Tag Archive | Food Economics

On Rising Food Prices and Low Inflation

Last week, NPR had a fine, short piece on the disconnect between consumer’s very real observations of rising food prices and economist’s less than comforting assertions about low inflation.

Economists track inflation through the Consumer Price Index which looks at a basket of goods that tend to have stable prices to screen out volatility. At 2.1 percent it is currently well below the historic average of 3.2 percent. This is the rate for things like TVs, phones and refrigerators. What it doesn’t look at is two of the categories that consumers are the most sensitive to: food and fuel.

Marilyn Geewax does a fine job explaining why food costs are up well above the 2.1 percent rate of inflation, namely the impact of three years of drought on cattle stocks and the PED virus that has been worrying the nation’s pork supply.

I think, however that a finer point needs to be put on the matter. Inflation is a very specific term for economists and it is a form of rising prices, but it is not synonymous with rising prices and that is something that is not very well understood. In fact, I know people with degrees in economics that can’t seem to keep the difference between inflation and rising costs straight. What economists are looking at when they look at inflation is signs of ‘too much money chasing too few goods’. It’s a money supply problem. Too much money in circulation, interest rates too low, employment levels too high, factors like that. What it isn’t is a measure of increased costs and stresses in supply chains. Three years of drought reducing winnowing cattle stocks. Natural gas shipments displacing grain shipments in Canada. The PED virus cutting pork stocks. Those are all reasons that food and fuel costs can go up, but they don’t constitute inflation.

Go back to the two posts we did on the price of oats coming from Canada. I looked at the impact of a tough winter and Canadian oat farmer Ron Rein explained the impact of rail policy in Canada. It was stresses in the supply chain that were causing oat prices to rise, not inflation. Cold comfort, but worth understanding the difference. If only so that you don’t throw your cereal bowl at the radio when they announce that inflation is still low. You wouldn’t want to waste that milk. It’s getting expensive.

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Organic Farmers Face Their Own Version of Baumol’s Disease

Nathanael Johnson’s recent interview with veteran organic farmer Tom Willey made about a dozen great points and raised about a dozen vexing issues. I’d like to look at just one of them.

In the interview, Willey is outlines two problems with one solution. One of those problems is going to get more difficult for organic producers over time.

Willey says:

[On the value of farmer’s labor] Because we think that growing other people’s food is as important as, you know, being people’s pastor or doctor or lawyer, and those professions are certainly well compensated. So why have farmers always had to take it in the shorts economically? And grow food for so many people and work so many hours and so hard for so little remuneration?

I don’t have his permission to say who he is, but there’s a very successful and highly revered organic farmer on the East Coast, and two years ago he had a horrible bout with cancer and he didn’t have the money for health insurance. I mean that is just unconscionable. And he is feeding many people some of the best organic products that we know of. It’s just not right.

[On tracking costs] We don’t do that to that anal of a level in our farm, but we do it. We do it particularly with labor, because on a farm like ours it’s insanely labor intensive. I’m telling you the truth here: When I sell you a dollar’s worth of produce, 70 cents of that goes to labor compensation. We’ve had a wave of wage increases here in the Valley over the past year, because the scarcity of labor has become extreme with the border shut down for so many years. The border used to be a semi-permeable membrane, they’d open the valve a little bit close the valve a little bit, but since everyone has gone apoplectic about immigration, the border is basically shut down. So little by little the labor pool is eroding here.

[On working with immigrant workers]
Well we do, we do, and a lot of our employees appreciate the fact that they have year-round work and other benefits. But when that wage started going up, our employees came to us and said, “Hey we need to have a chat here.” So we had a big meeting out in the front yard of the farm and we discussed it. They said, the disparity is just getting too great and you have to do something, or some of us are going to start melting away. So we instantly raised the wage a dollar. And with that, some of our crops became money losers, so we actually had to lose some of our diversity.

[On the need for serious attention to bookkeeping and marketing]
There’s a saying that farmers are always price takers, not price makers. You have to become a farmer who is a price maker. You have to distinguish your product from the masses in the market.

We really need to be growing the highest quality, most nutrient-dense produce. Unfortunately we don’t have the tools to assess that cheaply on a daily basis. If you can do that, you are a price maker.

If you are just selling into an amorphous market, under someone else’s label, you are a price taker. But if you are selling locally, you can really identify your customers. We established our name and our label and found a few thousand people who would support it. You just carve out your constituency, figure out how to produce what they need, and get them to understand that they need to pay you fairly for it.

The first problem is the historical weakness that farmers have suffered from in the market’s price mechanism. For specialty growers (produce), this stems from the fact that they are selling a perishable good and they feel the clock ticking much more keenly than the buyer on the other end of the transaction. This is compounded by the tendency of agricultural markets towards gluts. Everyone’s asparagus crop hits the market at the same time, and they all need to sell in the same window of time.

That problem affects all specialty growers, not just organic growers and the problem of gluts is an even bigger problem for commodity crop growers which is the reason why we have had various price stabilization policies in place since the Great Depression. The second problem Willey talks about is the fact that cultivating, processing and transporting organic produce on a small scale is incredibly labor intensive. This is where small organic producers run into a parallel version of Baumol’s cost disease.

The New Yorker’s James Suroweiki explains the disease:

When Mozart composed his String Quintet in G Minor (K. 516), in 1787, you needed five people to perform it—two violinists, two violists, and a cellist. Today, you still need five people, and, unless they play really fast, they take about as long to perform it as musicians did two centuries ago. So much for progress.

An economist would say that the productivity of classical musicians has not improved over time, and in this regard the musicians aren’t alone. In a number of industries, workers produce about as much per hour as they did a decade or two ago. The average college professor can’t grade papers or give lectures any faster today than he did in the early nineties. It takes a waiter just as long to serve a meal, and a car-repair guy just as long to fix a radiator hose.

The rest of the American economy functions differently. In most businesses, workers are continually getting more productive and can produce a lot more per hour than they could ten or twenty years ago. In 1979, workers at G.M. needed forty-one hours to assemble a car. Today, they need just twenty-four.

. . . Generally, productivity growth is a boon, but it creates problems for non-productive enterprises like classical music, education, and car repair: to keep luring talent, they have to increase wages, or else people eventually migrate to businesses that pay better. Instead of becoming nurses or mechanics, they become telecom engineers or machinists. That’s why teachers are getting paid a lot more than they were twenty years ago. (The average salary for an associate college professor has risen almost seventy per cent since the early eighties, and that’s if you adjust for inflation.) To pay those wages, schools and hospitals have to raise prices. The result is that in industries where productivity is flat costs and prices keep going up. Economists call this phenomenon “Baumol’s cost disease,” after William Baumol, the N.Y.U. economist who first made the diagnosis, using the Mozart analogy, in the sixties.

The problem for farmers is that they are competing with more productive industries for workers, but that they the goods they are selling compete directly with substitutes from more productive competitors.

Even the most vocal supporters have found organic [pdf] to require 35% more labor. On top of that, organic yields are consistently lower which is another way of saying that land costs per unit are higher. Because of the way that organic standards in the US are structured, the productivity gaps in labor and yield will almost certainly continue to widen over time. This means organic farmers will be competing with products that are increasingly cheaper in relative terms over time. Compound this with the structural problems that make all farmers price takers and you are facing a very steep climb. This is too say nothing of the problems with economies of scale that small farmers are saddled with.

From the start, Willey’s solution to these problems has been marketing. For farmers who choose organic certification, there are currently only two paths to profitability. You can either sell your soul and go big; selling tomatoes for sauce and canned tomatoes, salad greens for supermarket clamshells; or you can go niche, reaching high end restaurants, farmers markets and use the CSA model. This doesn’t bode well for those of us who’d like to see more produce grown under organic best practices at scales that can feed more people, more afford-ably, more sustainably. It’s not at all clear how marketing can take organic past carving out a niche market to capture the necessary price premium. If that is sufficient for those that want to follow their farming muse and find meaningful, remunerative work as farmers, that’s all to the good, but it relegates independent organic produce farms to being significant cultural assets, but insignificant parts of the food system.

 photo SomeOrganicYields_zps3094032b.jpg

Sources:
Sustainable farming needs math as much as mulch, says one veteran
Nathanael Johnson | Thought for Food | Grist | 30 January 2014

What Ails Us
James Surowiecki | The New Yorker | 7 July 2003

Organic and Conventional Farming Systems: Environmental and Economic Issues [pdf]
David Pimentel1, Paul Hepperly, James Hanson, Rita Seidel and David Douds | Bioscience | July 2005

The crop yield gap between organic and conventional
Tomek de Ponti,Bert Rijk,Martin K. van Ittersum | Agricultural Systems | April 2012

Comparing the yields of organic and conventional agriculture
Verena Seufert,Navin Ramankutty & Jonathan A. Foley | Nature | 09 March 2012