Food Security and Macroeconomics Discussion

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Table of Contents

Supply And Demand Factors That Affect Food Prices
Forces That Dictated Prices in Kenya
Effects of Rising Food Prices on Consumers and Governments
Macro Economy Policy: Germany
Policies to Tackle Low Unemployment
Happiness of Population
Strategic Possibilities for Tesco
Monopoly Power
Reference List

Supply And Demand Factors That Affect Food Prices

Demand Factors

Food prices are on an upward trend which started in 2008. Since then, many factors continue to affect food prices. Some of the major factors are listed below.

Population growth-global prices continue to increase in the light of a burgeoning world population. Asian countries continue to report growth in population of over 12% per annum. However, the trend slowed down in the last decade. This is especially true in India and China, which have an aggregate population of over 1.7 billion people.

These staggering figures continue to put pressure on the available food stock which drives prices upwards. The developed world‘s population, however, is on a decline. These countries can be able to self-sustain their populace unlike developing countries. It is in developing countries, however, where food is in high demand.

Bio fuel production- the world is in need for greener technologies to counter global warming. Most governments and traditional food reservoirs such as United States and Russia continue to stress the importance of employing greener technologies. This is a noble idea but it is reducing the quantity of food stock that is set aside for human consumption.

This is because, although there has been a diversion of the amount produced, no additional production has been made in light of the increased demand. Brazil and United States are the major contributors to this shortage. Brazil uses sugarcane to produce ethanol while the United States uses corn for that purpose. These two are majorly used for consumption especially in developing countries (Howell et al. 2006).

Shifting dieting habits- the world population’s diets continue to take new shapes. People’s calorie intakes have increased together with meat consumption. Although the world health organization is sounding a warning against this trend, people do not take heed. This trend is especially true in developed countries like United States, United Kingdom and France. Producers of traditional foods watch these trends and shift their production focus to them. This leaves a void in the other more important areas. This means Africa’s staple foods are sidelined during production (Schanbacher, 2010).

Market forces- United States dollar has been on a decline for almost a decade. This is the currency that most traders’ world wide uses for their day today trading globally. Imports and exports are done using the dollar. This decline means that food commodities are trading at higher prices in the markets that they may be needed like in Kenya. This is also true for other African countries. Crude oil is also traded in US dollars. This means that the associated costs of production such as transport and access of raw materials has increased leading to an even greater increase in food prices (Nestle, 2007).

Supply Factors

Land- further production means that space should be available. The burgeoning population, however, has continued to acquire land and use to develop other areas such as real estate. In places such Africa, land is valued and a persons worth is measure by whether he owns land. This trend cripples the need to have large scale production of food. The production of greener energies using food products is also another factor that is reducing land space.

Countries re setting aside large tracts of land for the production of corn and sugarcane to produce ethanol especially in the United States and Brazil. The EU is the largest biodiesel producer in the world at the moment and its transportation requirements account for over 10% in those countries. The trend is set to continue with an anticipated 45% usage by 2020. This is a bad trend which severely hurts the supply of food in third world countries which are not food sufficient (McDonald, 2011).

Uncertainties- currently there are a lot of uncertain events in the world. These events are hindering food production or destroying food reserves creating impromptu demand. A perfect example id the earthquake that hit New Zealand and the tsunami that Japan is grappling with. These two events have destroyed a void in food security which can be healed through other means. Climatic conditions especially in tropical Africa have also become unpredictable.

This means that farmers get disappointed when they plant crops and rains fail. The governments of those countries do not do enough to support farmers. This means that majority of the population lack food and depends on donors for supply (Iversen, 2005).

Forces That Dictated Prices in Kenya

There are many forces that dictate prices in different countries. The major determiners of prices in Kenya include politics, climatic conditions, government policies, market forces on food among others.

Politics- this is the major determiner of prices in this country for the past few years. Soon after the elections of 2007 which were disputed by then opposition leader Raila Odinga, the prices of various commodities (especially food) soared. This is because farmers from the agriculturally rich areas of rift valley province and other highlands were rooted from their homes. This means that, for the next several months food production stalled.

Rift Valley province is considered the food basket of the Kenyan population. In this aftermath, also, so much food that farmers kept in their granaries went up in flames as opposition supporters went on rampage. This has been the case in most previous elections apart from the 2002 poll. In that poll, there was so much expectation that saw prices come down. The incumbent president, who had ruled for 24 years and rendered Kenyan economy worthless, was going to be ousted. However, in the 2007 poll inflation reached its peak (United Nations, 2010).

Market forces- Kenya, unlike other African countries does not have oil reserves. It imports oil from countries such as Saudi Arabia and Libya. Oil prices have a spiral effect on prices in Kenya. This means that prices have increased to abnormal highs when there is uncertainty surrounding oil consignments and supply.

In 2008 and early 2009 the government of Kenya passed a bill that sought to set oil prices in Kenya. This is because the market operators had gone rogue and were haphazardly increasing prices. This severely increased the prices of food stuff which justified the government’s resolve to control oil prices (Tegemeo Institute of Agricultural Policy and Development, 2009).

Climatic conditions- most Kenyan farmers depend on rain to cultivate their foods. In the past years, rains have failed to deliver. Most of the Rift Valley province, which is known to produce so much food, lacked enough rains in 2008 and 2009. The larger Eastern province, North Eastern, Nyanza and Western provinces do not self sustain themselves food wise. They depend on food produced by farmers in other areas especially in central and rift valley provinces. When the rains fail the prices of foods go up exponentially (Kenya Food Security Steering Group, 2008).

Government policies- the government plays a major role in the determination of prices. Recently, the agriculture ministry was involved in a scandal for importation of maize. The subsequent hullabaloo that surrounded that saw the prices of many commodities increase because maize is a staple food in Kenya.

Policies regarding food sustainability in Kenya are not that stiff. The government has constantly been accused of laxity to educate farmers on better ways to cultivate their lands for maximum yield. Its response is always reactive rather than proactive. In a nutshell, Kenyan government policies on food are not helpful. Hence in an indirect way, this contributes to increase in prices when there is a small problem which the government ought to have prepared for (Kenya Food Security Steering Group, 2008).

Effects of Rising Food Prices on Consumers and Governments

Consumers

The consumers suffer the most in the advent of increasing prices. The only lot that enjoys this scenario is traders and business men. Consumers disposable incomes are severely reduced which impacts badly on their purchasing power. Their savings are also reduced as most of the income is used to purchase food items. In many third world countries, this has had a major impact on the social lives of people. They have opted to make their children work and quit school.

Hence, poverty levels continue to increase. The gains made in the period when the prices of food are stable are severely eroded when the prices start increasing. This means that most families work for food only. This is worse in countries where most of the population fall below the two dollar poverty line earnings (Wiggins and Levy, 2009).

The United Nations is also sounding an alarm on the quality of food poor households consume in the wake of such increments in prices. It argues that since they earn only enough to enable them purchase certain foods, when prices increase, they cut down on both quality and quantity. This is because the impact is instantly felt.

However, the impact may not be felt by the middle and high level income households. This problem is especially true in third world countries such as Botswana, Congo and Burkina Faso. The effect is so bad when the victims are aged, happen to be children or are HIV positive. This group is hardest hit by increasing food prices (Food and Agriculture Organization, 2008).

Governments

In developed countries, economic slowdowns have been experienced. This leads to increased inflation levels. Most employers shy away from employing more people in these climatic conditions. On the contrary, they lay off workers. This developments lead to very high unemployment levels in many countries.

Overall, this is to the disadvantage of consumers. Most governments there do not grapple with the problem of feeding the population; rather it is the effect that increasing food prices have on their welfare. Therefore, they largely focus on keeping people on the jobs during such a time.

The situation is very different in developing countries. Soaring food prices lead to riots in countries such as Ivory Coast, Senegal and Haiti. People get the feeling that the governments do not have their interest at heart. Therefore, most governments experience political instability which emanates from the fact that majority of its population is hungry (Gali et al. 2007).

Most governments in developing countries are grappling with the problem of food security. They are spending so much money on food imports which is stalling development projects. Most governments in Africa and other developing countries are reporting over 30% allocations in food imports. This budgetary allocation weighs heavily on their donor funds (Coutinho, 2005).

Governments Response to Control Prices

In the wake of such staggering figures on budgetary allocations, most governments are forging policies to ease price increases on food stuffs. Most governments are creating enabling environments to their famers. This means that they provide them with seeds for planting and other things such as fertilizers. The farmers are also encouraged to sell the food they produce to the government. This means that there is a win situation: economic benefits and food sustainability.

The United Nations is encouraging government’s world wide to make this part of their middle and long term goals. This way the government is guaranteed of food security of a long time. In many third world countries, land subdivisions contribute to lack of food sustainability. Most governments are revising their policies on land to suit the large scale farming recommended by experts. They argue that this may be the cure to food sustainability problems. The governments are also sensitizing farmers on the need to go large scale in countries where large scale farming is quite minimal (Woodford, 2003).

Other governments are also looking at other ways to deal with this problem. By looking into the major causes of food sustainability problems, the governments are coming up with policies to eradicate the problem. Examples include soaring oil prices in Kenya. This led to increased food prices in 2008 and ’09. The government stepped in and started controlling the prices of oil. This way it shielded farmers from illogical oil pricing which impacts badly on commodity prices (Woodford, 2003).

Macro Economy Policy: Germany

Macroeconomic policy comes in two forms: fiscal and monetary policy. The aim of either is different but overall they bring sanity in the economy. The past ten years have been tumultuous for the Germany economy. It has gone through two recessions. The major one is the 2008 housing crisis that hit the United States. By virtue of been a trading partner and interrelated institutions, the economy was affected. The government has been able to apply these policies and made Germany the fourth largest economy in Europe. Germany also happens to be the world’s largest exporter (Giavazzi, 2006).

The government has dealt with unemployment since the 1990. It has also increased peoples minimum wages to a reasonable level. In the wake of crises that hit the economy in 2008, the government injected money to banks that were crumbling to maintain investor confidence. This also shielded consumers from the possibility of overcharged goods because of inflation (Cowen, 2010).

Expansionary fiscal policy measures were put in place to counter the previous low employment levels, low wages and a stagnant economy. This was evident in the nineties and early 21^st century. This was despite the fact that it was and still is the world’s biggest exporter. Many observers say that this is a structural problem.

The government has also increased its spending levels since the 1990. This has had a multiplier effect on the economy (Söderström, 2005). Following the 2008 crisis, the government has formed a bit more stringent rules to govern the operations of its financial institutions. This is a lesson it learnt from the United States government which has been accused of having not-so-strict rules which led to the crisis that rocked the country.

Policies to Tackle Low Unemployment

This has been a problem to the Germany government for quite some time. Many observers say that it is structural considering the high standing of the German economy. For the next ten years, the government can increase its public spending to create employment. When the government increases spending, the effect on consumers increases exponentially (Vestin, 2006). This increase is triggered by the increased disposable incomes.

The increased spending level means that firms have to produce more to meet demand. For this to happen, more labor force is required. Hence, the firms hire more people and this creates employment across virtually all sectors. This is what is called the fiscal policy (Allsopp and Vines, 2005).

The government can also use monetary policies to tackle unemployment. This deals with price stabilization. The government injects money in the economy to tackle the demand for or against the local currency. If the demand for local currency increases, exports may reduce because of the relatively low prices they trade for.

If the demand for foreign currencies increases the prices of imports become quite staggering. This means that importers may shy away from them creating low supply. To counter this form of market shake ups the government regulates the supply manually. This reduces anxiety in the market and offers confidence to investors who create jobs (Hall, et al. 2001).

The government can also increase its manufacturing industries. By riding on brand recognition of its automobile around the world, the industry can be encouraged to manufacture cheaper models. These cheap models can do well in a market where German cars are deemed to be quite expensive. Such markets include the middle classes in Africa and other third world countries (Economic Research Service, 2008).

Happiness of Population

It is no doubt a population that is happy with its leadership contributes to economic growth. However, the government cannot make this its number one priority at the expense of economic growth stability, inflation checks, employment creation and balance of payments checking. The implications of ignoring or seconding these four economic measures may surpass the benefits of making the population happy.

There are difficulties that the government will face when trying to make the population happy. The fact that all the unemployed cannot get employed is one of them. The population cannot get happy overall (Krugman, 2006). This is because every policy that the government undertakes does not mean that every member of a country will be happy.

Some traders are happy when the prices go high. Members of the public complain of high prices. Therefore the government must set inflation rates at reasonable levels. In conclusion, it is rather hard to make every member of the public happy. This is especially true when we consider any government policy. This is because it is always not meant for an individual, it is meant for the general population (Carlin and Soskice, 2006).

Strategic Possibilities for Tesco

Tesco is the second biggest retail outlet in the world. It is the third largest retail outlet by market revenue. The company has set up base in many countries in Europe, Asia and North America. The company enjoys consumer confidence because of the unrivalled services and continued customer care. It also offers a wide range of products. The company which is listed in a number of countries has space for even greater growth.

Brand- the company has a great chance to ride on the brand name it has already created for itself in the world. This means the company can explore other market options such as franchising. Under the umbrella of franchising the company can enter deeply into markets in Africa, where it has no branch. It is also possible to enter into markets where government control of the local operations is quite stringent. A perfect example is china and Malaysia. In these two very large market blocs, the entry procedure is too complicated for foreign companies especially the western companies.

The only way the company can enter such big market blocs is by employing the concept of franchising. The company should, however, maintain its standard in the customer service and quality. The franchises should employ the company culture, its products, and organizational colors and most importantly maintained the Tesco brand. When the company enters these new and emerging markets, it will easily ride on its brand name which is almost a home name in every country (BBC News, June 2005).

Customer service- the company should continually improve its customer service levels. This way the company trounced long time rivals Asda and Wal Mart for United kingdoms market share. The company is employing internal strategies that have kept it ahead of the pack the most significant is the production and sale of private labels.

The company is strengthening its brand name and at the same time selling cheap products at a profit. This came in hand especially in the wake of the 2008 global recession. The consumer market was trying hard to balance their budgets and private labels came in handy. Market observers say that Tesco’s customer service levels are unrivalled. They say that this is the major competitive advantage that makes its competitors die in oblivion. For instance, the company rides highly on its pricing strategy.

It also invests back most of its profits in an attempt to trounce Asda from the top slot of the biggest retail outlet in United Kingdom. Coming from this high pedestal the company has a great chance to enter into the emerging markets of china and the Middle East. In fact, the company has a leaf to copy from in its success in South Korea. The company has been rated very highly by market observes when it comes to making customers from all segments satisfied. This is a strategy that is quite hard to pull off.

Mergers and acquisitions- the company has a wide door open in this arena. This is especially true in markets where measures for entry are so stringent. The company can enter those markets by acquiring majority stake holding in those companies. In 1999, it did just that and entered into the South Korean market through a joint venture with Samsung (BBC News, June 2005). This can be replicated in markets which are deemed hard to enter. By employing its marketing strategy, the company will easily make in ways in those markets. These markets are especially wide open in African and Asia countries.

There are also unexplored markets in Latin America. The company policy on marketing is that when it enters into mergers, it does not weaken the other brand. It works at strengthening the brand as it grows its brand. For example, it can acquire majority shareholding in the largest retail out let in East Africa, Nakumatt. Nakumatt is a Kenyan company which commands majority market share and strong growth prospects. If the company was to do that it would acquire wholly the retail outlet or it can strengthen its structures and growth.

By strengthening its infrastructural growth, the company will make profits at the same increasing its capital position in the company. It will also understand the market needs of the consumers in those countries such as Kenya, Rwanda and Uganda where Nakumatt is situated.

Internet platform- this is the largest consumer platform at the moment. The company has already entered it albeit on a small scale basis. Its grocery sales have continually improved since 2002. It has the capability to do business online. This will go hand in hand with home deliveries.

These custom made services, if well executed, can easily make it a stronger market leader in the near future. The internet use is at a high of over 50% usage level in countries such as United States, United Kingdom and Russia. In Africa the usage rate stands at 30% with countries like Nigeria, Kenya and South Africa reporting phenomenon growth rates. This means that if the company entered those markets, the future looks quite positive for internet trading (Walker, 2006).

Market share for tesco

This is the market share for Tesco and its growth since 2006.

Monopoly Power

Benefits

There are many observers who argue that monopoly power is beneficial. Their argument is majorly centered on a case by case basis. This means analysis of the already existing monopolies or those that existed. The major benefit of a monopoly is the fact it drives down the costs of doing business: both fixed and variable. These costs are the determiners of prices in a market. Hence, when costs go down prices go down too. This is to the benefit of consumers (Heckman, 2002).

Monopoly power is also important in markets where the volatility levels are quite high. These markets also require a lot of capital for entry. The government, therefore, encourages monopoly power so as to keep sanity in business. In most cases the government regulates pricing of the commodities produced from monopolies.

This way the interests of the consumers are protected. Many observers see this as a major boost to consumers. This is because the monopoly has the capability to produce so much. This large economy of scale is quite beneficial to a country. The production keeps the prices of commodities down. If it was a free entry market, the prices would have been high since the players would not produce too much. This is in anticipation of market competition and market share levels. This would definitely make prices to go up to the disadvantage of consumers.

Another advantage of monopolies that worked towards the benefits of consumers is the lack of promotion. Advertising takes a huge chunk of company capital especially in a really competitive market. Therefore, all the profits that a monopoly gets are used for research and development together with infrastructural improvements.

This means that, if this is carried out well, the consumers can enjoy top notch products at a cheaper costs compared to a situation where there was free competition and market entry. The lack of promotion also means that prices come down further as the overhead costs reduce.

Demerits

Monopoly power can easily be misused. This is because it may overcharge consumers for their products. The fact that there are no substitute goods, no cheaper alternatives and there is zero competition means that the consumers can easily be exploited. This is especially true in countries where the rule of law is ignored. A perfect example is countries such as Zimbabwe, Somalia and Cuba. In these countries, the rulers do not have the interest of people at heart. Hence, it is quite easy for exploitation to thrive.

The fixed costs associated with a monopoly are sometimes quite staggering. This makes the marginal-cost pricing unsound in the long run. Therefore, a monopoly can opt for price discriminations. This is where the same product from a company is sold at different prices to different consumer segments. This may not happen in a competitive market: it is simply untenable. Once again the government plays a pivotal role to ensure consumers do not get bogus services from the monopoly as noted by Collingham (2011).

The presence of a monopoly power means that there is no need for promotion. If the market that the monopoly holds touches on the livelihoods of the majority populace, promotion would be a viable business. It is a driver of economy in many countries. Hence, another segment which can offer employment to a large group of the population loses out.

The long run loss, if calculated can overturn the benefits accrued from a monopoly power. This is an observation made by the opponents of monopolies. The consumers are also on the losing end on this one. This is because they do not get to know the specific requirements of the commodities they would like. They do not have a choice and information to them is limited.

There are four factors of production: land, labor, capital and entrepreneurship. In a monopolistic set up, the factors of production are not wholly utilized. Entrepreneurship is the one particular factor that gets smothered. There can be better ways to improve quality of a product. However, those with such ideas do not get the opportunity to do so.

The other factor is labor. In a competitive environment, there is a greater chance that many people may get employed. These include marketers, salesmen, production employees and technocrats. This is not the case in a monopoly set up. Only a few employees get employment and this kills job creation efforts in a country (Collingham, 2011).

Monopoly Policy: Germany Case

Monopoly power was so prominent in the early seventies and before the merger of East and West Germany. Today monopoly operations are quite minimal and the existing ones are quite controlled by the government. The government formed the monopolies commission which is responsible for any issues regarding monopolies and their operations. It protects consumers from unfair pricing and low standard commodities. This measure was undertaken in the late 1970 after the government heed to the complaints of consumers regarding quality and pricing from certain companies (Orphanides, 2003).

The government introduced concentration measuring. This is a strategy that aims at reducing the number of monopolies in commodity markets that directly affect consumers. This way, consumers do not get affected so much in case there is a shake up in that frontier. The government has also slapped a ban on ownership mergers between banks and non-bank institutions. These institutions are especially monopolies. The government views this as a coalesce to defraud the consumers by affording so much credit to them at the expense of other institutions so as to expand influence (Orphanides, 2004).

The government has also introduced a policy that seeks to fully control government sponsored monopolies and closely observe the operations of natural monopolies. The government, through the monopolies commission, has made it a reality by drafting a law for that. This way the operators cannot be wayward in the markets and have a responsibility of been accountable to the consumers (Siebert, 2005).

Conclusively, monopoly operations continue to be closely observed by government’s world wide. It is impossible to go rogue. In some cases government’s world wide are killing sponsored monopolies and allowing free competition. Only natural monopolies are left to operate.

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