High food prices bad for the economy?

World Bank president Robert Zoellick said global food prices had reached “dangerous levels” and warned the impact could complicate fragile political and social conditions in the Middle East and Central Asia. Food prices were not the main cause leading to recent protests in Egypt and Tunisia, but they were an aggravating factor and could become worse, he said.

In this country, the already high prices for milk, butter and cheese are set to rise further on the back of surging international dairy prices. The average price for products on Fonterra’s bi-weekly international auction increased for the sixth consecutive time this week – up 3.9 percent  In shops, butter prices have risen 40 percent, cheese 17 percent and milk almost nine percent in the past year. Other food commodity prices are rising, too, with about three to six-month delay between changes in global commodity prices and those in supermarkets.

Higher global prices are good news for farmers, but household budgets are being stretched and health experts fear some low-income families no longer can afford daily glass of milk which now costs more than soft drinks. Medics say prohibitive milk prices risk exacerbating problems from less healthy options that lead to malnutrition or obesity.

But would the economy’s health suffer if global prices were to fall? BNZ economist Doug Steel, in his Rural Wrap, reasons that while higher food prices dampen consumers’ purchasing power, stronger NZ dollar boosts how far the consumer purse will go. And so the effect of high international food prices is net positive for the economy.

The NZIER has contrary view. It concludes that high food prices should be seen as more than just bonanza for New Zealand exporters. The effect on all New Zealanders needs to be considered. “Our modelling shows that the negative impact on households outweighs the benefits to exporters causing net welfare loss for New Zealand.”  It also shows that no one in the world wins from higher food prices.




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