Future of Food

National Geographic has launched a series of stories and videos on the future of food.  One of the big questions they intend to answer is: how will we feed 9 billion people by 2050 without harming the planet? 

A video on the site hints at their five answers:

• use resources more efficiently
• grow more on existing farmland
• stop expanding farms
• change our diets
• reduce waste

It's not a bad list.  The first three will require science and new agricultural research and development if they are to be achieved.  The need for technological progress often gets short shrift in discussions about food sustainability, but here it is (implicitly) a prominent solution.  Even the last "food waste" issue has an important technological dimension.  In many developing countries, food waste is a result of poor storage facilities and transportation infrastructure; it isn't all just a result of rich people throwing away too much food (although that is part of it too).  It seems to me that Land Grant Universities are well poised to address precisely these issues, although I suspect we won't get much mention in National Geographic's stories.   

It is also important to discuss the role of economics - particularly the role of prices - in achieving these outcomes.  We may well need to "change our diets."  But, the question is whether this outcome will result from paternalistic policies and dictates or whether changes in relative prices will cause us to change our diets.  If eating a particular food is, truly, "unsustainable", then the price for it must rise as the resources needed to produce the food become more scarce.  

Here is what I had to say on this issue in the Food Police when discussing organics.

Economics teaches that price differences are important, though sometimes imperfect, signals about resource use.  The price we pay for food in the grocery store must reflect all the costs that went into producing it: from land rent to the value of the farmer’s labor to the prices of seed and fertilizer.  Higher prices for organic means that somewhere along the line, organics used more land, more labor, more seed, more fertilizer, or more of any of the other inputs required to produce food.  The prices of all these inputs were each determined by their scarcity relative to people’s desires to use them for other purposes unrelated to food production.  So, when we see that organic is higher priced, it signals us that organics are using many more of the resources that society finds valuable than non-organics.  Using up more resources is exactly the opposite of sustainable.      

Normally the price mechanism is used to ration scarce resources and signal us as to how to allocate resources over time.  Rising prices for increasingly scarce resources like oil and fertilizer cause us to naturally back away from consuming them – thereby resulting in a “sustainable” future.  The fact that we are now using a lot of oil and fertilizer in agriculture means they are currently in ample supply relative to demand.  The sustainability movement represents an elitist attempt to ration scarce resources using social pressure, guilt, and regulation.

As I've previously discussed, desiring sustainable outcomes is uncontroversial - it's how we go about it that matters.  We need to let price mechanism work in telling us when to cut back on particular foods.  That last sentence in the above quote might seem a tad harsh, but shielding consumers from price changes, and distorting market forces, is truly unsustainable.  

Why are beef prices so high?

If you've been down the meat aisle in the grocery store recently, you might have noticed that beef is getting pricey.  Indeed, cattle prices have recently been near historically high levels in recent months.  For some perspective, here are inflation-adjusted retail meat prices since January 2000 (these are monthly USDA data compiled by the Livestock Marketing Information Center and the USDA-ERS; final data point is January, 2014).  

As you can see, real beef and pork prices are higher now than they've been in at least 15 years (and that means they're substantially higher in nominal terms).

As the graph reveals, starting in about 2010, beef and pork prices began to rise, although the rate of increase has been faster for beef than for pork.  Over the same time period, chicken prices have remained relatively constant, and are actually slightly lower in real terms today than in the early 2000s.  

The graph above masks what has been happening in the last few weeks and months.  On that issue, here is a graph from the Livestock Marketing Information Center showing wholesale boneless beef prices (fresh, 90% lean - mainly used in ground beef) in recent weeks.  As you can see, 2013 prices were above the 2008-2012 average, and 2014 prices are much higher still.

What is happening that has caused the run-up in beef prices?  

The answer to that question is a dissertation topic unto itself, but here are a few rough thoughts:

• I don't think the answer is primarily on the demand side.  Despite all the negative publicity for meat products (from media coverage of food safety, animal welfare, global warming, health, water use, etc. etc.), estimates from our Food Demand Survey and from the demand indices compiled by Glynn Tonsor at Kansas State suggests relatively stable to slightly increasing demand.  Higher demand will tend to pull up prices, but I don't think the demand changes are anywhere near large enough to explain the price rises.
  • Increased demand for meat products from other countries might tell part of the story, and although there has been a general rise in beef exports in recent years, it also doesn't seem big enough to explain the trend.
• That leaves supply-side issues.  Cattle inventories are at their lowest level since the 1950s. Because of technological advancement, we don't need as many cattle today today to produce the same amount of beef as we did in 60 years ago.  Still, fewer cattle numbers means less beef, and less beef supplied means higher prices.  Contraction in cattle supplies can be explained by a number of factors, such as drought in the plains states that limited the amount of grass and hay available and higher feed (mainly corn) prices due to drought, ethanol policy, etc., which pushed pushed more cattle to slaughter several years ago, leading to smaller inventories today.  Feed prices have now come down off their highs but cattle prices are still rising, partially because producers are holding back breeding stock to rebuild inventory.  Still, if high feed prices were THE answer, I would have expected chicken prices to rise in tandem with beef and pork (at least over part of the period), but as the above graph reveals, they didn't.
• It is also worth noting that on the supply side, the beef industry has stopped using technologies that previously generated more meat from each animal.  
  • The industry largely moved away from using lean fine textured beef (LFTB - aka "pink slime") in March 2012.  It has been estimated that not using LFBT is akin to reducing the cattle supply by about 1 to 1.5 head million annually.  So, removal of LFTB had an effect of further reducing supply on top of the other aforementioned factors.  One study suggests that removal of LFTB increased ground beef prices by about 3.5%.  Here is a recent TV news story about the role of LFTB and beef prices (I was happy to see they interviewed Kate Brooks from University of Nebraska - one of my former students).
  • The industry also moved away from using the beta-agonist, Zillmax.  According the the product's manufacturer, Zilmax added 24-33 lbs of additional hot carcass weight.  Multiply that by millions of head of cattle, and that's millions of pounds of beef that are now "missing" relative to a year or two ago.  
• On the pork side of the equation, there is a lot of concern about the porcine epidemic diarrhea virus (PED), which is kills young pigs.  It is yet unclear what effects it may be having, but speculation suggests it might be tightening supplies and pushing up pork prices.  This is a relatively recent phenomenon and can't explain the 2010-2011 increases.

Addendum:

Scott Irwin sent me a note with a couple links to posts at farmdocdaily, which touch on these same issues.  First, he noted (in a post almost four years ago!) that the corn/soy prices then were likely to lead to much higher livestock prices.  So what we are seeing now may be the fruition of this longer-term adjustment.  Second, Chris Hurt posted on March 3 about PED, and it does appear to be a big deal - hog futures are at record levels.  Chris concluded:

At the farm level, current futures markets are suggesting a live price for 2014 at a record high of $73 per hundredweight compared to $64 last year. This will provide record high industry revenues and the highest profit per head since 2005.

Who is going to pay for these record high pork producer revenues? Unfortunately, the consumers of pork are expected to be large net losers from PED-V as they will have to pay record high retail pork prices and also have less pork availability.

What has caused the recent rise in commodity prices?

Brian Wright from UC Berkeley attempts to answer that question in a recent review article in the Journal of Economic Perspectives.  His provocative answer:

The rises in food prices since 2004 have generated huge wealth transfers to global landholders, agricultural input suppliers, and biofuels producers. The losers have been net consumers of food, including the large numbers of the world's poorest peoples.  The cause of this large global redistribution was no perfect storm.  Farm from being a natural catastrophe, it was the result of new policies to allow and require increased use of grain and oilseed for production of biofuels.  Leading this trend were wealthy countries, initially misinformed about the true global environmental and distributional implications. 

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.