The looming food crisis? By Daryll E. Ray July 2, 2009

We tend to cringe when we hear someone argue that food production is not keeping up with demand. We heard Earl Butz make that argument when he began to dismantle farm programs, telling farmers that they needed to plant fencerow to fencerow. They did, and the price soon headed south.

Supporters of the 1996 Farm Bill argued that export demand from China would use all of the corn we could supply as the result of a growing middle class that demanded grain-fed meat. China increased its utilization of corn; the only problem for US farmers was they grew it themselves and managed to export millions of bushels of corn along the way. It took four years of Emergency Payments and Loan Deficiency Payments to keep the crop sector from going belly up.

Today those who are promoting the use of genetically modified crops (GMOs) make the food shortage argument—paraphrasing the pitch: “If you don’t get behind GMOs, agricultural production will not be able to keep up with the growth in population.” The apparent implication is “Support GMOs or people will starve.”

We are not trying to pick a fight with the scientists and companies who provide the basic research on GMOs, just their pitchmen. From our perspective their arguments are disingenuous at best and blackmail at worst.

Despite all of the arguments about a looming food crisis, we think the evidence points in the other direction. First, the problem of undernutrition is not an issue of production; it is a problem of money.

The world produces enough grains and oilseeds to meet the nutritional requirements of all of the people on the earth. So, if the 800 to 900 million who experience chronic undernutrition had enough money, they could outbid livestock producers and ethanol plants for the corn, soybeans, and wheat they need to meet their basic caloric requirements.

Not only does the world’s agriculture have the ability to meet the nutritional requirements of those who are alive today; it has the ability to meet the world’s needs for the time horizon used by most GMO pitchmen and pitchwomen.

Given the availability of land and yield-increasing technologies, it appears to us that the most pervasive problem that farmers will face for the foreseeable future is the same one they have experienced for the last one hundred years—on average production will exceed demand and chronic low prices will be the periodic norm. ... [more]

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Here's a story about how farm and commodity subsidies have gotten out of hand. It's an example of how systems effects can produce counterintuitive and pernicious consequences.

It's good that President Bush's new budget proposes overall limits on subsidy payments to farmers. It's true, as he says, that the limits would inject market forces into the farm economy. But the truth is that it's those "market forces" that led to the subsidies and the subsidies along with NAFTA led to our illegal immigration problem.

I know, I know. It's not politically correct to say, but it's exactly the case that what we have here is a "market failure. The fact is that the "free market" doesn't work for farming because both supply and demand for farm commodities are relatively inelastic.

How can this be? Step by step, here's how and why .

1. Farmers either don't earn enough or they want to earn more.
2. Each farmer makes a logical decision to increase land in production or invest in equipment to increase efficiency.
3. When every farmer logically does this, the greater supply of farm commodities depresses market prices. That's because supply and demand don't change much as prices change; that is, supply and demand are relatively "inelastic" to price. Supply doesn't decrease as prices fall because farmers tend to plant all their land. They can't predict demand and just-in-time production isn't possible ... it takes months for a crop to grow. Also, demand doesn't increase that much as prices fall because people who can afford food can only eat so much.
4. Farm income falls due to depressed prices.
5. Farmers ask for price supports, subsidies and loans so they can keep farming and invest in equipment to increase efficiency to increase profits.
6. This cycle continues to increase supply, depress prices and increase subsidies, which is the behavior we've observed.

The Republican congress passed  the "Freedom to Farm" Act in 1996. The idea was to relieve economic pressure on farmers by allowing them to plant as much as they want, ending farm subsidies and decades of government interference, such as crop quotas and payments to take land out of production.

It didn't work. Farm subsidies have increased by over 100% since 1996.

While each farmer's decision is individually logical, the overall behavior of the system is dysfunctional; the behavior of the whole is collectively insane. This is an example of what's known as the "Fallacy of Composition": When we act as if what is true for the parts is true for the whole.

The effects of these subsidies extend beyond U.S. borders and return to bite us.

7. Excess farm commodities are sold on the world market.
8. This depresses world farm commodity prices.
9. Mexican farmers, for example, thanks to NAFTA are exposed to these highly-subsidized low prices and can't make a living farming.
10. Mexican farmers leave farming and move to cities and need work.
11. U.S. jobs move to Mexico because of the abundant supply of low wage Mexican labor.
12. Now that those jobs in Mexico are going to even cheaper-labor China, this motivates Mexicans to illegally immigrate into the U.S.
13. U.S. workers displaced to lower wage jobs need assured supplies of inexpensive food.
14. Congress feels pressure to maintain farm subsidies to assure low prices.

There are even health effects in the U.S. The increase of corn production for cattle and the marketing of super-size products have contributed to the problem of American obesity. (Factory Farms & the Politics of Food)

While it's a good move to reduce subsidies, this is a case where it's a bad move to rely on "market forces." One can look at the total market for farm commodities as a "commons" in which there is only so much demand. With too many farmers using too much technology on too much land, prices fall to produce what's known as a "tragedy of the commons."

The only "solution" is take land out of production, and to preserve the "family farm," limit the size of farms. Heresy. Woe is us when ideology, instead of pragmatism, drives public policy. 

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The farm policy dynamic is described in detail in The Squeeze on Farmers.

Note 9/2/08

For more on the inelasticity of supply and demand in agriculture see these from Daryll Ray, Agricultural Policy Analysis Center
at the University of Tennessee:
Subsidies and Demand
Other industries have the tools needed to manage excess capacity
Policy Impacts on Agriculture
Jobless recovery: Another fallacy of composition example 3/20/04