Food Prices and Food Security

 I often hear claims to the effect that: food production is not the problem - we need more equitable distribution (e.g., see here, here, or here for just a few examples). The implication of this claim is that farmers should stop with all the technological innovation, fertilizers, and pesticides; let's just figure out better policies to get the food we already have to the people who need it.

There is an element of this claim that is based in fact.  In an accounting sense, it is true that global production of food calories exceeds the daily requirement of calories from humans.  But, it is a stretch to leap from that fact to the claim that the problem of food production is "solved". The problem with that thinking, in short, is that it mistakes an accounting problem for an economic one.  

The REASON we have the number of calories we do now is (at least partially) a result of the incentives inherent in our current market system.  If one removes those incentives and replaces them with, say, tariffs, export bans/subsidies, or some sort of forced food redistribution, then we wouldn't have any reason to expect the same volume of food production that we now enjoy.  Moreover, we need to look beyond the accounting identity today and think about volume of production will be required to meet future food demand from a more populated world (indeed, we may have a hard time increasing crop yields according to some sources). 

If one seriously believes the claim that "we have enough food production", we wouldn't expect much relationship between food prices and hunger (or food insecurity).  Yet, from an economic standpoint, rising food prices will typically reflect scarcity (i.e., insufficient supply to meet current quantity demanded).  I recently ran across this article published in Applied Economic Perspectives and Policy by Christian Gregory and Alisha Coleman-Jensen of the Economic Research Service at the USDA.  Here is a portion of the abstract:

While research establishing the link between high food prices and increased food insecurity in developing countries is robust, similar research about the United States has been lacking. This has been due in part to a lack of suitable price data, but it has also been due to the assumption that prices matter less in the United States, where households spend a relatively small fraction of their income on food. In this article we examine the role that local food prices play in determining food insecurity in the United States by using newly-developed price data. We examine whether low-income households participating in the Supplemental Nutrition Assistance Program (SNAP, formerly Food Stamps) are more likely to be food insecure in areas where food prices are higher. We find that the average effect of food prices on the probability of food insecurity is positive and significant: a one-standard deviation increase in food prices is associated with increases of 2.7, 2.6, and 3.1 percentage points in household, adult, and child food insecurity, respectively. These marginal effects amount to 5.0%, 5.1%, and 12.4% increases in the prevalence of food insecurity for SNAP households, adults, and children, respectively. 

In short: when we don't produce enough food, food prices rise.  When food prices rise, there are more hungry people - even in a rich country like the US.  Those statements would seem rather obvious were it not for claims like: 

scarcity is clearly not the cause of hunger

The new gentleman farmer

That's the the title of a story in the winter issue of WSJ.Money magazine.

The piece documents the rise of the gentlemen and gentlewomen farmers: folks who made millions elsewhere and who are now trying their hand at agriculture - primarily organic agriculture.  

Here are some of the folks jumping in:

It's late afternoon on a Friday, but Lerner, the 58-year-old tech pioneer who co-founded Cisco Systems, is still working, driving her Range Rover around the pastures and barns that make up her 800-acre Ayrshire Farm in Upperville, Va 

. . .

The nation is in the middle of an organic-food boom, and in case you haven't noticed, a surprising number of boldface names are becoming part of it. That includes Oprah Winfrey, who is growing kale, carrots and more than 60 other varieties of vegetables, fruits and herbs on her organic farm on the Hawaiian island of Maui, as well as comedian Roseanne Barr, who is growing macadamia nuts and produce on her organic farm on Hawaii's Big Island. Fashion-world honchos George Malkemus and Anthony Yurgaitis—president and vice president, respectively, of designer shoe brand Manolo Blahnik—have a dairy farm in Litchfield, Conn., where the 325 cows are pasture-fed (at least when the weather allows; otherwise, they are given a special diet of high-quality hay and a premium feed)

Are they making any money?  

It appears not.  Indeed much of their fortunes are being lost (or rather perhaps we should say they are spending their fortunes on a consumption good or experience).

But by Lerner's own admission, she has yet to turn a profit on her $7 million-a-year business, which includes two additional farms in the area, bringing her total acreage to 1,200. And at times, it seems she is consciously running it as a nonprofit entity, especially given the considerable time and energy she devotes to research on organic farming practices.

It seems she is having to make some big changes:

she has taken a series of steps to save money, including farming out some of her operations and making adjustments in her meat-packaging operations. Her biggest step of all, though, is deciding to sell a good chunk of the farm. Indeed, some 600 of Ayrshire's 800 acres are now on the market, replete with the mansion she's restored. The asking price: $30 million. To many, this might be seen as an acknowledgement that Lerner has ultimately failed in her mission. She prefers to view it as the next step in the evolution of her business. 

More generally:

But the good intentions of these type-A types notwithstanding, the economics of organic farming are a potential blow to their fairly large egos. These are individuals with scores of successes in life, but experts say that despite the price premiums that come with organic labeling or other likeminded practices, the math doesn't always work out. It is just too expensive to do. For that matter, almost all farming, organic or conventional, is a financial boondoggle when it's outside the realm of factory farming. The median projected income of the American farm in 2013? It's actually a loss of roughly $2,300, according to the U.S. Department of Agriculture. Is it any wonder that—the organic boom notwithstanding—the number of farms in the U.S. has been on a dramatic decline, from a high of nearly 7 million in the 1930s to 2.2 million today?

Although I have been critical of many of the claims of organic agriculture, one shouldn't be too quick to conclude that all organic farming is unprofitable.  Indeed, many conventional producers have switched some of their operation to organic because they expect higher profits (i.e., they expect the higher price premiums for organic to compensate for lower yields and higher input costs).  But, the ones making money at it typically aren't "gentlemen farmers" or mom-and-pop set-ups.  

In terms of profitability, it may matter less whether one is an organic or non-organic farmer as compared to whether the producer uses efficient practices and technologies.  For example, here is a study about dairies by some of my former colleagues at Purdue University published in the American Journal of Agricultural Economics.  They show that the technology used by organic farms is less efficient than that used by non-organic (organic is about 13% less productive).  However, there are differences in efficiency across farms, both organic and non-organic.  As they say:

To our knowledge, our research is the first to show that economies of scale also exist in organic dairy production.

In other words, size matters - even if you're organic. Larger dairy farms are going to have lower costs. That's true for non-organic and it is true for organic.  Also:

We find that compared to the Upper Midwest, the technology used by farms in the Southeast is more productive. Farms with cows of higher weight also produce more milk. . . .In terms of management practices we find that farms that tend to rent more of their land for either crop production or pasture are less productive. Intuitively, a renter does not have the same incentive as a land owner to invest in the productivity of the land. Farms that raise more of their own feed seem to be less productive. . . .

If gentlemen farmers want to make more money, they may have to stop being so gentlemanly and get down to business.

The journey of an Indian onion

That was the subtitle of a recent article in The Economist.  The article tracks the path of an Indian onion from farm to consumer, and in the process reveals a badly antiquated food system in that country.  It also shows how much we consumers in the developing world take for granted.  

There are huge opportunities for efficiency gains associated with storage, transportation, and economies of scale but, as the article reveals, various Indian policies have, to the detriment of Indian consumers, kept out firms like Walmart, Carrefour, and Tesco who have the capacity and know-how.  

According to the article:

wholesale onion prices soared by 278% in the year to October and the retail price of all vegetables shot up by 46%. The food supply chain is decades out of date and cannot keep up with booming demand. India’s rulers are watching the cost of food closely, too, ahead of an election due by May. Electoral folklore says that pricey onions are deadly for incumbent governments.

A year ago it seemed that India had bitten the bullet by permitting foreign firms to own majority stakes in domestic supermarkets. The decision came after a fierce political battle. Walmart, Carrefour and Tesco have been waiting for years to invest in India. 

but

On the ground little has happened. Foreign firms complain of hellish fine print, including a stipulation to buy from tiny suppliers. Individual Indian states can opt out of the policy—which is unhelpful if you want to build a national supermarket chain. In October Walmart terminated its joint venture with Bharti, an Indian group. India has reduced the beast of Bentonville to a state of bewilderment. Tesco has cut expatriate staff

People in the developed world like to complain about Walmart, but I think it says something that any of us would be stunned if we walked into one of their stores and were asked to pay more than a buck or so for an onion.  And, we'd be completely perturbed if there were no onions for sale.  Rarely do we stop and think about the process (and the companies) that have led to such "unnaturally" high expectations.

The Hidden Cost of Cheap Food

The "food movement" has a long and varied history, but it seems to me that much of the force behind the modern calls for action came from writings during the early to mid-2000s (think Supersize Me or Fast Food Nation or Omnivore's Dilemma or Food Politics, which ultimately lead to more recent things like Food Inc and Salt Sugar Fat and Pandora's Lunchbox).   

The interesting thing about this time period is that food commodity prices were historically very low.  As a result, a common mantra developed that goes something like the following.  Food is too cheap.  This cheap food masks costs to health and the environment.  These masked costs represent externalities, and economics tells us that externalities justify government action like food taxes, subsidies, etc.  This line of thinking reached such a level that the CDC and the Institute of Medicine of the National Academies has held a couple meetings on the issue (I participated in one of those; more on that in a moment).   

There are two problems with this like of reasoning.  First, in the US, we witnessed extraordinarily run-ups in commodity prices in 2008 and again in 2011.  Worldwide, food prices are higher today in real terms than has been the case for almost 40 years (e.g., see this UN FAO graph).  One might argue that certain types of foods are "too cheap" but to broadly make such a claim is no longer consistent with the facts.  Second, I think outside circles of trained economists, there is often a deep misunderstanding of the nature of externalities, and even within economic circles a lack of critical thinking about the ability of taxes/subsidies to solve externality problems.  

This second point was the focus of an invited talk that I gave to the Northeastern Agricultural and Resource Economics Association this summer in Ithaca, NY.  That address has been published in the association's journal, the Agricultural and Resource Economics Review.  The paper is now available online.  

Here is the abstract:

Social critics have taken aim at modern production agriculture using a common theme: many food, health, and environmental problems are explained by corporate farms, agribusinesses, and fast-food restaurants failing to account for the full costs of their actions. How accurate is this diagnosis? How feasible is the assumption that these externalities are most effectively mitigated via Pigovian taxes and subsidies? Drawing on my experiences at a National Institute of Medicine meeting on the subject, I seek to clarify the definition and nature of externalities and discuss situations in which public policy is most and least effective in efficiently making "hidden” costs of food visible.

A few snippets:

One of the striking observations that emerged from the conference was
the wide disconnect between the views held by participating economists
and noneconomists about the nature and role of externalities. Among many of the noneconomists, it seemed that any “bad” outcome that resulted from food production and consumption—heart attacks, obesity, the low pay of slaughterhouse workers, soil run-off, animal welfare problems, climate change— was evidence of an externality that required regulation, typically in the form of some sort of tax. I also learned in the process that some of my views about externalities were perhaps a bit unorthodox relative to those of other economists.

and

Clearly, the case for regulating externalities is more complicated than first
meets the eye. Indeed, as the preceding examples illustrate, one is apt to
see externalities everywhere. The sheer abundance of examples that fit the definition of “externality” coupled with our unwillingness to tax them all
away is suggestive. As Coase put it, “The ubiquitous nature of ‘externalities’ suggests to me that there is a prima facie case against intervention”

and I start the conclusions with the following:

This essay arose from my failed attempts to explain externalities to
noneconomists and my desire to challenge fellow economists to think more seriously about the real-world implications of policy advice derived from simple textbook models. In popular writing about food and agriculture, there seems to be a lack of appreciation for the types of externalities that reduce welfare and of the difficulty associated with crafting corrective actions that actually increase the size of the pie. Moreover, the concept of externality is often used to advance a particular cause or point of view. There is a lot of talk about the “hidden costs” of our modern food production system. What about the “hidden benefits?” Failing even to mention, let alone seriously address, that question suggests that one is not willing to think seriously about externalities as anything more than academic-sounding justifications designed to garner enough power and support to enact a faction’s preferred policy.

I learned a lot writing the essay, I hope readers might learn something too.

Is Farming the Future?

A story from CNBC has been making the rounds indicating that students should "Skip the MBA, get an agricultural degree."  As a professor of agricultural economics I'm predisposed to like this argument.  And, personally, I think most ag econ departments offer solid skills that students just don't get in an MBA. 

That being said, I think there are good reasons to take pause.  This argument is being made by Jim Rogers, an investor and hedge fund owner.  For years, he has been saying things like: 

There’s going to be a huge shift in American society, American culture, in the places where one is going to get rich. The stock brokers are going to be driving taxis. The smart ones will learn to drive tractors so they can work for the smart farmers. The farmers are going to be driving Lamborghinis. I’m telling you. You should start Forbes Farming. 

With a growing world population, and the struggle to continue increases in agricultural productivity, he may be right.  He (probably) has millions betting on this proposition.  But, he may also be wrong, and if history is any guide, he may be very wrong.  

If you think ag is going to be really profitable in the future, buy stock in Monsanto, Bayer, John Deere, Tyson, McDonalds, Brinker, and other food and agribusiness companies.  But my reading of the research suggests that by and large, gains in stocks of agribusiness companies have lagged other industries.  For example, here is a graph of relative returns from an Ag Index developed in this research by agricultural economists, and reported on in this paper (the time period runs from 1970 to 2008) relative to S&P 500.

Investing in ag might be good a diversification strategy, but as strategy to maximize returns, the graph above show it would have been a spectacularly bad bet since the 1970s.  

Here is a different perspective in a paper in the Journal of Agricultural and Applied Economics by Zapata, Detre, and Hanabuchi, which shows the price ratio of stocks to commodities from 1871 to 2010.  Again, there are periods where commodities would have provided some diversification benefits, but clearly stocks have generally outperformed commodities over this 100 year time period, as the upward trend indicates.  

Just as Malthus under-estimated the potential benefits of agricultural research and technology to keep up with population growth, I think Jim Rogers may be doing the same.