Peak Wheat

Paul Krugman links rising food prices to climate change.   “But the evidence does, in fact, suggest that what we’re getting now is a first taste of the disruption, economic and political, that we’ll face in a warming world. And given our failure to act on greenhouse gases, there will be much more, and much worse, to come.”    He could be right.  How does a free market respond to the growing realization that agricultural yields could be more volatile (great output, low output) over time?     Capitalism provides a number of adaptation strategies.  We can hold inventories.  We can buy futures contracts.  In areas where there are not great alternative uses for land, farmers can grow crops hoping that the price will be high when they harvest.     Paul Krugman should not forget the power of international trade to protect us!  Global agricultural trade (with low tariffs and quotas) is the best way to adapt to this anticipated volatility.  If Russia has a great harvest, it can export to Egypt at the world price.  Assuming that climate change has different agricultural impacts in  different geographical areas, this offers diversification of our food portfolio.

Dr. Krugman forgets that there are two sides to a market. We worry about rural poverty.  Which farmers are making good $ selling now that prices are high?  He is correct that the urban poor are hurt by this price spike.  But, this raises a basic nutrition question.  If the price of wheat, corn, sugar and oils all soar, what can a household substitute to? 

UPDATE:  An economist who actually conducts research on international trade in agricultural products contacted me.  Here is his post.

Author: Matthew E. Kahn

Professor of Economics at UCLA.

27 thoughts on “Peak Wheat”

  1. Les Brown has been beating this drum for a long time. Maybe folks are starting to hear.

    BTW, corporations and countries are starting to purchase agricultural land in anticipation of more water shortages. Why are they doing this? They are securing distant water for themselves. No word on what happens when locals want some of the food and water, but likely they will migrate to areas that don’t want the migrants. Surely someone will innovate a product to quell anger.

  2. Olive,

    Read my post again. I am trying to start a debate about capitalism’s role as a force for protecting us against climate change. You appear to want to divide the world into “good people” and “bad people”. This isn’t Star Wars and I’m not Darth Vader. I am an economist. People move to cities for opportunities. Cities in India and China have lifted hundreds of millions of people out of poverty.
    As people gain income, they can afford to pay higher prices for food. Richer cities will have more tax revenue to provide redistribution to their poor.
    I fear climate change. Climate change will cause us pain but capitalism will help to shield us from this pain.

  3. To be sure entrepreneurial creativity and an open market allow for a maximum of adaptation. We will need both badly in the scary years to come. But there is another side you ignore, alas.

    Once a business is successful it will generally try and control or suppress forces that compel it to adapt or put it out of business, and usually that is by using political forces as its servants. For example, the Koch brothers have seriously perverted scientific understanding over global warming. This is normal behavior – look at what Disney did to copyright laws, and on and on. The market is a spontaneous order in Hayek’s sense but capitalism is something different: a particular arrangement of institutions that includes the market but is not reducible to it. In capitalism organizations and their owners seek to control the market to further enrich those who control capital. Conflating capitalism with the market seems to me a way of obscuring the realities of the abuse of wealth behind the promise of freedom and creativity.

    This is simply one example of a general principle concerning all teleological organizations in complex adaptive systems such as markets, science, democracy, and eco-systems: the interests of those currently successful are not the same as the interests of the system where they rose to success. Successful parties try to lock in their success by tweaking democratic election rules, successful academic schools of thought try to control hiring and grants, successful businesses try and control their environment and if deer could vote I am sure cougars and wolves would now be extinct. The systems work well when these efforts are of only limited success, and break down when they succeed. Failure to curb global warming is caused in no small part by efforts to distort and discredit science by those with a financial/ideological stake in there being no adaptation.

  4. I am trying to start a debate about capitalism’s role as a force for protecting us against climate change.

    Good luck with that. Capitalism regards the environment as a free lunch. Always has. Hang your tailpipe in the wind for free everyone. In fact, hang two or three of them; because we know how greed as a core value works: More is better, and much more, is never enough. The true cost of effluent has never been part of capitalism’s calculus. Except, in so far, as concentrated capitalistic wealth, buys up our congressmen, and turns them into lapdogs that deny the harm of outgassing, river pollution, mine tailings, arsenic in our water, etc, etc, etc…

    Now if you want to say instead:

    I am trying to start a debate about capitalism’s role as a force for protecting us against climate change despite its tendency to over-concentrate wealth in the hands of a few, and steal the machinery of government for the people and by the people, then I think you have legitimate conversation starter. But that’s the very problem isn’t it? You’ve got the Koch brothers, arch-capitalists, denying global warming even exists. So in order for capitalism to work its greedy magic, these arch-capitalists must go. For only then can we create incentives to steer the greed machine in the direction we want: that is making capitalism acknowledge that the environment is not a free lunch….

    So the real questions are:

    How do we rid ourselves of capitalism’s oligarchs? They are literally murdering us…
    And how do you transition dumb capitalism, that caused global warming, into Capitalism 2.0 that works to eliminate it?
    (i.e. The atmosphere/ocean/planet as a Commons rather than free cess pool.)

    Those are the real issues Matthew…
    This nonsense about “better air conditioners” is nibbling at the edges of nothing…

  5. Matthew, I am not completely against “free market” philosophy, but I must say you seem a bit naive.

    People *may* move to cities for opportunity. Many also move there because they get pushed off their land by your magic invisible hand. Or even theft. As an economist, I guess it is your job to look at the bright side, but you might want to keep in mind when you write that many of us do not feel that the economy – and the government that heavily regulates it — “protects” anyone but rich people. In fact I’m sure it doesn’t. Only government regulations do that, and not all that well.

    And I don’t believe in private ownership of water. Well, or land really either (improvements though can be owned). I reject this idea out of hand. And I don’t even consider myself a Socialist.

  6. All California water is owned by the people, for example. This is what we call “civilization.” I am astounded that peoples elsewhere have been dispossessed. Private ownership of water is one of those things that gives economists a bad name.

  7. Well, maybe I’m not being fair to you. When you say “we” can hold inventories, etc, who is your “we?” With whom in this scenario do you identify?

  8. “How does a free market respond to the growing realization that agricultural yields could be more volatile (great output, low output) over time? Capitalism provides a number of adaptation strategies.”

    It certainly does. You forgot such popular wonders as, loan the farmer money and foreclose when he fails. Or, form giant food processing firms and engage in criminal price-fixing. Adulteration is popular, as well. Let’s improve yields with pesticides that kill off the bees, and see how that works out! But, wait, we could clear the rain-forests!

    A counterfactual fantasy about the benign inventiveness of non-existent “free markets” does not constitute actual knowledge about the economy. I’m sorry if that sounds harsh, but your frame is avoiding all the critically important problems posed by increasing volatility of yields, against the limits of agricultural resources.

    The paradox for farmers has always been the coincidence of high yields/low prices or low yields/high prices. Inventories and financial vehicles, are a second-order solution, but the first-order problems are to respond to risk with cultivation and planting strategies that manage capital investments and natural resources against the inevitable assaults of nature.

    (Intellectually, this is a quite general, though overlooked point about the economics of risk and risk management. Managing the risks of automobile travel, for example, is primarily about the design of vehicles, highways and traffic control systems. Using the defective “free market” for automobile insurance to handle some of the residual, irreducible risk is entirely secondary to the technical efforts to make the whole system for producing automobile travel, very safe.)

    For example, “free markets” are prone to magnify the volatility, as uncoordinated farmers systematically err in response the feedback they get, from actual results, with overplanting and under-investment. Conservation of top-soil and fertility can come under considerable pressure in a riskier economic environment. The pressure to implement technological advancements will not coincide with an increased capacity to critically evaluate and manage their impacts.

    Historically, American agriculture confronted many of the problems associated with increasing volatility of yields and demand in the 1920s and 1930s. The increasing poverty and immiseration of many farmers in the 1920s was among the most prominent “real economy” causes of the Great Depression (conveniently forgotten by Keynesians and monetarists alike). The “free market” tried and failed. The decade of the 1930s included some of the hottest years of the century in the U.S., contributing to the infamous Dust Bowl. But, the weather was less important than the simple fact that technological advance in agriculture had brought farms to a point, where large investments needed to be made (to implement the available technologies), but, overall, resources devoted to agriculture (particularly labor) had to be drastically reduced.

    The institutional solutions, embodied in the second, 1935 regime of the Agricultural Adjustment Act (the Supreme Court found the first regime unconstitutional — nothing ever changes) were wildly successful. The AAA was one of the most successful New Deal programs, but, of course, is despised by economists, when it is isn’t almost entirely forgotten. Yields per acre for a broad range of commodity crops began to rise markedly in 1935, as available technologies were applied, and kept rising for decades.

    It is worth recalling that the first-order problems are going to be properly managing, against fully internalized costs, the technical problems of agriculture, so that Dr. Pangloss doesn’t make things worse. “Free markets” create Dust Bowls.

    And, although the U.S. and many developed nations have largely completed the migration of labor off the farm, it is worth remembering that that problem of too much labor in the agricultural sectors is still a common problem in the developing world. In countries like Thailand, Guatamala or Egypt, the conflict between an urban middle-class and a large population mired in poverty and low productivity on the farm is the central, unsolved problem of politics, driving unrest and attempts at revolution. That’s another problem “free markets” are not likely to solve.

  9. Read my post again. I am trying to start a debate about capitalism’s role as a force for protecting us against climate change.

    Olive’s response was my own, and I’m not able to grasp your objection to it. Yes, we understand that markets will adapt. But market adaptations often mean that people will starve. Offering people “Bobs Red Mill, All Natural Egg Replacer” as an economical replacement for eggs – well, you really could have saved yourself some time and space by using Olive’s summary instead.

  10. “As people gain income, they can afford to pay higher prices for food.”

    Income on this planet comes from ecosystem utilization and appropriation (farms, fisheries, forests), and from non-biotic resource extraction (oil, coal & gas, metals mining, ). Reduce the productivity of ecosystems and most people’s incomes on this planet will not rise.

    Not hard to grasp. Not hard at all.

    Oh, wait: rich people can afford to pay higher prices. The poor, well, they will migrate to places that likely won’t want them.

    Or, alternatively, perhaps I’m not smart enough to figger out how the system that is degrading ecosystem services will magically reverse ecosystem service degradation while at the same time continuing the increasing pace of resource appropriation. Surely there is an answer somewhere.

  11. Aren’t ll of the adaptations you describe as being “available” already in place? Don’t we have wheat futures and international trade in grain? Don’t people already plant spelt?

  12. “. You appear to want to divide the world into “good people” and “bad people”. This isn’t Star Wars and I’m not Darth Vader. I am an economist. ”

    Don’t even try that.

    Economists have been a major driving force in the neoliberal lies we’ve been sold for the past 30 years. And so far there is *nothing* which will cause an economist to be disowned by the profession, unless it’s favoring liberal causes.

    And that means *every single last one of you*, unless you have a personal and public record of dissing econowh*res.

  13. “If Russia has a great harvest, it can export to Egypt at the world price.”

    Wow, you really couldn’t have picked a worse example. Krugman specifically attributes high WORLDWIDE grain prices to a bad harvest IN RUSSIA. I guess you thought Egypt and Russia weren’t allowed to trade grain until they join NAFTA? That the president of Egypt was a die-hard agricultural mercantilist who would rather be overthrown than let people import grain?

    Thirty seconds on Google tell me that Egypt is a major grain importer and applies no grain tariffs at all.

    P.S. There is a way that governments actually are adjusting their trade policy to lower food prices, but it’s not as warm and fuzzy as your plan. Venezuela and Argentina have imposed export restrictions.

  14. Adaptation and innovation for this:

    Singapore (AFP) Feb 6, 2011 – Asia must prepare for millions of people to flee their homes to safer havens within countries and across borders as weather patterns become more extreme, the Asian Development Bank warns.

    A draft of an ADB report obtained by AFP over the weekend and confirmed by bank officials cautioned that failure to make preparations now for vast movements of people could lead to “humanitarian crises” in the coming decades.

    Governments are currently focused on mitigating climate change blamed for the weather changes, but the report said they should start laying down policies and mechanisms to deal with the projected population shifts.

    “What is clear is that Asia and the Pacific will be amongst the global regions most affected by the impacts of climate change,” said the report, titled Climate Change and Migration in Asia and the Pacific.

    “Such impacts include significant temperature increases, changing rainfall patterns, greater monsoon variability, sea-level rise, floods and more intense tropical cyclones,” it said.

    “Asia and the Pacific is particularly vulnerable because of its high degree of exposure to environmental risks and high population density. As a result, it could experience population displacements of unprecedented scale in the next decades,” said the report, primarily targeted at regional policymakers.

    Research carried out for the United Nations showed that 2010 was one of the worst years on record worldwide for natural disasters.

    Asians accounted for 89 percent of the 207 million people affected by disasters globally last year, according to the Belgium-based Centre for Research on the Epidemiology of Disasters (CRED).

    Summer floods and landslides in China caused an estimated $18 billion dollars in damage, while floods in Pakistan cost $9.5 billion dollars, CRED’s annual study showed. Not to mention the catastrophic human cost. … [emphases added]

  15. P.S. You don’t seem to have given much critical thought to your link either ( Seriously?). Do you personally think that eggs and dairy are “easy” to substitute? I’ve had a dozen varieties of vegan pancakes, but none that tasted like pancakes.

    Oh, you can replace eggs with “egg replacer”. Care to be more specific? No, they don’t. The link does not list any ingredients, but assures me that its egg replacer is made from all natural, stone ground flour. Last I checked flour did not taste much like eggs (and is not a very good suggestion for someone who says they have a wheat allergy!).

    And spelt products are “available”. Available at a nearby supermarket for a low price? No, just “available”. Like caviar is available.

  16. “Capitalism provides a number of adaptation strategies. We can hold inventories…”

    You left out that old favorite. “We could let people die.” Given that Capitalism in America has chosen this solution for Americans with respect to health care, I think it’s hardly baiting to point out that it is the likely possibility.

    More to the point, isn’t Malthus considered an economist? You might want top pay a little more attention to his ideas. There comes a point at which you cannot make a rock float, and all the dicking around in the world with prices signals, research into better grains, etc etc, will not change that. Simply claiming that we’re in a post-Malthusian world does not actually change the world, just like me claiming we’re in a post-debt world doesn’t change the fact that I still have to pay off my bills or face the consequences.

  17. Global agricultural trade (with low tariffs and quotas) is the best way to adapt to this anticipated volatility. If Russia has a great harvest, it can export to Egypt at the world price. Assuming that climate change has different agricultural impacts in different geographical areas, this offers diversification our food portfolio.

    Not to get all economic here, but diversification does not protect against systemic risk.

    The assumption here seems to be that what we will see is just an increase in volatility. That in itself has costs. Storage and other holding costs rise, and more transportation is needed. So futures prices rise also.

  18. Argument reminds me of a joke I read (I think) in one of Herman Daly’s books: Conventional economist, by definition of the capitalist persuasion, is giving a talk to a roomful of economists and points out that since “agriculture” represents only a small part of the “total economy” the health of that sector shouldn’t make all that much difference in his grand scheme of things. To which someone in the back of the room asks of his companion, “What does this moron think we will eat?” Keep trying, Professor Kahn. When you find the unicorn of capitalism, the pony of free enterprise, the mermaid of neoclassical economics that seriously addresses these issues, you will recognize it. And a Nobel will await.

  19. Like caviar is available.

    Like cake! Olive really nailed this one in the very first comment, and Kahn’s failure to grasp olive’s point speaks pretty poorly of his insight as an economist.

  20. And where exactly are these individual markets for protection against future food price increases? For an economist you seem to have a bad sense of how markets operate, the size of the Russia wheat crop affects world prices. And ignoring that grains tend to be inputs for other food stuffs to begin with, you do realize there is something known as cross-price elasticities right?

  21. Perhaps the solution to this is “peak ethanol”; Surely feeding grain to cars isn’t helping the poor afford food…

  22. This post is kinda embarrassing. Volatility in agricultural yields (along with the need to balance seasonal income against year-round outgo) is how futures markets were invented. Centuries ago. What we should be asking, if we’re going to talk about this kind of stuff, is what new market institutions might be needed to deal with a likely longterm upward trend in prices (from risk premia if nothing else) and what changes in existing markets, regulatory or otherwise, should be made to ensure that markets fulfill their role of efficiently (and equitably) allocating supplies, just as capital markets (are supposed to) efficiently allocate capital. It seems pretty clear that governments not intending to have their citizens starve or to pay oligopoly rents will want to take a fairly active roles in such markets.

  23. Thanks fellow commenters for taking apart Kahn’s rather weak strawman responses. This is not about good or bad at all. “Markets” are just one mechanism for describing how people interact in certain situations. They are useful for certain things (toothpaste, televisions, etc), and fail predictably and reliably at other things (climate change, food shortages). Your economic theories are built around simple equlibrium models and fail at predicting or responding to shocks. People starve and die in these shocks and chaos that economic theory cannot really solve. You need a tool box of interventions, some market driven, some based on long term sustainability, some based on simple confiscation and redistribution of hoarded wealth, some based on community health, some based on behavioural interventions, some based on simple altruistic “charity”. It is the simplicity of your arguments and reliance on “single tool” theories that give economists a bad name these days.

  24. They are useful for certain things (toothpaste, televisions, etc), and fail predictably and reliably at other things (climate change, food shortages).

    Yes Рthere are some things that are simply not substitutable, despite the effort to make it appear so. Ecosystem services are not substitutable at scale. This is useful to consider when railing against Nestl̩ and its water rights purchases and Bechtel and its actions in S America.

  25. My update…I don’t have the time and I’m not sure if I have access, but here is a paragraph from said post:

    “In my research I’ve found that world trade volumes would need to increase substantially if there is just a small increase in yield variability, modeled as a general broadening of the probability distribution for yields (Counterfactual 1 in Reimer and Li, 2009). As long as the world trading system remains flexible, however, people’s welfare would decline only very modestly in most of the 21 countries in our sample. I find this using a specially adapted Ricardian comparative advantage trade model based on the approach of Eaton and Kortum (2002).”

    Here are my questions: Which 21 countries? What about the other 174?

  26. The wild card in any discussion of wheat production is the stem rust called UG99. It causes about 80-90% loss of yields in infected fields. First discovered in Uganda in 1999 (hence the boring name), it has since spread across Ethiopia to Yemen and then across the Persian Gulf. Infected fields have been reported in Iraq, Iran, Pakistan, Afghanistan and those other ‘stans with too many consonants to the north. That region produces about 15-20% of the world’s wheat, mostly in smaller subsistence farms. These are the folks who aren’t wealthy enough to purchase genetically modified wheat – not that any commercial strains have been produced that are resistant to UG99. The infections aren’t widespread yet, but the spores look like dirt, and there are a lot of dirty boots coming back to the US from IQ and AF.

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