Addendum on Rising Food Prices-Becker It was an oversight that I did not discuss explicitly long term prospects for food price increases. The brief discussion below corrects this. A major concern about the rapid rise in food prices is that these high prices will persist into the indefinite future, and perhaps food prices will rise much further. An analogy is often drawn with oil prices since both have risen rapidly during past couple of years, and there is much fear by oil importing countries that oil prices will continue to go up during the next few years. However, the analogy to oil is seriously flawed. Whatever happens to oil prices, there are grounds for much greater optimism about food prices. Any increase in the production of oil is limited by its fixed availability at different locations on earth. The supply responses to higher prices of agricultural production will be much greater than that of oil production for two fundamental reasons. The first is that only a small fraction of potential arable land is used for farming because the growth of cities and suburbia has led to mass conversions to other purposes of land formerly used to grow foods. Persistent high and climbing prices of grains and other foods will induce conversion of some of this land back to farming. The second reason for optimism relates to the lower productivity of food production in the poorer parts of the world relative to the United States and other developed countries. Higher food prices will induce an increase in productivity in developing nations by encouraging greater use of machinery, fertilizers, and other forms of capital. It will also encourage consolidation of some agricultural holdings into the hands of more efficient farmers. Efficiency in oil production is more uniform in different parts of the world than is food production since the major energy international conglomerates produce all over the globe, including many poorer nations.

Comments

[jackie]

good

[Jack]

Ha! The Lawns to Legumes movement?

More seriously, scroll down on the link and take a look at recent

http://www.farmdoc.uiuc.edu/manage/newsletters/fefo05_22/fefo05_22.html crop budgets for IL of roughly $400 gross income/acre and $114 net. Using just a 7% capitalization rate (ie paying the interest on a 7% loan) points to a land price of $1,600/acre.

I see land lying fallow in the fertile areas of NE OK but I think the crops that used to grow there, bean fields, vegetables, pecans are far more labor intensive than IL corn and soy. If the land is near a highway, lake, city or even a small town, despite its lack of viability as farmland the prices range upwards from $10,000/acre.

I suppose that there are areas where, if as Becker suggests, the price of crops were to soar, that owners might farm as something of an offset to the holding costs of unused acreage. There's another pressure on marginal farmland too; that of hunters of birds and other game buying up land as hunting preserves. The economics of hunting "country clubs" seems to be far more lucrative than that of farming.

I am eying the lawns though! No longer mowed by hand nor even providing a job for the kids on the street they are maintained by crews using lots of fossil fuel and even worse, don't seem to be able to organize to mow in one area but are hauling all this equipment across town at perhaps 9 mpg.

Perhaps if crops continue to soar crews will share crop berries and organic veggies in the back yards?

[n]

http://money.cnn.com/2006/07/07/technology/newvillages.biz2/index.htm?cnn=yes

The next real estate boom
Dense settlements, not sprawling ranch houses, are the future of housing - and could make for a smart real-estate investment.
By Chris Taylor, Business 2.0 Magazine senior editor
July 7 2006: 2:50 PM EDT

[n]

http://www.byrneinvest.com/margin_requirements.shtml

Excerpt:
Margin requirements in futures trading runs about as low as 3% for some contracts, as compared to the 50% minimum margin requirement to trade individual stocks.

http://www.dealbreaker.com/2008/03/commodites_slump_as_traders_ex.php

Commodities Slump As Traders Exchange Rumors Of New Margin Requirements
Posted by John Carney, Mar 19, 2008, 4:07pm

Excerpt:
What sparked concern was a rumor that the futures exchanges or regulators—or maybe both—were considering raising margin requirements for “non commercial” commodities traders—especially non-com energy traders. Non-commercial traders speculate on the price of commodities but do not ever take delivery of the commodities. Amaranth was a non-commercial trader, while Exxon-Mobil is a commercial trader.

[Thomason]

An "analogy" between oil and food may not be apropos, rather it is the linkage between these commodities that fuels the concerns. If you have land, then you may choose not to plant because of the costs of fertilizer, and of gas to till, plant, fertilize and harvest, plus the sunk costs in equipment and in finding labor. With those costs ahead, and the uncertainty of weather, a farmer may take a pass, despite the common perception that corn will command a high price. High, but high enough?
The extraction cost in oil-rich lands is stable, and the rate of extraction can be increased by those with power over those fields.
However, the cost to increase grain production is uncertain but rising.

[n]

Jack

I clicked on your link. The $1600 number is based on corn of around $2-$3 per bushel, and soybeans around $5-$6 per bushel. On the other hand, cash prices have recently been $5+ for corn and $10+ for soybeans -- this is possibly why people are rioting.

also, yields (bushel per acre) may be higher than in the budget at your link ... offset by higher fertilizer, seed, pesticide or other costs.

interest rates are going down, as well as the stock market and possibly the high yield bond market (tbd) -- opportunity cost has changed.

So the $1600 number may be revisited.

How do ag prices compare to tuition cost? (thank you to Becker-Posner for the *free* blog)

http://www.discovery.org/a/74

The Faith of a Futurist

In the future, as in the past, religious faith is central to the process of innovation

By: George Gilder
Wall Street Journal
December 31, 1999

Excerpt:
The weight in tons of U.S. gross domestic product has dropped 25% in the past two decades, while its value has more than doubled.

[Brian Davis]

I have to believe we'll see correction to our worst-offending bio-fuel subsidy and trade policies before we're reduced to growing our own groceries out of necessity. True, we're here today because our forbears did it (and did it well), but modern agriculture has too many advantages.

With oil prices, however, we're being played. And I don't mean by the Big Oils or the domestic refiners. They could be sticking it to refined product consumers much worse than they've elected to this point in margining the crack spread. Some will recall when the Hunt Brothers tried to corner the silver market and it crashed on them. High oil contract prices are being kept pumped up not just by current demand but by capitulation to fears of scarcity in the emerging markets. When the storage tanks, terminals, and refining complexes reach capacity, speculators who've bulked up with expensive contracts on borrowed $$$ will have to start unloading. It could get ugly, but the U.S. Big Oils, which are very well-managed enterprises, will be the first to declare just desserts.

[Jack]

Thanks "n", and as most of the costs of production were covered by the old prices much of the gross of the new price should drop to the bottom line.

BTW the ever-interesting T-Boone Pickens has an hour long interview on Cspan just now. He predicted above $75 when oil was half that and now predicts $150, but then adds that he won't be investing in $150 oil, suggesting as Brian, a peak and then a crash...... as Boone indicates, those prices WILL cut demand as happened in the 70's.

My concern is that if we do, finally?? respond as in the 70's that growing demand from India-China et al will lessen the effect on OPEC.

Boone is playing with wind to the tune of billions on a couple hundred thousand acres and with water rights and a nine foot diameter water delivery to Dallas powered by wind.

But! the farmers and others are already chasing the Ogallala Acquifer down so let's hope he's not pumping it dry~

WASHINGTON – Dallas energy magnate T. Boone Pickens said Thursday that he plans to execute contracts as early as next week for $1.5 billion in wind turbines across four Panhandle counties to generate power for North Texas.

Mr. Pickens said he also hopes to start acquisition in May for a right-of-way to transmit the power and large volumes of aquifer water to the Dallas area from ranch and farming land around Pampa.

Mesa Power LLC's wind and water project would spread wind turbines over 200,000 acres and deliver enough water to the Dallas area to fill a pipeline 9 feet in diameter.

Mesa plans to build an electricity transmission line for the project with its own funds, spokesman Jay Rosser said.

Mr. Pickens, speaking at Georgetown University, warned a group of about 75 students and faculty members that oil and natural gas prices would continue to increase as long as global demand exceeds supply.

"The price will come up, and the price will eventually have to kill demand," he said.

Mr. Pickens heads two investment funds that deal in oil and natural gas.

Earnings were down in the first quarter 21 percent compared with last year, he said, because he had made a mistake in anticipating that oil prices would fall.

Mr. Pickens called Mesa's power and water proposal in Roberts, Gray, Hemphill and Wheeler counties "the biggest project in the world," with a combined cost of $13 billion.

He said Mesa expects to produce 1,000 megawatts of electricity by 2011 and 4,000 megawatts once the project is finished in 2014.

A $1.5 billion contract for wind turbines expected in May would cover the first 1,000 megawatts, he said.

Mesa also hopes to sell 200,000 acre-feet of water to North Texas from the Ogallala Aquifer beneath the same four counties.

[neilehat]

Hey guys! You know the recharge rate on the High Plains aquifer aka, Ogallala, is 5,000 to 10,000 years. So what happens when we pump it dry, wait five to ten thousand years to recharge? Perhaps we could pump down the Great Lakes. A better idea would be to start thinking about installing Desalination Plants on the three coasts. East, West and Third Coast.

As for food prices, there is a direct couple to oil prices. The "Green" Revolution has made sure of that through the heavy use requirements of fertilizers, herbicides, pesticides, insecticides, mechanical farming techniques and genectcally modified organisms. All of the materials are heavily dependant on oil, gas and their conversion into agri-chemicals and energy.

In agribusiness, its no longer the case, that someone can go out, pickup forty acres and a mule, and start up self sufficiency farming. Nowadays, there are exceptionally high entrance costs and exit costs to getting into and out the business. Whcih are far beyond the financial capabilities of most individuals today.

[n]

A lot of money (value-add) in food business comes from marketing (brand management) and distribution. Focusing on the land and production costs of commodities is only one part of this.

I saw T Boone Pickens on C Span. He was speaking to students at Georgetown. He has had very concise, witty statements in the past. This time did not disappoint. An attempted paraphrase: At the beginning of the speech at Georgetown, Mr Pickens said that during a prior speech to an audience, he could not find the microphone for the first 10 minutes or so. Turns out he was sitting on the microphone. He told the audience that they could tell people the speaker spent the first 10 minutes talking out his ass.

On a more serious note, the guy is full of facts and figures off the top of his head. He had one part where he may have outlined a vision for the future where the U.S. would have more energy independence. It might be worth reviewing this - he spoke fast and I am not sure I caught all of it. He is certainly very successful and knowledgeable, and I enjoy listening to him.

Mr Pickens tends to view the world in terms of friends and enemies (as far as countries or regions). Is this a useful or relevant frame for viewing the world? What is good about this, and what maybe not so good?

And as for energy independence: is some interdependence an okay thing? How much? People around the world consume a lot of american culture (music, movies, etc).

[Jack]

N....... I saw the Pickens interview on Cspan and he seems one of the rare folk to have a somewhat rational overall scheme to get us out of this mess.

I'll try to sum it up, but first; I'm getting weary of hearing that we're part of a global economy in the morn and in the eve hearing a lot of claptrap about "energy independence". There will be no such thing as we outgrew our energy supplies years ago and it will be many, many years before a viable substitute for NG and Oil are developed.

To your question, I've long thought it utterly irresponsible of industry and our elected leaders to assume a steady flow of one of the most important resources used to mfg our goods and maintain our standard of living. What would a bright CEO in most industries do? He, or she would typically want to have a number of non-related suppliers of the raw materials they use so that no one supplier could hold them hostage to crippling price increases.

Thus, what "energy independence" likely means is lowering our dependence to the point that the price would reflect a negotiation based upon "a willing seller and a willing buyer" rather than that of a desperate buyer with few choices anteing up what is demanded by a seller with far too much market power.

Where does that level of independence come from? Looking back to the 70's "crisis" we and our government responded with measures to dramatically lower energy consumption, and even the oil man Pickens embraced that notion as a part of the solution.

For the rest he had sort of a chess game construct of moving resources around: Say, nuclear playing a much larger role in electrical generation. Cleaned up coal playing a role. Wind, his current pet, playing a much larger role, and with his putting a billion and half into wind generation on 200,000 acres, he's doing his part to increase wind from the 1% that it is today.

His model theoretically freed up a third of the NG which he's use in transportation. If fuel cell tech comes on line and the hydrogen is stripped from the NG, its power is doubled, some claim tripled, and burned H is, of course H2O that is harmless to the environment.

(I'm not sure what happens to the carbon left after the hydrogen is stripped from hydrocarbons; does anyone know? Will they be a useful by product for chemicals or ......... pollution to be dealt with?)

Keep on listening to Pickens! He seems rarely wrong on oil and has made a ton making the right call, though just recently I think he called an oil top and lost some money as it soared higher. Interestingly, early on he figured out that he could buy oil inventory cheaper than it cost to explore and develop it, and "raided" a number of oil companies, ie buying them out for their oil assets as exploration costs and the cost of oil itself was rapidly rising.

[Jack]

Neil agreed! However, as with energy, I'd guess conservation and recycling will be most important. Desalination is expensive and another energy hog. Having spent a lot of time on boats solutions that involve both conservation and two types of water come to mind. Residences might get two uses out of the water with shower or laundry water being used for lawns, and in many areas roof top collectors could provide a lot of water.

Ag can go a lot further toward conserving and over-irrigation is already salting fertile farmlands. (Salting (over-mineralization) is why those areas of the M/E that were irrigated for centuries can no longer be farmed.)

[poetryman69]

Want to protect the earth and save energy? Then stop all wars, conflicts and terrorism. How do you do that? Make the United States free of foreign oil. When the US is energy independent there will be no more oil wars and the terrorists will no longer be able or interested in reaching us. This will save lives AND energy. Let's study what Denmark, France, Brazil, and Australia have done on diversifying their energy supplies and do likewise. Let's drill wherever we have oil and put a new nuclear power plant in every state. Let's use all our coal and natural gas. We don't need foreign energy. And we will be safer, greener, and richer with out it. All of the earth’s natural resources will be eventually used by someone at some time. Would your rather these resources be recovered in an ecological friendly and sustainable way by the US or that some dictator who does could not care less about the environment exploit the earth. All alternative sources of energy will take decades to bring online because their conversion efficiencies are not yet high enough. Eventually, the US will lead the world into a sustainable green economy, but energy independence comes first. It is the low hanging fruit and gives immediate benefits now.

[Peter Schwardmann]

The recent food price inflation can be expected to have large adverse effects on the world's poor. Some developing countries have tried to protect themselves from higher prices by means of export restrictions on food, although, as Dr. Becker points out, this strategy is largely based on flawed reasoning and perpetuated by the lobbying of vested interest groups.

Still, there are those who benefit from the current hike in food prices. More specifically, many food producers should have experienced a major increase in profitability. This follows from the observation that the share of food price inflation that is due to ethanol subsidies as opposed to an increase in energy prices, inflated the food industry’s output price while not affecting its input prices (this argument does not hold for animal farmers who experienced a steep increase in the cost of animal fodder). The boost in profitability should be experienced by most food industries as opposed to only the corn producers (which are most immediately affected by the ethanol subsidies) because land use substitution on the supply side and consumers substituting their budgets into relatively cheaper foods on the demand side helps spread the price increase across food categories.

In the current environment of higher prices many developing country producers have a real chance of achieving greater international competitiveness and entering attractive export markets. This is a fact that could and perhaps should be exploited by the developed world’s trade policy. The US, Europe and Japan have historically found it notoriously hard to make any concessions in regard of the trade barriers erected around its agricultural sector. This follows from the fact that the farmers constitute an extremely effective lobby and have big stakes in the choice of trade policy while the costs of trade protectionism are spread out over too many domestic consumers so that they are too small for the individual to bother.

The developing world has long viewed the excessive farm subsidies in the US, Europe and Japan as a particularly evil trade policy tool. One of the problems of competing with a subsidized producer is that you don’t only get put at a competitive disadvantage in her domestic market, but also in common export markets. An import tariff does not have this effect. The World Trade Organization also favors the use of import tariffs over subsidies, because it’s the latter are much more inefficient.

Unfortunately, the picture is not quite as black and white as it may seem. Most net food importers in the developing word like the developed world’s subsidies because they provide a source a cheap food. The same is true for consumers in net food exporting countries. Of course, especially now, cheap food is more desired than ever.

As a result of these considerations, the developed world finds itself in an unprecedented situation with respect to its trade policy. Developed country’s governments are likely to experience less pressure from the developing world to slash trade protectionism in general and farm subsidies in particular; there should be less pressure from the domestic farm lobby due to its increased profitability as a result of higher food prices; and there is likely to be a rising pressure from the domestic consumers in developed countries demanding cheaper food.

The developed world could use the current policy space to drastically decrease tariffs and enter commitments to abolish subsidies in the future (but not now). Developing countries would benefit. Developed country farmers would find it hard to put up too much of a fight. Developed country governments could earn some goodwill from their domestic consumers. And on the way some concessions in agriculture could embellish the so far impotent Doha round of trade negotiations and rescue the WTO from its dwindling credibility and reputation.

Then, when as Dr. Becker predicts, food prices come back down in the future, we may have the added perk of freer trade.

[Saint Darwin Assissi's cat]

Kind of disappointed there is not a new blog for April 21, 2008...working on Hillary Clinton's campaign here in Las Vegas, NV ... all the issues Judge Posner and Professor Becker blog about are addressed on her web site, and are, of course, discussed in this campaign...in one of the comments "until all of this mess just explodes" .... is that about the sum of things? In the meantime, I keep enjoying this classy site; Posner and Penelope Piggy (by the way, guinea pigs were involved in 23 Nobel Prizes, see "A Guinea Pig's History of Biology," Jim Endersby) and staying healthy so I can give blood.... who knows when our miniscule movements, choices, and thinking make a difference.... do you recall Judge Posner's blog about the airlines? He was not happy.... I bet last week's airline performance about blew his stack.....

[Bruce de la Vega]

ugh. "In-fill" is evil; we're already over-crowded. And those eastern media people who talk about "unused land" in "fly-over country" are clueless. That "un-used" land IS being used, for farms, parks, wood-lots and lumber, water recycling and retention, escape from the hideously over-crowded cities and suburbs... or is simply recovering from previous over-use. (An interesting topic in itself, since, in the Jewish calendar, we are currently in the sabbatical/fallow year in which no one is supposed to plant or systematically harvest.)

And then there are "victory gardens". In my grand-mother's time, she reigned over the "kitchen garden" of an acre or less, while the boys managed the cash crops, livestock and work horses on the other couple hundred. By the time "victory gardens" developed, the vegetable, fruit, berry garden and mini-orchard was a quarter acre and the livestock took up maybe 800 square feet.

Today, people who can afford a tacky, glued saw-dust home tacked together by illegal aliens using nail-guns, on a tenth of an acre are fortunate. That's certainly not conducive to victory gardens at all. And forget about doing much gardening in that human sardine wannabe's nirvana, NYC, where an "apartment" averages over a $1M, and it requires dozens of licenses, permits, set-asides, and thousands of dollars in what are now neighboring towns to be allowed to garden.

[Adam Ek]

As far as the sabbatical or fallow year in the Jewish calendar, that specifically applies to the Land of Israel.

[Kelly]

Your discussion about the rapid rise in food prices. I think the current environment of higher prices many developing country producers have a real chance of achieving greater international competitiveness and entering attractive export markets. This is a fact that could and perhaps should be exploited by the developed world’s trade policy.

[Anonymous]

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[Anonymous]

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[Anonymous]

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[Anonymous]

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THX :(, Palash.

[Anonymous]

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[Anonymous]

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[Anonymous]

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