According to the data of the Food and Agriculture Organization of the United Nations, the prices of foodstuff have increased by 95.8% within the period of 2006-2008YY.
Just in a year, through 2007-2008YY, average price of food has increased by 52% globally. Georgia is not an exception. Major part of incomes of the population in developing countries is spent on foodstuffs. Just like other developing countries, consumers in Georgia are in deplorable situation.
There are several factors defining the price increase in whole world: long lasted droughts and minor harvest in wheat exporter countries; general tendency of developing countries – increased income, average standard of life and consequently demand. Among of the factors of price increase, speculative prices should be taken into account also. In addition to global financial crisis, permanent inconstancy of inflation-deflation, high prices on foodstuff caused by cartel and monopolistic deals, another serious problem arises – global warming that threatens the world with starvation.
“Food prices will be tripled by 2050Y due to global warming” – reports forecast of the UNO experts.
According to the FAO forecasts, in order to avoid global starvation by 2050Y, world must produce 70% more foodstuffs and spend $83 billion in this sector annually. Such measures are necessary to provide increasing world population with foodstuff. Experts are explaining that world population will reach 9.1 billion in 40 years or will be increased by 2.3 billion. Malthus theory starts working with the full clarity, less abundance and increased demand that will be logically resulted in steadily increasing prices on foodstuffs.
75% of the world population, today lives in villages. Main source of living for them is agricultural products (Source: World Bank). Due to high prices on food, many people either cannot buy food at all or economize on quality of products, thus often buying low quality products hazardous to health. World Bank experts suggest that the number of people living in extreme poverty might reach all-time showing in 2009Y and make up 1.02 billion people. Even before financial crisis, 1 billion people had to exist with less than $1 income per day; while 923 million people were on the verge of famine. Global recession has aggravated the situation even more.
However, on contrary to many other segments of economy, global economic recession had positive effect on food prices. Food Prices were reduced in 2009Y that was encouraged by decreased demand and fall in price of fuel.
0.3% consumer price fall has been observed in Euro Zone countries in September of this year. Deflation made up 0.2% in Europe in August. Landslide of prices continues in Euro Zone already forth month. Record-breaking – 0.7% deflation has been observed in June (Source: RBC). As we have already mentioned, the prices on food is decreasing all over the world. For instance, export price of 1 ton of wheat in Mar-2008 was $481, while in Jul-2009Y, this index reduced to $233.
According to FAO data, international export price of meat and dairy products went down below 2007 year index.
Minor decrease of retail prices has been noticed at USA supermarkets, in the third quarter of 2009Y. Common value of 16 goods necessary for preparation of meal in a family decreased from $46 to $26 in comparison with second quarter of 2009Y. This index is 10% less than the index of previous year (source: http://www.euromonitor.com).
Under the conditions of global recession, despite reduction of food prices caused by decreased transportation expenses and demand, they remain high in comparison with 2007Y average index. Prices are still considerably high on some articles of prime necessity. For instance, price of corn is 50% higher than average price of the period within 2003-2006 years; while rice price is increased by 100%, sugar price is 74-80% higher than prices of 2007Y, and soya – 36%.
Population of developing countries suffers damage out of this most of all. Considerable part of their incomes is spent on food. For instance, in the countries like Brazil, Russia, India and China, 29.3% of expenses made by population were spent on purchase of foodstuffs. In African countries this indicator exceeds 70%. At the same time, population of the EU spends only 11.8% of incomes on foodstuffs.
According to the FAO data, price of grain crops in 58 developing countries was 25% higher in Jul-2009 than in the same period of 2007Y. After 2008Y peak, despite price reduction on an international scale, food prices remain high in many countries and common tendencies are not reflected on their markets.
The same might be said about Georgia. Agricultural product prices are increasing without batting an eyelid, for instance, dairy products. But, record breaker is sugar. Both retail and wholesale sugar prices have considerably increased in the recent period. Retail price of 1 kilogram sugar increased from GEL 1.6 to 1.8. Sugar importer companies are explaining this by deficit of product at international markets. Sugar price beat the 20 year record on an international scale. The price of 1 ton sugar exceeds $600. The price of one sack of sugar in Georgia is above GEL 82. What is more important – there are no prospects of price reduction yet. On the contrary, traders do not exclude that sugar price might reach record breaking rate – GEL 2 per kilogram. In brief outline, the price of necessities is gradually increasing in Georgia and in the whole world. Dairy products are quite expensive also. Experts are anticipating sunflower oil price increase either. Everybody has reconciled oneself to the fact that oil products prices are in their zenith for a good while. The price of eggs has increased by Tetri 3-5 over last few days.
The rise in the price of vegetables is noticed at Tbilisi markets. Tradesmen at Vagzali and Isani agrarian fairs are saying that aubergines, potatoes, cabbages and greens have rise in price by 15-20 Tetris. They are noting that price increase is connected with the winter coming and they do not exclude price increase by even more 10 Tetris. The price of kilogram potatoes is 1 Lari instead of 80 Tetris, aubergines cost 1 Lari instead of 70 Tetris, and the price of kilogram cabbages has risen from 50 Tetris to 70 Tetris. The price of meat products has risen also; pork meat costs 9 Laris instead of 8 Laris and veal meat costs 8 Laris instead of 7. Meat product sellers declare that price increase was defined by increased volume of sales, the demand on meat products has risen by 25% over last year. With winter, the prices may go even higher.
Experts of the United Nations explain steady high prices on foodstuffs in different countries by lack of competition, cartel deals and by the fact that price growth process is simple rather than inverse process. The head of Consumers Federation of Georgia, Mrs. Madona Koidze speaks of the same tendencies: “Prices in Georgia are not regulated by the state and entrepreneurs are responsible for the process themselves. However, it is desirable that the price of some product to correspond to its quality. Both product quality, and the product prices fully depend on entrepreneurs and their honesty. If price increase is observed at world markets, this is immediately reflected on prices in Georgia. However, the same cannot be said of price reduction, as reverse process never takes place here and prices mainly remain the same, for instance, oil and energy carriers, or the same foodstuffs. Despite heavy social situation in the country, entrepreneurs and importers find it difficult to downgrade the prices. It would be great, if entrepreneurs take into consideration this circumstance and offer real prices to the consumers. In most of the cases, entrepreneurs and importers do not consider consumers’ concerns. I have heard from many foreigners that price of some products in Georgia are much higher than in manufacturer or exporters countries. This might be said about salt, matches, sugar – the prices on these products are catastrophically high.”
G.E – What do you think are these cartel prices on foodstuffs in Georgia?
M.K. – It’s hard to say. Our organization protects the rights of consumers and it would be hard for me to answer the question, as I am not the competent authority. Economists and experts would give you correct answer on the question. However, the facts show that prices on foodstuffs in Georgia are very high and consumers find it difficult to pay for them.
Full Professor of Tbilisi State University, economist, Mr. Nodar Khaduri:
N.K. – Prices are defined by two factors – demand and supply. Agricultural harvest of 2007 was extremely low. Several factors, such as weather and productivity are defining the volume of harvest. As a result, the supply was decreased. When supply decreases and demand remains the same, prices grew automatically. This explains the price peak on foodstuffs in 2007-2008YY.
Different tendencies started in whole world in 2008Y. First factor was increase of crop capacity and second – the deflation processes started due to global economic crisis. The price of barrel of oil up to Jun-2008 was $144, but the price reduced to $34 afterwards. This caused cheapening of food products. In other words, price reduction on a world scale was defined by two main factors – increase of crop yielding and decreased demand due to global recession.
One can hear the question quite often – why have not we felt price reduction in Georgia? Let’s admit that downturn in prices of some products has been visible. For instance, there was a setback in the price of sunflower oil, imported from Ukraine. The price of wheat slightly decreased and thus the bread became cheaper. The reason of such minor reduction of prices is that demand on foodstuffs has been increased. Despite the fact that many people both in Georgia and in whole world became unemployed or their incomes have reduced, one cannot economize on foodstuffs as these are articles of prime necessity. People might economize on other goods and services, but this does not concern food products as human cannot exist without them. There is demand at the market and thus prices are high also, especially foodstuff prices, such as greenery, cucumber, tomatoes, potatoes etc – in other words, articles of price necessity.
Advance in prices was caused by sharp reduction of supply. Several regions in Georgia were withdrawn from the list of suppliers at foodstuff market last year, for instance, regions abutting with Shida kartli, Akhalgori region, and Abkhazian regions. Shida kartli and Samegrelo regions had huge problems as the war actually destroyed whole harvest. The population of these regions became consumers instead of supplying market with agricultural products such as corn, apples, and haricot. This was another main reason of price increase last year.
G.E. – you are saying high demand defines increased prices. However, one might suppose that there are cartel deals made at the market and population is left no other way, but to accept offered high prices. What can you tell about this?
N.K. – Interesting question. Unfortunately, it would be difficult to deny this and say no. One cannot declare doubtlessly about cartel agreements. However, there are entities with serious market powers in some fields. This is quite sharp problem, as there are people, companies that control very large part of the market. They have the means to reach some agreements with each other. Two years ago, due to investigation carried out by Internal Revenue Service in some company, soap, shampoo and detergent disappeared from the market. This means that there are companies with such powers at the market, whose withdrawal from the market causes prices increase at the market. Under such conditions, naturally these companies might dictate the prices to the consumers.
Price increase is still anticipated
We have discussed the tendency of price reduction on foodstuffs, but experts are prognosticating that downturn in prices is just temporary and escape from global recession will be followed by increase of consumer prices. According to the IMF (International Monetary Fund) prognosis, global economy decreases by 1.4% in 2009Y, but from 2010Y economy starts reviving. IMF experts are expecting that in 2009-2018YY consumer prices will be higher than in 2006.
Experts of the United Nations forecast that in the nearest future, recurrence of 2007-2008YY consumer price boom is expected. Experts assume that overcoming of recession will be followed by increasing demand on foodstuffs and consequently by advance in food prices. Price on oil, natural gas and other goods are expected to increase either. This fear is aggravated by 2002Y-2008Y tendency of GDP growth. Its growth is accompanied by increased purchasing ability of the population and thus increased prices. World price index of the World Bank has increased by 140% within the period of 2002-2008YY. 75% price index growth was observed after September 2006Y. Oil product prices directly influence foodstuff prices. Price of oil reached its peak in 2002-2008YY and almost quadrupled – $145 per barrel. Experts were assuming that oil price would even increase up to $200 that logically would have been followed by price increase on food. Global recession put the brakes on price growth process, until GDP starts increasing again.
Precondition of such prognosis is price growth on oil products. The price of barrel of oil in December, 2008Y was $40, the price already increased up to $70 in August, 2009Y. The price of “black gold” is increasing as far as, under the conditions of positive prospects of the economies of developing countries OPEC forecasted increased demand on oil products in 2010Y. OPEC specialists reckon that demand will fall by 1.41 million barrels per day this year and it makes up 82.24 million barrels. 0.8% demand growth will be observed in 2010Y and it amounts 84.9 million barrels. Broadening of Asian markets positively influences price growth of oil (source: k2kapital). Thus, another reason of food price growth will be increased transportation expenses.
Due to strong prices of food and increasing demand on it, development of farming activity is given a special importance. However, agricultural lands are dramatically decreasing in many countries of the world, especially in developed countries. Aid and investments in agriculture reduced since 1980ies. Only 17% of aggregate aid was allocated in this field by donor countries in 1980Y. Nowadays, this figure is only 3.8%. Experts are explaining advance in prices of foodstuffs with the lack of investments in the field.
Much attention is not paid to the development of agrarian sector in our country. Economic expert, Mr. Nodar Khaduri speaks concerning this subject:
“Advance in prices on foodstuffs is anticipated in any case, as there are many factors determining such tendency. On the first point, the fact that population’s incomes are increasing. Consequently, purchasing ability of the population is rising. If the volume of goods at the market does not increase then the prices will advance naturally. This is a very simple explanation of what should we expect in the nearest future. Under such conditions, economic development and increase of industrial activity are of considerable importance. Georgia cannot boast with the progress in this field. Most agricultural lands are uncultivated; peasant have abandoned their lands and come to Tbilisi, waiting for job opportunities at Eliava. Agriculture has lost its value in Georgia. State should try to return people to the villages”.
As we’ve already mentioned, similar tendency is observed in many countries. For instance, the price of agricultural lands in Great Britain might double in 5 years. British experts reckon that “Advance in prices might be caused by lack of agricultural lands and increased demand on foodstuffs.”
According to annual forecast of the company Knight Frank, the peak of land prices was noticed in Great Britain in 2007Y – the price of one acre of land was £4970. However, experts are forecasting that such increase is not anticipated until 2014Y. Though, land prices will advance and make up $10 thousand in 2015 (source: Daily Telegraph).
Everything points that we should expect another wave of advance in foodstuff prices and Georgia is not an exception here. Maybe the solution to this problem is development of agrarian sector? Even 40% of agricultural lands are not cultivated and thousands of families are unemployed and live without source of income in the capitol or other big cities. It seems so simple – unemployed people should cultivate land and produce agricultural products. Both these people and country would benefit out of this. Unfortunately, everything is much complicated. Successive policy encouraging development of agrarian sector should be carried out in the country, – the policy that returns peasants to the countryside and agricultural products to the economy of Georgia.