Tuesday, December 14, 2010

The Up Side of Food Prices

Taken from the Economist’s Daily Charts

Paying more for food might be good for Saskatchewan and Canada as a whole. The price of food is on the rise again. The obvious reason why this is likely to be good for the “great flatness” is a lot of wheat and other food crops are grown here. The higher the price of agricultural output, the better the Saskatchewan economy tends to do. It also helps the price of potash (a key input into many fertilizers), again the higher the price of potash the better things tend to go for the province. The price of potash also has a major impact on the health of the government finances as potash royalties make up a huge portion of government revenue.

While both these things clearly suggest that higher food prices are good for the GDP of Saskatchewan I’m thinking about something a little less obvious. More than 1 in 5 adults in Saskatchewan rate as obese on the BMI, and more than half of Canadians are overweight, with almost 1 in 4 self-reporting obese. (And this is self-reported!). Generally, speaking an increase in the price of something reduces the amount people buy.

Now before we get too excited, the demand price elasticity of food (the sensitivity of how much people buy to the changes in the price) is fairly small. For example the Agriculture and Agri-food Canada estimate of the price elasticity of eggs is -0.35, meaning a 1% increase in price decreases the amount people purchase by 0.35%. On the plus side there is an effect. Increases in the price of food reduce consumption. An increase in the price of food generally has the potential to reduce our consumption. Remember we aren’t talking about a developing country in which people are in danger of starving to death if they eat less. A reduction in calories in developed countries like Canada is likely to improve health.

A downside might be people making a quantity for quality trade off. If this happens we might actually see an increase in obesity in response to an increase in the price of food. I don’t think this is too likely to happen for most Canadians, as other forms of entertainment will likely be substituted. Also countries with exceptionally high food prices (Japan and France for example) have relatively low rates of obesity.

Rising food prices. That’s a good thing?


Anonymous said...

I think the quantity for quality tradeoff is more likely than you think, as long as you take a step back and measure quantity by caloric intake. Quality food ingredients (sans hfcs and other nasty fillers found in cheap food) will be abandoned for the cheaper to produce, cheaper to purchase, all-in-wonder boxed mystery meals.

Sad thing is, the average consumer isn't going to know they are making this health vs cost tradeoff, as I suspect consumers (myself included) measure their food budget by "number of meals in cart / price at till".

economistatlarge said...

Clearly I'm not as convinced about the tradeoff as you are. Obesity has leveled off a little in recent years and we're seeing some interesting "movements" around food. I think the bigger source of the problem isn't cost, we could clearly reallocate spending away from food and likely be better off, but knowledge and time. Many folk don't know how to cook or don't think they have the time.

Your point about shopping is valid. I'm reminded of the stand-up economist. People don't stand in the produce aisle going, I'll buy an orange, I'll buy another orange, etc.