Price Controls and the Threat of High Food Prices

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Ahead of Monday night's clash between the two sides, Fulham manager Mark Hughes has praised the work of Kenny Dalglish and believes Andy Carroll and Luis Suarez could go on to join a list of historic strike partnerships at Liverpool. Despite only playing as a duo sporadically since their January arrival, Carroll and Suarez have each chipped in with goals; a fact which implies Liverpool can be pleased with its business after the sale of Fernando Torres, according to Hughes. "I think the view is that they've done good business in terms of the two players they've got in with the money they've got for Torres," said Hughes, according to the Daily Mail.


The Nation (Nairobi)

Moses Ikiara, Jacob Oduor and Nahashon Mwongera

9 May 2011


Nairobi — The issue of high fuel and food prices has dominated public talk in Kenya with public demonstrations and intense discussion in Parliament.

This prompted some response from Treasury in form of tax reduction on kerosene and diesel.

With the looming battle on minimum wages and the seeming failure of the long rains, the matter is unlikely to go away soon.

In an attempt to address the problem earlier, Parliament in June last year passed a Bill that proposed to control prices of essential goods including maize, rice, wheat, sugar, cooking oil, petrol, diesel and paraffin.

The President declined to assent to it and returned it to the house for revision. MPs may attempt to re-introduce the Bill in future as price pressure builds.

There is also a likelihood of further pressure from the public for more direct price controls as costs continue to soar.

The Energy Regulatory Commission (ERC) has introduced oil price controls. The question is whether these controls are beneficial to the economy or not.

Are prices rising faster than income in Kenya? Costs of most essential goods in Kenya have risen sharply in the last few years.

For instance, sugar prices rose by about 64 per cent between 2000 and 2009. The years 2007-2008 in particular saw dramatic increases in world food prices, by up to 83 per cent.

Are these prices rising faster than income to warrant concern? Income actually declined from 4.05 per cent in 2007 to – 0.2 per cent in 2009.

Thus, as prices were rising from 2007 onwards, per capita income was shrinking, eroding the consumers’ purchasing power.

This, therefore, shows that consumers have a genuine reason to worry. Moreover, prices of commodities are higher in Kenya relative to the situation in neighbouring countries and globally.

Retail and wholesale sugar prices in Kenya for instance are way above international (London spot) prices by as much as Sh52 kilogramme.

In addition, the price of petrol (super) in Kenya was $116 cents per litre in 2009 compared to only 33 cents in Ghana, 43 cents in Egypt, 69 cents in Botswana, and 82 cents in South Africa.

Supply constraints

For all the commodities analysed, production levels are short of consumption requirements with the gap widening over time due a number of factors.

First is falling output levels. Wheat production, for example, declined considerably from 4.1 million bags in 2005 to 1.3 million bags in 2009.

Second factor is declining productivity. Average rice yield fell from 72.70 bags per hectare in 2005 to 38.7 bags per hectare in 2009.

Reduced output is associated with supply constraints ranging from use of low yielding varieties, high cost of inputs, high cost of infrastructure services, over-reliance on rainfall and high cost of credit.

Other factors that constrain supply include escalating petroleum prices, agricultural subsidies in developed countries and climate change

Demand factors

Increased use of food for bio-fuel production, rise in population and change in consumption patterns have put pressure on food crops and increased their prices.

Trade Policies

Egypt, Vietnam and India banned export of rice to cushion domestic consumers from rising prices during the 2007/2008 food crisis.

This adversely affected countries that are net importers due to the resultant reduction in global supply.

In addition, regional differences under the EAC and Comesa trade regimes in application of tariffs on sensitive products, together with exemptions and duty remission schemes, lead to price disparities.

Governance and institutional factors

These include delay in paying farmers, low crushing and milling capacity of sugar and maize processing firms respectively, lack of capacity of the National Cereals and Produce Board to buy all the maize stocks and control of market by a few big suppliers (millers) leads to poor income to farmers.

In the petroleum sector, there are major institutional weaknesses including lack of adequate hedging facilities to cushion the country from international price volatility, old and outdated refinery, inadequate pipeline and pumping capacity, lack of efficient railway system to complement the pipeline infrastructure and inadequate implementation of the 90-day stock.

Are price controls the answer?

Even though price controls have merit when markets are not perfect, direct price controls as a long term measure have not worked in the past in Kenya and elsewhere.

In addition, that will violate international and regional trade agreements that the country has signed prohibiting anti-competitive practices.

It will lead to shortages of goods targeted leading to queues and black markets which will hurt the consumer even more.

Controls may lead to collapse of sectors targeted when producers cannot make reasonable profits especially considering that the causes of high prices in the country are mainly supply constraints.

Further, price controllers may not even have full information to be able to set prices at optimum levels.

What to do?

The government, with assistance of development partners, should consider greater use of targeted social benefits as an urgent stop gap measure through emergency food aid, conditional or unconditional cash transfers and food-for-work programmes.

Lowering prices through trade and administrative measures

As a short term or temporary measure, the government should reduce tariffs and other taxes on essential goods, providing subsidies to boost local production, and increasing buffer stock.

Hastening of the effective implementation of EAC Customs Union and common market regimes would also help by facilitating free movement of commodities across the region. Production subsidies are also useful but only as a stop gap measure.

Other measures would entail increasing the capacity of NCPB to absorb surplus grain during bumper seasons, eliminate governance weaknesses at NCPB and also remove administrative bottlenecks that hinder quick decision making and release of funds for purchase of surplus grain.

To stabilise petroleum prices, there is an urgent need to implement the decisions taken towards building an efficient refinery, reliable 90-day buffer stock of crude oil, and improving the efficiency of the current oil pipeline.

There is also need to enhance competition by passing and implementing Competition Bill 2009 and Article 46 of the 2010 Constitution rather than resorting to direct price control.

Enhancing long term food supply

The only sustainable route to managing escalating prices of essential commodities is to enhance long-term food security through interventions such as increased funding for agricultural projects, providing input subsidies especially for fertiliser and pesticides and increasing the acreage of food crops under irrigation.

Others are enhancing investment in geothermal and alternative sources of energy, addressing weak institutional governance and bottlenecks (for critical institutions like NOCK and NCPB), and regular publishing of indicative fuel prices determined through an effective formula to empower consumers.

Dr Ikiara is the executive director, Kipra, Dr Oduor is a policy analyst and Mr Mwongera is a research assistant both at Kipra.

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Price Controls and the Threat of High Food Prices