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We thank Brent for sharing his reasoned approach to this issue and providing such copious data. In addition to the letter, Brent sent along two attachments, both of which are worth reading; we provide them for you here. Brent’s point about multiple dynamics causing food prices to rise is well-taken. Even in our piece, the first cause we noted in the headline was the “dollar” — we apologize for the editing error that said “high” dollar rather than “low” in the headline — it was correct in the text — which serves to reduce imports and increase exports. Without a doubt, the numerous factors Brent implicates are important in this situation:
Yet we focused on the dollar and the issue of biofuels because they are more specifically a product of public policy. There is, of course, no “correct” or “incorrect” price for a commodity — there is just a market-clearing price. To the extent that prices are up due to drought, that is in all likelihood a short-term phenomenon, and next year we will have rain again. If the drought is due to global warming or some permanent change in climate, it is no longer correct to call it a drought; it just means that this is the new situation and reduced supply in that area will mean a change in the supply/demand equilibrium. That areas of the world, such as China and India, are becoming more affluent and looking to eat more animal-based protein is undoubtedly true. Yet the impact of inflation on this dynamic is difficult to assess. People, after all, have brains and hands as well as mouths and stomachs. These newly affluent people are major contributors to the world economy — that is why they are newly affluent. If they pull the cost of food up by increasing demand, they also push down the price of many items by increasing supply. Net/net, it is a complex case to make. The dollar has certainly impacted the situation, especially in the US in an industry such as produce. Yet if the issue was primarily the dollar, we might see food price inflation in areas linked to the dollar and food price deflation in areas not linked to the dollar. After all, if our prices go up because we no longer import as much food or we export more of our food, the rest of the world would have to experience the opposite effect and retain more of their domestic production and absorb imports of extra food from us. The unusual point about this global price increase is that it is, in fact, global. Although some companies will be able to grab “opportunistic” price increases — that is to say, price increases in excess of what commodity prices have increased — we know of no evidence that en mass the industry will have higher profits. Anecdotally, for every restaurant or frozen-dinner manufacturer who was able to grab extra margin, it seems as if there are ten that can’t pass along all the increases in the price of inputs. We could have included the high price of oil in our analysis as the price of oil is to some extent dictated by public policy. If it was easy to drill for oil in Alaska or off the coast of Florida, we might have lower oil prices. If one could build an oil refinery “as of right,” there would be more refinery capacity and probably more competition, thus keeping prices down. For the sake of discussion, we thought of oil prices as a “fact of life” that the ag industry has to deal with. The reason for the focus on biofuels is that, unlike a failure to produce food due to drought or an increase in demand due to rising prosperity or export/import switches caused indirectly by a low dollar or opportunistic price increases in the food chain and high oil prices, increased demand for biofuels is mostly a matter of the government putting its thumb on the scale by declaring that it will mandate or subsidize such fuels. Just last Tuesday, April 15, 2008, for example, Britain began a mandate for biofuels: A new law went into effect in Britain on Tuesday that requires 2.5 percent of all gasoline and diesel sold for any vehicle to come from biofuels. That will rise to 5 percent by 2010, and the European Union has proposed a target of 10 percent across Europe by 2020. While those targets initially were criticized as a timid response to global warming, now there is some relief that the policies haven’t gone further. Brent correctly points out that lots of things impact food prices and that we should be aware of things such as land lost to development, land used for ornamental horticulture, etc. However, simply doing anything that will make food cheaper is unlikely to be the public policy goal. We would argue that the focus of public policy should be on reducing externalities — and then let the private sector determine the best course of action. If the problem is carbon, then tax it; if you believe that lack of oil independence imposes high defense costs on the country, tax imports of oil and products containing or made from oil. Then the private sector will respond to those new conditions. Perhaps the answer is corn-based ethanol or maybe cellulosic ethanol or perhaps plug-in hybrid cars or maybe electric cars or hydrogen-fuel-cell powered vehicles — who knows? Just as the French and British decision to invest government money in the Concorde didn’t put us all on supersonic jets, so in all likelihood government dictates in this area will lead to payoffs to political constituencies and significant diversion of resources from their most productive use. Put it another way, we don’t see biofuels as a problem; we see government mandates and subsidies for biofuels as a problem. We will say that we enjoyed the note on potatoes — a fine crop indeed. But excess dependence on any one crop, as our Irish friends can tell us, is a dangerous situation. Once again, a sincere thanks to Brent Searle and the Oregon Department of Agriculture for such a comprehensive and thoughtful response.
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