Article 4

 ‘World food prices are increased’.

It is observed from the past few years that the food prices are increasing due to intense economical pressure, lack of financial resources, increasing demand and so on. The ultimate effects have to be experienced by the people across the world, because for the same amount of food and for similar quality, they have to pay the higher costs. Although this could have no major impact, but at the other end the household incomes are remain the same or decreasing. The consumers therefore have to face more trouble in buying the foods at higher prices.

The below analysis is also conducted in accordance with the news article which was published by BBC (2012) focusing on the increased prices of world food by 1.4% in September.

(http://www.bbc.co.uk/news/business-19827998)

It has been observed that only in September 2012, the prices of cereals, dairy and meat products increased by 1.4%. This growth of prices in such basic commodities is very high for the consumers. If the above scenario is analysed within the context of Microeconomics, there can be various possibilities of increased prices. Such as increase in demand can increase the price of products, stable demand but reduction in supply can also increase the price. 

It can also be noted from the above chart that the price can only be increased in two cases; (i) if supply decreases and demand remains unchanged, the shortage of supply will cause the increase in price and (ii) if supply remains unchanged, but demand increases, the ultimate result will be the increase in prices. 

The drought this year has influenced the production of crops, especially in the main grain producing and exporting countries of the world, such as the United States, Ukraine and Kazakhstan. It seems that in various regions of the world such as Central Asia, US, Midwest as well as Europe that contribute heavily towards meeting the global demand, the drought in the case of crops has leaded towards the increase price of foods.

 

 

The diagram above shows the experience of 2010 drought in Kazakhstan. The graph reflects the percentage of changes in price from Jan. 2010 to May 2012 for flour, meat and milk products. In addition, at the other end the demand is increasing due to increasing population in Kazakhstan. Thereby, the drought in crops will also affect the production of cereal. And this will also lead the higher prices of food, meat and dairy products.

For example, since Kazakhstan, Russia and Ukraine are the main grain exporting countries in the CIS (Commonwealth of Independent States) whatever happens in their grain market has a strong impact on grain prices in the region, especially in the economies that depend on grain imports. It should be mentioned that when droughts and other natural disasters hit grain exporting countries, the overall quantity of grain available for export declines due to decrease in production.

Following on, the prices of food will remain high as well as the price volatility will also increase. According to economists due to shortage of production, in the following few months, the higher price of cereal, meat and dairy products will remain same. In my opinion, the main reason is the fact that supply is limited. Even at one point, if the cereal crops keep experience the drought, the price will further increase in the nearest future.

Total cereal production used to be 2.286 billion tonnes. However, due to the decline of cereal crops, the actual production was recorded to be 2.295 billion in the month of September 2012. If compared the production with the same month of last year, there is a decline of 2.6%.

However, in the month of February 2011, Price Index reached to the maximum level of 238 points, but currently (Sep 2012) at the level of 216 points. It reflects that the food prices of cereal and other associated products such as meat and dairy products were higher than current situation in the past. Again the concept of microeconomics about demand and supply seems to be valid in this case, because in the past, there may be shortage of supply or increase in demand. Therefore, ultimately the prices of food products increased.

In my opinion one of the reason of increasing dairy price is purely because of the fact that feeding cost of animal is increasing. Therefore the milk costs more than the previous months.

The above short analytical report was based on the microeconomic issue, which is increasing prices of meat, dairy and cereal products across the world. It has been observed from the news article that at one end, the demand of these products is increasing, but it can be understood that since population is increasing, the demands of basic foods such as cereal, meat and dairy products are increasing. However, at the other end, the droughts of crops have affected the production of cereal and other crops quite seriously. Due to intense weather and heavy rains etc, the crops are unable to produce as per the initial expectations.

Therefore as a result, the production of cereal has reduced by 2.6% within the last one month, which caused the prices of cereal, meat and dairy products to increase by 1.4% in the month of September 2012. From the microeconomic point of view, the demand is increasing and supply is decreasing, and this ultimately is affecting the prices to be increased.