Why Is Food More Expensive in Developing Countries?
Food inflation.
In developing countries, food inflation (the percentage increase in prices of essential foods) is significantly higher than developed countries and is a major driver of general inflation. This translates into an increase of 6% - 12% for essential foods every year. For example, if you are spending $1.00 every year on food, the following year you will be spending $1.06 - $1.12. While this may seem marginal to consumers in developed countries, in developing countries the economic impact is tremendous. To understand why, we must break down the economics of food in developing countries, starting with food inflation.
What are the drivers of food inflation?
In the most basic sense, it is supply and demand. Due to rapid population growth and the expanding rate of urbanization in developing countries, cities are unable to sustainably provide economic food options. To better understand this macro trend we will breakdown the five key drivers of food inflation, in order of impact and directly provide comparisons to developed countries.
Urbanization and Population Growth. Currently 54% of the world lives in urban areas and this number is expected to rise to 66% by 2030, of which 90% of this growth will stem from developing nations in Asia and Africa. What does this all mean? It means over one billion people in developing regions will move to urban areas in the coming years. This unprecedented urbanization, coupled with tremendous population growth, will leave growing cities extremely overwhelmed for food resources. Developed countries simply do not have these urbanization and population trends.
Lack of Agricultural Infrastructure. Developing nations do not have the agricultural technologies possessed by developed nations. Countries like India, Nigeria, and Kenya lack essential productivity technologies including irrigation systems, sensors to plan crop cycles, greenhouse heating and cooling systems, cold storage, and packaging systems. Lack of essential technology translates to increased spoilage and wastage. Over 40% of crops in developing countries become spoiled before reaching markets, leading to a critical headwind to supply. In developed countries, this is at least 8-10x lower.
Unpredictable Weather Patterns. We’ve all heard about climate change and its effects. For this factor we are not talking about global warming or CO2 emissions, rather small changes to temperature over the past two decades which are leading to unpredictable rain falls. For example, due to unpredictable rain falls, farmers in areas like India, East Africa, and West Africa can no longer reliably produce crops year around. Think of this as the “time value of water.” If rain falls before or after a farmer needs rain, the entire crop is destroyed. This creates volatile supply and in turn volatile pricing. In developed countries, this is equally damaging.
Regional Export Markets. Large cities like Bangalore in India or small countries like Cameroon in Africa plan and produce agricultural for regional consumption. However, due to the above three factors and other issues like conflict, they are forced to sell to higher paying neighboring cities or countries. This simple supply and demand inefficiency fosters the transfer of critical food supply away from resource strained local markets. While this is a boon for regional traders, from an economic standpoint this is not sustainable as it leaves a 1) critical lack of supply in the local markets where food was originally planned to be sold and 2) higher overall prices. In developed countries, the two of the above three factors are lacking and there are strategically planned local markets which absorb the small supply imbalances which do occur.
General Inflation. Lastly, general inflation materially increases the price of critical inputs like labor and agricultural supplies. In price sensitive economies, which are experiencing strong GDP growth, this translates to a higher price for food. In developed nations, inflation and GDP growth occur at healthier, manageable, and sustainable rates, resulting in reduced consumer price shock.
These five factors all translate to higher food inflation for developing countries. But you are probably asking yourself, why does all of this matters. So what if the $1.00 I spend becomes $1.06 or $1.12, its only 6 to 12 cents! But it’s so much more.
How much do we actually spend on food?
Food as a percentage of household budgets is significantly higher in developing countries than developed countries. A good example is Engel’s law, an economic term used to describe how as income rises, the proportion of income spent on food decreases, even if the absolute amount increases. The chart below depicts the percentage of household food expenditure by nation. You can clearly see how consumers in developing nations spend. If you are already spending $1.00 on food, and that represents 40%-60% of your household budget, how can you realistically afford spending an additional dollar. You cannot, unless you cutback on other expenditures.
Proportion of Household Expenditure Spent on Food between Developed and Developing Nations
Photo Credit: United States Department of Agriculture
For example, in the United States consumers spend approximately 6% of income on food and only eight countries in the world spend less than 10% of their income on food which, as you correctly guessed, are all highly developed Western countries. If we look at developing countries, we see a stark difference.
In African nations like Kenya and Cameroon, consumers spend on average over 40% of their income on food. Due to the inelasticity of food (demand remaining consistent despite price increases) and general price volatility, in some months this percentage reaches upward of 60%-80%. This ultimately means that a one percent change in food prices more drastically affects consumers in developing nations than consumers in developed nations. From a producer perspective, this is not a sustainable business model. By increasing prices and making profits from a small minority, you are ignoring the significantly larger pool of profits to be made from the common person.
What does this all mean?
The bottom line is until there are sustainable sources of supply for these growing urban centers there will be no stability among food prices. Reducing food inflation and optimizing production near key urban areas will stabilize food prices and maximize producer profits.