The Locavore's Dilemma (28 page)

The complaint that agricultural prices are too low to allow producers to earn an honest living is probably as old as commercial agriculture. Of course, while low prices are never good news to inefficient producers, to the extent that they are “market” prices means that they are still sufficiently high to allow the best farmers to earn enough profit to maintain and develop their businesses. This being said, no producer has ever complained about higher sale prices and reduced competition. Historically this has meant that wherever they carried enough political clout, inefficient domestic producers were able to keep cheaper nonlocal products at bay through import tariffs, outright bans, and government schemes which artificially restricted supplies (sometimes by killing millions of farm animals, which is what occurred in the USA during the 1930s) or created an artificial demand for some commodities (such as the ethanol program today).

Artificially high prices, however, have always hurt consumers (especially the poorest ones) and resulted in much waste of valuable resources. Policies that artificially inflate prices without reducing production also ensure increased environmental damage by rewarding the planting of crops in less suitable land that might require additional inputs (such as irrigation water and fertilizers) and be more prone to erosion.

In the last few decades, many governments in less advanced economies have been able to provide a reasonable amount of food at very cheap prices through government-purchased grain imports and their sale as subsidized bread or flour in urban markets. (The suspension or termination of these policies, often brought about by the threat of being denied stabilization loans by the International Monetary Fund, often resulted in so-called “IMF riots.”) More recently, as mentioned earlier in this chapter, numerous governments addressed rapidly rising international food prices by fixing domestic prices on a wide range of foods at below-market levels.

What thousands of years of price control experiments have convincingly shown, however, is that they never achieve their stated goals of stopping inflation and remedying shortages. Far from delivering tangible benefits, they always provoked greater scarcity as local producers were no longer able to cover their production costs and had the assurance of losing more money the harder they worked. Because artificially lower prices quickly increased consumption, reduced stocks, and encouraged hoarding, essential goods rapidly became scarcer. Not surprisingly, producers and industrial purchasers always tried to find ways around these restrictions in order to cover their costs. In Europe, a classic reaction to the freezing of the price of a loaf of bread was for bakers to reduce their size in accordance with the rising price of breadstuffs. In many other cases, a price-controlled product would simply disappear from store shelves. Black markets would then inevitably emerge to satisfy consumer demands, but at a higher price than would have been the case in the absence of price controls, if only to compensate black marketers for the additional risks they took. The main victims of such developments were consistently people with lesser means.

Apart from discouraging production and distribution, in the long run price controls also killed innovation and adaptive behavior by preventing fluctuating prices from transmitting useful information and
by stifling entrepreneurship. Ironically, by impeding people from buying when prices were cheap and selling later when there was greater scarcity and therefore higher prices (which is essentially what “hoarding” amounts to), political authorities have also long amplified price fluctuations.

As far as famine and price controls are concerned, the main lesson learned is that the political rulers from regions suffering a food shortage should refrain from imposing price controls. This approach was occasionally tried and proved successful (which is not to say that all hardship vanished, but rather that the final outcomes were much better than they would have been under price controls).

A case in point is Bengal, India, which in 1770 experienced one of the most infamous famines in history with a death toll ranging between 6 and 10 million people. Some researchers now attribute it to severe droughts in the previous decade,
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but a more traditional interpretation puts the blame on price controls and the lack of tax relief by the British authorities.
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Evidence for the latter claim is that crop failures on the same scale in 1865–66 did not result in a similar outcome in the absence of price control policies.

According to William Wilson Hunter, the Scottish historian stationed in Bengal in the mid-1860s, in 1770 “the Government, by interdicting what it was pleased to term the monopoly of grain, prevented prices from rising at once to their natural rates.” In doing so, it made it impossible to send the right signals to spread out consumption of whatever was then available over the next 9 months in order to last until the next harvest. “Private enterprise if left to itself,” Hunter wrote, “would have stored up the general supply at the harvest, with a view to realizing a larger profit at a later period in the scarcity. Prices would in consequence have immediately risen, compelling the population to reduce their consumption from the very beginning of the dearth.” Unfortunately, this was not the case in 1770. In 1866, however, the British authorities realized that they had to stimulate private trade and prices were allowed to rise. As a direct consequence, “respectable men in vast numbers
went into the trade; for Government, by publishing weekly returns of the rates in every district, rendered the traffic both easy and safe. Everyone knew where to buy grain cheapest, and where to sell it dearest, and food was accordingly brought from the districts that could best spare it, and carried to those which most urgently needed it.” The result in Hunter's assessment was the equalization of prices “so far as possible throughout the stricken parts” and the pouring of rice “into the affected districts from all parts.”

This outcome was also greatly facilitated by two technological advances that did not exist a century before: the telegraph, which allowed the instantaneous and accurate diffusion of regional prices, and the railroad, which could move much larger volumes at much more affordable prices. Hunter further observed that Orissa, the only region that suffered significant harm at the time, “possessed no English mercantile public, and had never expressed any desire for the means of intercommunication which is the first demand that such a public makes.” Because its commerce had always been oriented towards the ocean rather than inland, it did not possess a railroad to connect it to other nearby regions. When supplies ran low the southwest monsoon had set in and, as it did every year, made local harbors impractical to use while the “only landward route was wholly unfit for the transport of sufficient food for the country, and the doomed population found themselves utterly isolated, ‘in the condition of passengers in a ship without provisions.'”
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Had the region been connected to the rest of India by the railroad and the telegraph, much suffering would have been alleviated.

If a growing number of food activists have come to understand the absurdity of much agricultural policy, most still cling to the notion that markets cannot be trusted and that what is really needed is to appoint the right person at the helm of government. A case in point is the
New York Times
' food writer Mark Bittman. In a column titled
“Don't End Agricultural Subsidies, Fix Them!,” he lamented the fact that well-meaning agricultural support policies created during the Great Depression now mostly benefit “wealthy growers [who] are paid even in good years, and may receive drought aid when there's no drought . . . homeowners lucky enough to have bought land that once grew rice now have subsidized lawns,” and “Fortune 500 companies and even gentlemen farmers like David Rockefeller” who receive cash payments for no valid reason. As if this was not bad enough, agricultural subsidies also delivered “high-fructose corn syrup, factory farming, fast food, a two-soda-a-day habit and its accompanying obesity, the near-demise of family farms, monoculture, and a host of other ills.” Yet, he adds, what these subsidies need “is not the ax, but reform that moves them forward” towards a “resurgence of small- and medium-size farms producing not corn syrup and animal-feed but food we can touch, see, buy, and eat.”
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Even though he typed these words in 2011, Mr. Bittman was somehow oblivious to the fact that since “Hope and Change” had swept through the White House a few years earlier, President Obama's main achievements in terms of the writer's agenda had been a small garden at 1600 Pennsylvania Avenue and a few hundred million dollars promised to local food activists. Without being too cynical, it would seem that shoveling (or redirecting) all the corporate welfare manure out of the policy barnyard is somewhat more challenging than a food columnist imagines. Perhaps this is because, as Adam Smith observed more than two centuries ago, it is typically “the industry which is carried on for the benefit of the rich and powerful that is principally encouraged” by the political system “while that which is carried on for the benefit of the poor and the indigent is too often either neglected or oppressed.”
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In other words, the poor and middle-class can't afford top lobbyists while the path of least resistance for politicians has always been the creation of new programs rather than the phasing out or redirecting of existing ones. If history is again any guide, however, beneficial change can sometimes happen in the wake
of a crisis (although plenty of bad things can happen, too . . . ), as we will now discuss.

For nearly a century and a half, food activists and small producers of all kinds have argued that unbridled competition will destroy family farms and empower “monopolistic” corporations. True, in a free market inefficient firms are continuously being driven out of business while the most efficient ones are rewarded by consumers and growth as long as there are economies of scale to be realized—but only until the day they stop providing the best alternative available and are themselves driven out of business or absorbed by more efficient competitors. As we parse the available evidence, the fear of monopolies is misplaced, at least inasmuch as real food prices have been going down for decades, something which wouldn't happen in the presence of true monopolies. Besides, business history bears ample testimony to the fact that once-dominant firms will in time be eclipsed by creative upstarts. For instance, in the meatpacking industry, the original Chicago “Big 3” of Armour, Swift, and Morris have long been outgrown, divided, and absorbed by other firms while new upstarts, such as Tyson Foods, and older companies previously involved in other lines of work, such as Cargill, are now dominant players in this line of work. Opening up markets to competition of all sorts is the best way to reign in monopolies while government-enforced restrictions and bailouts are the best way to create and preserve them.

This being said, there is a time-tested way to help small agricultural producers reap economies of scale and remain competitive. Although rarely if ever discussed in any meaningful way by agri-intellectuals, for over a century and a half agricultural service cooperatives have helped smaller producers access cheaper supplies (from seeds and fertilizers to fuel and machinery), marketing services (including processing, packaging, storage, sales and distribution) and credit (from working capital to
investment). No doubt these institutions would help small producers thrive once counterproductive policies had been eliminated, as was demonstrated most convincingly after the liberalization of the New Zealand agricultural sector. In 1984, following the near bankruptcy of the country and the election of a government with little support among agricultural producers, virtually all subsidies to agricultural production, export incentives and funding for natural disaster relief were eliminated while farm advisory services were privatized. Perhaps the best indicator of the scale of these reforms is that two decades later the portion of farm income represented by subsidies fell from 33% to less than 2%, with most of the latter figure being spent on agricultural research. True, many small independent operations and cooperatives merged to become more efficient and competitive, but a business model like the dairy cooperative giant Fonterra, which is owned by more than 11,000 dairy farmers and represents nearly 30% of the world's dairy exports, is something that should be considered by activists who truly care about thriving small operations, increased efficiency, lower prices and reduced environmental impact.
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Food activists are fond of saying that prices do not adequately reflect the true environmental costs of production. Fair enough, but typically the most meaningful problem in such cases is government failure. Maintaining agricultural prices artificially high usually brings more fragile and less productive land under the plough or hooves, which then requires sucking more water out of the ground, rivers, and streams along with the greater use of synthetic chemical inputs. The results are greater deforestation, soil erosion, and water scarcity for wildlife than a free market would have delivered.

By contrast, maintaining food prices artificially low discourages production and encourages waste, as when subsidized bread was used to feed cows and pigs in the former Soviet Union. Subsidizing inputs such as nitrogen fertilizer also ensures that more will end up in waterways, in the process increasing the nitrate concentrations in drinking water and causing eutrophication
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of streams, ponds, and lakes. Subsidizing
pesticide prices will encourage their abuse and typically result in the greater destruction of beneficial insects. Subsidizing the cost of irrigation water will result in more environmental damage through greater and more wasteful use of surface and underground water than would occur without these subsidies. When something is made artificially cheap, people have little incentive to use it as carefully as they would when it is not.