Friday, April 04, 2008

Will global food prices keep us healthy?

Nothing makes a geeky food policy student like me more excited than seeing the NYTimes writing about cross-price elasticities of demand, except that they didn't actually use the technical term for it. The cross price elasticity of demand, or the change in demand for one food when the price of another changes, is a formula for calculating the response consumers will have to changing food prices. For example, suppose the price of corn syrup goes up 1 percent, so people buy less corn syrup and more of other stuff-- the cross-price elasticity for fruit would show the percentage increase in fruit spending in response to the higher corn syrup price.

In light of the recent surge in global prices of food, especially grains and meat, Wednesday's NYTimes article is about the light that some healthy and local food advocates see at the end of the global food "crisis" tunnel. So their theory goes: If the price of products produced with large quantities of corn, like corn syrup and grain-fed meat increase drastically--which is already beginning to happen--then people will switch to eating more fruits and vegetables and more locally grown food that doesn't require as much fossil fuel to transport it to the grocery store.

While this phenomenon may be true for some, it may take more than rising prices for consumers to change their behavior. One of the factors affecting this response is the degree to which food A, fruit for example--is a complement or a substitute for food B, corn syrup in this example. One can use cross elasticities to show how much the price of corn syrup would have to go up in order for consumers to "demand" more fruit.

Of course the response also depends on how much prices continue to rise, whether fruit and vegetable prices continue to rise less than those of other foods, and if farmers change their production decisions for the coming year. But I wonder if substitution to healthier or more sustainable foods will actually happen on a large scale, or if we, and our food companies, will just figure out shortcuts to our favorite processed flavors. We also should remember what a small percentage the price of corn represents in the price of corn flakes- in other words, most of the cost of processed foods is for value-added in production, marketing and distribution, not the raw ingredients themselves.

4 comments:

Anonymous said...
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Sarah Grace said...

Just wanted to say that I really like your work. Your perspective is fair, given your economic influence. I come from "commodity county," i.e. the Midwest. The current food price climate hits me from both sides. The high commodity prices mean high incomes for my family and my community; yet it means a painful trip to the grocery store. I, too, have a degree in economics and have really enjoyed the debate over the current economic climate. I am certainly not convinced that high corn prices are going to drive consumers to substitute salads for cheeseburgers. ~Sarah

Jan said...

I just signed up for your feed, so I'm a little late chiming in on this one...

This is for sure the big debate nowadays. Will the change in food prices affect consumers' choices, and how so? I, like many others, want to believe that higher-priced processed products will eventually stimulate sales of local, unprocessed foods, like fruits and vegetables. And the timing's good for folks in the Northeast like me, where we're just a few weeks away from the start of CSA season.

You argue, though, that one limiting factor may be the extent to which a given food can substitute for another food, to the consumer's satisfaction--with which I agree. (I think the example you use, however, is slightly flawed. Eating is, for one, an experience, and I hardly think that swallowing a spoonful of corn syrup is similar to taking a bite of a banana.) I think another limiting factor, to build on the observation you make in the penultimate sentence, is that many people will keep eating what they know and what they enjoy. If they're not at all in the habit of including fruits and vegetables in their diet, I'm not sure they'll suddenly take up eating them now. And many will keep eating what they enjoy, including processed foods, though they may have to eat less of it. At this point, we're all just waiting to see what'll happen...

Kadu said...
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