Food demand and price volatility

In Mankiw's Principles of Microeconomics textbook, he poses students the following paraphrased question: Your friend notes that food has a very high demand elasticity and comments that it would be a good source of tax revenue. In what sense is your friend right about it being a "good" tax and in what sense is the tax "not good"?

Most students successfully answered that it was "good" in the sense that it would generate a lot of tax revenue, (missed the part of it being "good" in the sense that there would be very little deadweight loss), and that it is "not good" in the sense that it will hurt the poor who may not have enough to eat more than the wealthy.

FAO in its new High Level Panel of Experts report on food price volatility takes that excellent point one step further in rigor. As societies and individuals become wealthier, their demand for food becomes less sensitive to price (less elastic). This means when any price change occurs, it is the poorer consumers who will change their consumption pattern most. When all food prices increase and it isn't because of an increase in demand*, the poor have less to eat while the non-poor are still able to have enough food.

Food price volatility increases the inequality of food consumption. They also show that biofuel policies increase the inequality of food consumption even further, shaping a food system designed to hurt the poor more when food prices rise.

Stewards of the Earth

On GMOs, Roman Catholic bishops in Kenya are credited with "taking a new stance," and though it's only a small switch it's surprising to me how many people are against it. What's the new stance? If you're going to starve to death because of famine, it's really much better to eat genetically modified food than to die. ... I know, what was the policy before? Death before GMO? And there are people against this!? I think we need to call in Jon Stewart for this one.


On "over"population, I wish there were far more people arguing that babies are not the problem. Here is one argument from Yglesias:

It’s especially mistaken, I think, to try to look at children as a negative environmental externality. The beginning of wisdom here is to note that pollution isn’t “bad for the planet.” The planet is a gigantic roughly spherical chunk of rocks that can easily survive whatever level of greenhouse gas emissions or whatever else we care to pump into the atmosphere. The big picture ecological threat is a threat to human beings, and to the continued existence of ecological conditions that are conducive to human flourishing. Radical population reduction would sharply reduce the quantity of anthropogenic ecological impacts, but to what end? The goal needs to be to reconfigure human activity in order to make it sustainable over a longer time horizon. But sustained human flourishing requires both acceptable levels of ecological impact and also the continued production of new human beings.

On the lowered and falling prospects for jatropha, a new report by Wu and Kant addresses the Indian and Chinese largely failed plans:

It appears to be an extreme case of a well intentioned top down climate mitigation approach, undertaken without adequate preparation and ignoring conflict of interest, and adopted in good faith by other countries, gone awry bringing misery to millions of poorest people across the world. And it happened because the principle of “due diligence” before taking up large ventures was ignored everywhere. As climate mitigation and adaptation activities intensify attracting large investments there is danger of such lapses becoming more frequent ...

On the land grab, there is a new film out attacking the primary banana corporation in Cameroon. Among the interesting political economy issues:

"If you look at the congressman of the region, he is also the director of public relations of the company, the minister of trade of Cameroon is also president of the board of directors of the company."

An interesting paper showcases informal seed exchange between farmers for preserving seed diversity in Mozambique following a disaster. They argue food aid should include local seed varieties as part of the package to speed diversity recovery following a disaster.

The research established that nearly 90% of the farmers in the affected areas received cowpea relief seed immediately after the back-to-back calamities. Two years after, only one-fifth of the recipient farmers were still growing the seeds, while more than half sourced their seeds from markets. However, this did little in restoring cowpea diversity in the affected communities as the seeds bought by farmers from the market were mostly uniform, coming from other districts that grew just one or a few select varieties. 
On the other hand, about one-third of the affected farmers obtained seeds from friends and relatives living within the same or neighbouring localities to restock their farms – the same people that they have been exchanging seeds with prior to the disasters. This practice was the main reason why cowpea diversity was restored in these areas, the study showed.

Energy independence meets comparative advantage

According to Don Boudreaux:

Achieving energy independence in the U.S. would require Americans to gain a comparative advantage at producing all forms of energy.  But as every ECON 101 student learns, to go from having a comparative disadvantage to having a comparative advantage in one industry means that a country goes from having a comparative advantage to having a comparative disadvantage in some other industry (or industries).  Looked at differently, energy independence would mean that resources now used in other American industries – for example, in agriculture, aviation, or biotech – would shift into American energy industries.
Americans would then become more dependent upon the likes of foreign food suppliers, airplane builders, and pharmaceutical companies.  And it’s not at all clear that such “dependence” would be any better (or worse) than dependence on foreign oil suppliers.

From various commenters:

1) Shifting resources from a reliance on stated enemies ... towards a reliance on agriculture from Canada or aircraft manufacture by the EU may provide benefits that counter the pure economic efficiencies of a totally free market.

2) Should New York City be self-sufficient in energy as a political entity? Manhattan by itself? If not, why not? And why wouldn't those sorts of reasons be just as valid for larger political entities like the US as a whole?

3) The U.S. gets most of its foreign oil from Canada, Saudi Arabia, Mexico, Nigeria, and Venezuela. The U.S. government didn't have to send troops to any of those nations in order for U.S. energy companies to obtain their oil.

FAO on jatropha

“Although there have been increasing investments and policy decisions concerning the use of jatropha as an oil crop, they have been based on little evidence-based information,” the report said, adding that identifying the true potential of jatropha requires separating the evidence from the hyped claims and half-truths.” ...

The FAO has also punctured the argument that growing jatropha utilizes marginal lands effectively. The level of economic returns needed to secure private sector investment “may not be attainable on degraded land”, FAO said, noting considerably better gross margins which can be gained on sugar cane and oil palm plantations. The UN organisation, however, does not rule out the oilseed completely, but has flagged an urgent need to multiply the yields.

Kenya: Food Price Controls and Biofuels

The Kenyan Parliament has passed a price control bill, currently awaiting Pres. Kibaki's signature. I'm not informed of all the details, but it sounds heavily directed at maize and wheat prices. Analysts at the Kenya Institute for Public Policy Research and Analysis argue that price controls in the 1990s did more harm than good and these are likely to go the same way: "it may benefit the poor who have been priced out of food in the short term but is unsustainable in the long term." Among the reasons for concern are reductions in FDI and agricultural job loss, farmers switching to cash crops which would reduce food supply, and increased maize hoarding by farmers.

The last several maize harvests have not been good, leading to a 130% price increase in 2009 while world maize prices declined following the food price crisis. Despite this, overall inflation has fallen from almost 20% to 5%.

Proponents of the bill contend that it is an attempt to regulate maize and wheat millers, who "are a cartel that makes supernormal profits..." Analysts and retailers ask whether price controls are the way to deal with the cartel. There are anti-trust laws that can be used; increased international trade can provide additional sources of competition; it could hurt the newly forming COMESA (Common Market for Eastern and Southern Africa); and is "treating the symptoms and not curing the underlying disease." Agricultural research and investments to diversify agriculture and consumption patterns into a more diverse diet -- remember, meat, milk, fruits, and vegetables also compete with maize -- could lower prices both directly and indirectly without risking increased unemployment and hunger.

Meanwhile, there are arguments for and against setting aside 50,000 ha. of woodland forest for growing jatropha trees to produce biofuels. Opponents contend that the benefits jatropha trees have been vastly oversold and their costs underestimated: "a number of companies in East Africa have abandoned Jatropha cultivation citing its non-profitability with no single large-scale commercial growing of Jatropha succeeding in East Africa." The crop is blamed with eroding rather than preserving marginal lands, "causing poverty in many parts of the world," its oils are poisonous to humans and livestock, and would endanger some native species.

"The crop actually requires more water per litre of bio-fuel produced than most other bio-fuel plants. They even claimed that one plant can yield 4-6 kgs of oil per year yet recent studies by Kenya Forestry Research Institute (KEFRI) have shown it can only give away 0.6kg."

One proponent firm, Sun Biofuels, argues that it has had success and hasn't displaced food crops, having bought land used for growing tobacco. "If biofuels weren't a viable option, the Kenyan government wouldn't have added a provision for it in its revision of its feed-in tariff."

Lit in review: 3 of 3 on Biofuels

3) Hochman, Rajagopal, and Zilberman (2010), "Are Biofuels the Culprit? OPEC, Food, and Fuel," AER Papers and Proceedings (100:May), 183-187.

A great paper. Very useful.

They expand on explanations of the recent food price spikes by including OPEC as a Cartel-of-Nations (CON) rather than a cartel of firms. A CON "maximizes the joint domestic consumer and producer surplus from crude oil." OPEC's actions change how biofuel production affects food markets, both through land allocation and energy prices. The basic insight is that OPEC reduces production (raising fuel prices) in response to growing biofuel competition, which serves to ... stabilize food market volatility by partially offsetting fuel market changes. When including this, biofuels account for 10-15 percent of the change in corn price in 2007, while lower energy prices would reduce corn, soy, wheat, and rice prices 5-10 percent and reduced demand growth from China and India would reduce corn, soy, and wheat prices by 15-20 percent and rice prices by 40 percent. Adding OPEC's reduction in oil production to the model by itself accounts for 8 percent.

When they add supply factors and lower inventories, demand factors become even more important. "Agricultural productivity is crucial and should be improved, either by improving traditional farming practices or by embracing biotechnology" (p. 187).

Lit in review: 1 and 2 of 3 on Biofuels

1) Gehlhar, Somwaru, Dixon, Rimmer, and Winston (2010), "Economywide Implications from US Bioenergy Expansion," AER Papers and Proceedings (100:May), 172-177.

2) Whistance, Thompson, and Meyer (2010), "Ethanol Policy Effects on US Natural Gas Prices and Quantities," AER Papers and Proceedings (100:May), 178-182.

WIDER Panel: Global Food Crisis and Response

Per Pinstrup-Andersen (yay!): The Political Economy of Food Price Policy (our next project)
The former and current heads of IFPRI largely agree on where the world is and is heading.
He references my work: almost all the increase in hungry people in Africa is from the Dem Rep of Congo
"I do not believe FAO's recent numbers."
Why? 1 - Price transmission from int'l to national is very low in countries with poor infrastructure and in China
US rice prices spiked highest for international Thai rice, 20% lower in Philippines and Egypt, 60% lower in India and China
But if prices didn't increase in China and India, the number of hungry people must have increased enormously in other countries based on FAO
Wheat prices went up more in Egypt than internationally. Maize prices went up in Kenya but didn't come down for national, not int'l reasons.
Global stock increase: 25% for rice and wheat
Terrible lack of commitment to putting plans into action. (more of my research behind that one)
Agrees with Fan's #1 Priorities. Priority #2: double public investment in ag to increase production sustainably: win-wins are possible
3 - incentives for private sector to invest in sustainable ag (saving and credit institutions for farmers, risk management, public goods)
Need to regulate land grabbing (and enforce them) and internalize environmental externalities (full-costing, PES, polluter pays)
Full costing will have to be international to be effective, and I'm not very optimistic if we can get the agreement.
He puts up our diagram of a modified environmental kuznets curve showing win-win-win: reducing poverty, hunger, and soil degradation at once.
"I'm probably the only one in the room who believes real food prices are going to continue down again. Please talk to me."

Alain de Janvry and Joachim von Braun below the fold

Livestock vs Ethanol: Corn Always Wins

Livestock on ethanol:

“Favoring one segment of agriculture at the expense of another does not benefit agriculture as a whole or the consumers that ultimately purchase our products.”

Ethanol on livestock:

"Such practices resulted in farmers getting more income from the government than they could from the marketplace, while corporate livestock industries prospered.”

Try this on for size: favoring one segment of society at the expense of another does not benefit society as a whole. Such practices result every time in one segment of society getting more income from the government than they could from the marketplace, so that politically favored industries and the government prosper.

Hat tip: Wilde

Less Pollution Than Advertised: Five Second Lomborg

One of the difficulties in aid and advocacy is that you just can't go sharing good news. Cheerful advocates don't get big money. (Maybe that's why dismal scientists do so much developmental work.) For Earth Day, Lomborg came out with some positively beaming environmental news to help keep the man-made gloom in perspective:

In virtually every developed country, the air is more breathable and the water is more drinkable than it was in 1970. In most of the First World, deforestation has turned to reforestation. Moreover, the percentage of malnutrition has been reduced, and ever-more people have access to clean water and sanitation. ...

One of the "core issues" that the organizers of this year's Earth Day say we should be worrying about is the use of fertilizers and pesticides. It may be unfashionable to point this out, but without the  high-yield agricultural practices developed over the past 60 years, virtually all the forests of the world would have to have been cleared to make way for food production. And starvation would be much, much more prevalent. ...

What about indoor air pollution, which happens to be the world's No. 1 environmental killer? In poor countries, 2.5 billion people rely on "biomass" — wood, waste and dung — to cook and keep themselves warm. This year, the resulting pollution will kill about 1.3 million of them, mainly women and children. Switching from biomass to fossil fuels would dramatically improve the lives of more than a third of the world's population. ...

I'm not saying we can blithely ignore global warming. Man-made climate change is real, and we do need to do something about it.... we should focus on the many more immediate problems faced by the developing world today — problems such as malnutrition, education, disease and clean drinking water. At the same time, we should take meaningful steps to ensure that the future of the developing world will be powered by green energy. As long as the electricity from sustainable sources such as solar panels costs us 10 times as much as electricity generated by coal-fired generators, no one but rich nations will go green (and then only if there are government subsidies). What we need to do is to promote the kind of technological breakthroughs necessary to make solar panels cheaper than fossil fuels. Once we have done that, no one will have to be ordered to give up coal and oil.

Theme and variation: Discussion about the maternal mortality rate brouhaha last week from Easterly and a response indicating there was more sound and fury that significance.In short - Lancet published some numbers that said fewer mothers were dying in child rate AND that some advocacy groups had asked them not to publish that number until they could get some funding. The second half got a lot of press, but ... we're having difficulty finding the advocacy groups and there are important data concerns about the first part.

Lit in review: 1 of 7 on Food Prices

(1) Senauer (2008), "Food Market Effects of a Global Resource Shift Toward Bioenergy," Nov, 1226-32, ungated.
The article is mostly a summary of what happened during the 05-08 food price increases. Little new information, but some useful numbers and a good summary of the debate on how biofuels affect food prices. Summary and facts below the fold.

Lit in Review: Food Demand

Roberts and Schlenker (2009), "World Supply and Demand of Food Commodity Calories,"  American Journal of Agricultural Economics November, 1235-42, ungated January version.
They use 2SLS to provide what they term "a useful reality check for whether microcomplexities add up to patterns that are observable in the aggregate data." They gather data on corn, wheat, rice, and soybean production in any country that produces more than 1% of the total (plus one "country" to take care of the remainder) to calculate individual country trends and weather shocks. These are then converted in calories so that there is a single aggregated term.

They assume that demand for calories is unrelated to current weather shocks that affect supply, so current weather shocks trace out the demand curve. There is nothing revolutionary in this, as they point out. The unique idea is that past weather shocks shift the demand for calorie storage but not supply. They is sadly undefended, but if farmers know that demand will be higher the year following a bad one to replenish stocks, there ought to be a supply response too. If their assumption holds, though, they can trace out supply curves too. They estimate a supply elasticity of 0.1 and a demand elasticity of -.04 that may or may not be significantly different from 0. These lead them to conclude that US biofuel policies increased each commodity price by 35%

Toler, Briggeman, Lusk, and Adams (2009), "Fairness, Farmers Markets, and Local Production," American Journal of Agricultural Economics, November, 1272-78.
They perform an experiment at farmers markets and local grocery stores in Oklahoma. Participants write down offers to purchase four tickets, one of which is randomly selected as binding. The tickets pay off:
A) $4 to themselves and $7 to a local farmer
B) $4 to themselves and $7 to an out-of-state farmer
C) $4 to themselves and $1 to a local farmer
D) $4 to themselves and $1 to an out-of-state farmer

The folks at farmers markets were willing to pay a little more for every ticket, but otherwise there was no difference between the groups, nor was there a difference based on how often one went to a farmers market. The average willingness to pay for ticket A was between $3-4; for B and C were $2.50-3, with 54% willing to pay more than $3 for ticket C [giving more to the farmer than themselves in essence]; and $2 for D. They fail to reject the notion that the shoppers at each venue have different concern for inequity or for local farmers. But there was a significant willingness to benefit local farmers over out-of-state farmers, and a significant preference for letting others have the better end of the deal.

Zheng and Henneberry (2009), "An Analysis of Food Demand in China: A Case Study of Urban Households in Jiangsu Province," Review of Agricultural Economics, Vol. 31, No. 4, 873-93.
Uses the update to the Chinese National Bureau of Statistics household surveys to examine basic food consumption elasticities for ten food products. Prices are household specific (amount paid divided by amount consumed according to diary entries). Most of the data is based on 900 households in 2004, and only in-home consumption. Highlighted series of results:

• 1990-2004: Rural households (60% of China) decreased annual grain consumption (262 kg to 219kg) and increased animal consumption (28 kg to 42kg).
• 1990-2004: Urban households decreased grains by more (131kg to 78kg) and increased animals by more (41kg to 73kg).
• Demographics: Average per capita income is $1,286, households usually of 3, it is more likely the third person is a senior than a child, 7% college educated.
• The most price-sensitive foods are grains, oils and fats, dairy, and "other" (tubers, alcohol, cakes, etc.)
• The least price-sensitive foods are aquatic
• As incomes increase, dairy, aquatic, other, poultry, and meats will increase their share of expenditures while fruits, eggs, vegetables, grains, and oils and fats lose share.
• "Pork accounts for more than 70% of ... total meat expenditures."
• Overall, diets are converging to those of Japan, S. Korea, Taiwan, and Hong Kong.
• Poultry consumption was rising steadily, but food safety concerns slowed this process recently.
• Dairy consumption is pretty low, and lower than other estimates have shown, but has increased by 400% percent.
• Half of the cross-price elasticities are significant: meats are substitutes for grains and eggs, but a complement to fish and dairy; vegetables are substitutes for poultry and dairy but complement eggs and fish. If you compensate demand, most everything is a substitute.
• Large portions of meat consumption (over half of poultry) are done outside the home.
• Demand for feed grain will outstrip demand for food grain as incomes increase, requiring an increase in imports from the US. China's land devoted to corn and soy have increased significantly (16% and 25%) with small decreases for rich and wheat (7% and 9%).

Lit in Review: 2.5 on environmental policies tangentially related to the food system

One of the most insightful presentations I went to last year was recently published:
de Gorter and Just, The Economics of a Blend Mandate For Biofuels, AJAE, August 2009, 738-50; ungated.
The US supports biofuels using two primary policy instruments, a blend mandate that requires a certain level of biofuels to be mixed into gasoline and a biofuels tax credit. They demonstrate with a simple theoretical model that the combination of policies is perverse, effectively subsidizing gasoline instead of biofuels, increasing pollution, traffic congestion, and foreign energy dependence. We're subsidizing foreign oil instead of domestic corn producers. The figures get a little hairy, but it's highly recommended.

Parkhurst and Shogren, Smart Subsidies for Conservation, AJAE, Vol 90, No 5, Proceedings 2008, 1192-1200; ungated.
They demonstrate experimentally the usefulness of internalizing environmental externalities into subsidy payments. If landholders are forced to retire a certain acreage of land, they pick the lowest value land. The same thing happens if a simple subsidy is used that simply reimburses them enough to encourage them to retire the desired amount of land. A smart subsidy that pays a bonus based on the number of common borders on a landholder's own land and neighboring landholders' results in a stable equilbrium where the largest contiguous zone of land is preserved for biodiversity. This occurs without enforced public or private cooperation mechanisms.

Barry Goodwin's discussion in the same journal brings up an excellent point in evaluating the effects of climate change on agriculture. Researchers need to include models of how crops will evolve and be adapted (naturally and via genetic modification) to the requirements of new climate realities. "Yield data from yesterday (1960-2007 in the case of this article) may not tell us a great deal about yields in 2050."

Lit in Review: Biofuels

Review of Agricultural Economics, Vol. 30, No. 4, Winter 2008

Tokgoz, Elobeid, Fabiosa, Hayes, Babcock, Yu, Dong, and Hart, "Bottlenecks, Drought and Oil Price Spikes: Impact on US Ethanol and Agricultural Sectors."
Method: Calibrated model (2006) of supply and demand for temperate ag products, multi-country, partial-eq. Projections 2007 and 2016.
Baseline projections: Ethanol demand is the limiting factor to its growth, selling at a wholesale discount of $0.13/gallon below its energy value relative to gas. Ethanol plants cover their variable costs, but not full costs. Soybean production shifts from US to S. America.
If oil prices are $10/barrel higher than baseline, ethanol production increases 55%, corn price increases 20%, US grain exports decrease between 12% and 30%. Livestock feed costs increase 13.4% so pork prices increase 1.5% at retail, decreasing US pork consumption 0.6% and exports 6.2%. Other livestock markets respond similarly. Worldwide meat consumption decreases, with US pork exports decreasing and beef exports increasing because the price increase affecting all meats lowers the relative price of beef. The effect on total food prices is 1%.
If a major drought occurs in 2012 with given mandates: corn prices rise 44% and soybean 22%; US corn exports decrease more than 60%, offset partially by increases from S. America, China, and other countries. Broiler production decreases 2.7%, egg prices increase 11%, broiler prices increase 10%. Herd sizes adjust only a little because the price shock is expected to be temporary.

Gohin, "Impacts of the European Biofuel Policy on the Farm Sector: A General Equilibrium Assessment" ungated version.
Method: Computable general equilibrium model, simulations, uncertain what data years are used
Findings: Compared to a baseline, the EU governments enact tax and mandate policies to guarantee 13.8 Mote of biofuels in 2015. Biodiesel will be supplied largely by imports and bioethanol by EU production because bioethanol faces high import taxes. The increase in the price of vegetable oils leads to an increased demand for animal fat and other animal byproducts, so livestock production remains relatively constant, meat prices decrease slightly so more is consumed. Farm incomes increase significantly, but less than EC estimates. Rapeseed oil and sunflower sectors expand significantly.




Wilson, Koo, Dahl, and Taylor, "Impacts of Ethanol Expansion on Cropping Patterns and Grain Flows" ungated version.
Method: large-scale (12,979 variables) non-linear spatial partial optimization model, data calibrated to 2000-2004, projected 2010, 2020, 2030, and 2040
Findings: In the case of high ethanol demand: world exports increase from 263mmt to 406; US total grain exports increase until 2020 then decreases to 90% of base; Canada increases 50%, Brazil doubles exports, Argentina and Australia nearly double exports, E. European exports treble.

Petrolia, "An Analysis of the Relationship between Demand for Corn Stover as an Ethanol Feedstock and Soil Erosion."
Corn stover (cobs, stalks, and leaves) provide organic fertilization when left on the farm or can be used as biomass to produce biofuels. In southern Minnesota, replacing the soil nutrients (phosphate and potash) lost from one ton of corn stover would cost $4.76. Different numbers of biomass plants can be supported depending on how efficiently stover is harvested (40-90%). For a given level of efficiency, the price of stover increases slowly until a threshold is reached (8-10 for 40%, 10-12 for 50%, 15-18 for 80+%) at which point the price shoots up. Thus, "even under current tillage practices, there will be little to no incentive to violate erosion constraints" as long as there aren't too many biomass plants competing for the same stover. If farmers move to no-till practice, the threshold number of plants increases to 19. It is found to be unlikely that corn ethanol prices increase high enough to incentivize the threshold levels of biomass plants.