The Cost of Living: Three experts give their views

The Royal Gazette's The Cost of Living series has revealed how increasing numbers of people are struggling to cope as, against a backdrop of growing unemployment and shrinking wages, the price of staple food items has risen by 50 percent in ten years, with electricity bills soaring by 70 percent in eight years.
Tim Smith spoke to three experts, from home and overseas, about why prices have grown, how they're expected to change in coming years, and what can be done to make life in Bermuda less expensive.

Dirk Willem te Velde: Economic growth in China, and oil prices, affect food prices

Small island states will be exposed to yet higher food prices if China’s growth continues and global conflicts send oil prices up once more, according to expert Dirk Willem te Velde.

Investment in agriculture and renewable energy is one solution to becoming more efficient, says Dr te Velde, the head of Investment and Growth at the Overseas Development Institute in London, who has analysed price trends in the Caribbean.

The level of world income is a key driver of both food and fuel prices; stronger growth will increase demand for commodities and with reduced/constant supply this will put pressure on world prices for food and fuel.

In recent years, strong growth in emerging powers, especially China, have increased demand and prices for food. At various times, different supply factors also play a role. For example, bad harvests can also drive up prices.

The increase in biofuel production in recent years has also increased food prices somewhat through increased competition for land and water. Generally, over the coming decades, scarcity in land, water and energy will drive up real food prices.

I am less convinced that financial speculation has a long-lasting effect (in the long-run prices have to follow the economic fundamentals), although it may have contributed to price volatility and price formation in the short-run.

When it comes to oil, we have to factor in geopolitical factors, such as unrest in the Middle East and North Africa which has pushed up prices. The level of oil stocks also affects price volatility, as a surge in demand can cause oil prices to rise especially when stocks are low.

Looking forward to the next five or ten years, the rate of growth, especially in China, is important for both oil and food prices. For food prices, data on harvests are important and, for oil, any evidence on disruptions to supply such as armed conflicts.

Different countries, and different groups within them, will be affected differently. Oil exporters gain from high oil prices, oil importers lose. Urban consumers tend to lose from high food prices, whilst land owners and farmers often gain.

Due to food and energy components in the consumption basket, poor countries and poor consumers are hit often more than their richer counterparts, but the precise effects are context specific. Small island states often need to import relatively large quantities of food and energy products and are therefore particularly exposed.

How can global food and fuel prices be kept as low as possible? This question assumes that energy and food prices are as low as possible. This is not straightforward. The starting point is that food and energy prices need to reflect the full costs of using and providing them including environmental costs.

Hence, oil subsidies are not appropriate because the use of oil has implications for carbon dioxide emissions. Similarly, food prices need to reflect that land prices are increasing and water is becoming increasingly scarce. Food prices can be kept low through more investment and research and development in agriculture. Energy prices can be kept low by investing in renewable energy such as hydro, wind and solar power.

Craig Simmons: We should look to grow more of our own food

Bermuda College economist Craig Simmons says food prices in Bermuda are inflated, firstly, because food is largely imported and, secondly, because the Island’s small population makes it difficult to import or produce in bulk.

One way of bringing prices down, according to Mr Simmons, is to improve efficiency by using modern farming techniques to produce more food on the Island.

Meanwhile, he says, Government, civic organisations and the market itself needs to do their bit to ensure food is available to those in most need.

He also stresses the importance of improving our food storage to guard against any future problems with supply, noting we only have six weeks’ worth of food on the Island at any given time.

No one should expect food prices in Bermuda to be less than or equal to food prices in, say, the US, UK or EU. Locally purchased food, whether imported or grown locally, will always be more expensive for two reasons.

The first, comparative advantage, an age-old economic principle, states that an individual, or region, or country should specialise in an activity for which it is relatively cost efficient. Whilst Bermuda’s climate is great for growing tobacco, onions, and potatoes, we found that we could do better by converting farmland into golf courses, hotels and tourist attractions.

It pains me to admit that Virginia tobacco is of superior quality to our own; or that Prince Edward Island potatoes and Jamaican cassava are better than local varieties. The use of irrigation, fertilisers and pesticides could minimise any quality differences, but the money and environmental cost would be prohibitive.

In effect we switched from growing and exporting food to exporting tourist services because we recognised that, from a cost, quality and foreign currency earning perspective, it was better to import than to grow our own. Such are the gains from specialisation and trade.

We see the principle of comparative advantage at play within countries. For example, within the US, California specialises in almonds and strawberries; Idaho in potatoes; and Florida in citrus.

The second reason why food will be more expensive in Bermuda appeals to another age-old economic principle, economies of scale. According to this principle, large scale food production will be on average cheaper than small scale food production. In an economic experiment, the early settlers discovered their inability to compete on a cost basis against the much larger tobacco plantations in Virginia. They learned from experience the principle of economies of scale.

Locavore, the idea of eating and growing local produce, is inherently inefficient when compared with large scale cultivation often from distant locations. It is analogous to using a residential electrical generator to supply one’s household electricity needs rather than BELCO. Brits, for example, are fond of growing tomatoes in their flower boxes; it is woefully inefficient when compared to Spanish imports. The largest cost, both in money and carbon footprint, is in cultivation, not transportation.

We are victim of both economic principles when it comes to food production and the prices we pay for food. The future doesn’t look promising. The Food and Agricultural Organisation (FAO) predicts that food prices will continue to rise as both the world’s population and standard of living especially among the BRICS (Brazil, Russia, India, China, and South Africa) continues to soar.

It is within this context that local policymakers and entrepreneurs must work toward defining and operationalising our own food security. For one, it behoves us to increase on-island food storage. Presently, we have around six weeks’ worth. This is clearly at odds with any notion of food security.

Secondly, we should increase on-island food production in the areas for which we are least inefficient. This is where we can get ourselves into difficulty. I have just argued that locally produced food runs the risk of violating the principles of comparative and economies of scale. Weighing the costs of local production against the benefits of increased food security isn’t easy. Whilst the costs of production are relatively easy to quantify, the benefits of increased food security are not. This is the now familiar black swan problem: the highly unlikely event of our food supply being comprised in a significant way. This begs the question, why waste resources to cover the odd chance that it is comprised? A similar argument could be made about residential construction. An outsider might wonder why we spend a disproportionate amount on limestone roofs and concrete block walls when hurricane force winds occur so infrequently. Wouldn’t it make more sense to build cheaper roofs and walls so that we could spend more on the things we use every day, like food, furniture, appliances and electronics?

As a third possibility, we could take a page out of the Chinese food security playbook: lease farmland from foreign jurisdictions, possibly in the Caribbean where land and labour are relatively inexpensive.

Europeans and Americans are willing to underwrite their food security with tens of billions of taxpayer euros and dollars. As is the case with many entitlement programmes, ends and means get muddled; perverse incentives and unintended consequences dominate the food security agenda.

From an economic perspective, the Bermuda food market is pure. That purity and faith in the market mechanism won’t help us when hunger strikes. There is no doubt that we will need to make costly changes to how food is procured. Over the next decade, there is no chance that prices will fall. Knowing our inability to act, this will be a simple case of put up or shut up.

EU and US food production is subsidised to the tune of $70 billion and $20 billion per annum respectively. Bermuda’s farmers receive little Government support and no subsidies. When thinking about the global trade in food, the so call ‘free’ market is anything but free. The biggest countries manipulate markets to satisfy their food security interests. Small island states must therefore carefully manage their economic relationships with the global economy.

The US government isn’t afraid to use its food supplies to further its political and economic ambitions. What appeared as an innocuous plan to further US energy security, the substitution of gasoline for ethanol, led to a doubling in the price of corn between October 2007 and July 2008. Also in 2008, Bermuda residents fell victim to a number of Asian countries pursuing their food security needs. Vietnam, Thailand, Pakistan, India, and Myanmar instituted export bans on rice to protect their poorest denizens from food shortages and price hikes. As a result, rice prices tripled over a six-month period.

What can we do about rising food prices?

One unacceptable response is doing nothing. That is, allow the forces of demand and supply to allocate food locally. There are significant risks and social costs associated with this option. Whilst the risk associated with an interruption in our food supply is small, the impact of an interruption would be catastrophic. Bermudians spend an inordinate amount building stone houses that can withstand hurricane winds even though the probability of such an event is small. We do not apply this logic to food security; otherwise, we would have more than six-week’s supply on island.

I think the jury is still out on the effectiveness of farm subsidies in respect of food security. These have proven unhelpful to the average farmer: ten percent of US farmers received 75 percent of all subsidies and the ten percent are corporate types not small and medium sized farms. A subsidy is an entitlement. Once enacted, it will be very difficult to un-enact. Subsidies target farmers’ incomes. They do little to target the poor’s ability to purchase food: the rich and non-rich benefit as well.

Whilst Bermuda residents benefit from EU and US food subsidies, such an environment disadvantages local farmers. This would explain why an entrepreneur could import lettuces from California cheaper than from Devonshire.

High-technology solutions such as vertical farming, growing fruits and vegetables hydroponically or aeroponically, require coordination and long-term decision making by investment bankers, venture capitalists, government, and entrepreneurs. Vertical farming addresses longer-term food security needs, not pressing affordability issues.

If the problem is the poor’s inability to purchase sufficient calories, then economic and social policies targeting the poor are warranted. In other words, the visible hand of the Government, civic organisations and market will have to coordinate the distribution of foodstuffs to families at and below the poverty line. The task is daunting, but no less than that which faced Friendly Societies on the eve of Emancipation. Thousands of slaves or nearly 40 percent of the population had no land, housing or food. The historical record suggests that civic organisations stepped in where the status quo refused to tread.

Peter Everson: Flip side of high food prices is cheaper electronic goods

The key reason for Bermuda’s high food prices, its geographical location, is never going to change, says leading businessman Peter Everson who concludes it’s Government’s policies which will have to be amended.

Mr Everson, the economic chairman of the Chamber of Commerce, also noted families in Bermuda are actually enjoying the flip side of higher global food prices: some electronic goods are now much more affordable because of increased global standards of living.

The structural issue behind Bermuda’s comparatively high food prices is geography. Bermuda is 650 miles off the US East Coast. We have to pay the transport costs, mainly shipping and some air. Because we do not have any material exports, the ships take empty containers back and thus we pay twice for the transport costs.

We are not alone in this. Hawaii has the same problem. Throughout the US, prices vary and often transport costs are a key factor. Therefore, gasoline prices are higher in Vermont than Texas because of the distance from the refineries.

Several factors are behind price increases in Bermuda:

* Increases in the world price levels for food; increased food prices in the US.

* Devaluation of the US dollar / Bermuda dollar makes imports from all non-dollar economies more expensive, such as Canada, UK, and Europe.

* Domestic cost increases: payroll tax; health insurance costs; wage increases; electricity.

How will things change moving forward? Taking things in order, geography will not change. Reduced oil prices, if they occur, will help reduce shipping costs over time.

World food prices have risen due to increased living standards in Asia. This is likely to continue for many more years.

Domestic price pressures will only ease after the Government acknowledges that it is a key driving force and changes policies. This will take several years to come through after the concept has been digested.

When looking at food prices, many observers make the mistake of looking at them in isolation. As an example, the increased living standards in Asia is the flip side to average Bermudians being able to purchase 4G phones, iPads and flat-screen televisions. No one complains that they can buy such lifestyle-enhancing products for such little money in real terms. It is part of the change in the world.

So Bermudians pushing for lower food prices also implicitly want to keep the affordable electronics too. This is natural. If someone promises you something better, such as lower food prices, and it does not affect anything else then you would vote for it. The reality is that it has to be paid for by someone or something. What the voters always ignore is that the ‘someone or something’ is always them.

If the Government felt that society would be improved by lower food prices then it could adopt the policy of taxing electronic goods very highly, 250 percent import duty say, and using the money to provide food stamps to the needy.

The reality is that food imports are an open area in Bermuda’s economy with low barriers to entry. There are many food stores and so price competition is in effect.

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Published Apr 20, 2012 at 8:00 am (Updated Apr 20, 2012 at 8:48 am)

The Cost of Living: Three experts give their views

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