imports. The data for 2002-2003 indicate that 98.8% of the value of food imports was captured within 18 of the 24 categories at the 2 digit level of the Harmonised System (HS) of trade classification. The category with the highest value of imports was ‘dairy products and birds’ eggs with 12.6% of the value of total food imports. This was followed by cereals with 10.1%. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||