Heat and ag yield, cont.

Michael Roberts' great paper with Wolfram Schlenker on the effect of detrimental increased heat on crop yields (which I first excitedly blogged here) is getting a lot of (well-deserved) attention.

First, Ezra Klein cites the work in the Washington Post, and, despite a few minor inaccuracies by Klein, Michael is deservedly proud of having cracked into the mainstream media.

Second, the paper was noticed as far away as Brazil, whence came a letter to the editor challenging that Brazil (being warmer and high-yielding) refutes the Schlenker/Roberts conclusion, or at least casts into doubt its generalizability. But their quick-and-dirty analysis seems to corroborate their original findings:

First, they cherry picked the state and the year from Brazil. Mato Grasso is the highest yielding state in Brazil and 2008 was a remarkably good year for them, due to unusually good weather. Other states in Brazil have average yields that are about half those of Mato Grasso.

Second, Mato Grasso yields were higher than average yields in the U.S. as a whole, but not higher than the best yielding states in the U.S.

Third, if we narrow our comparison by looking a particular state—Illinois, the number two yielding soybean state in the U.S.—and also look more closely at the data, Mato Grasso doesn’t look much warmer. In fact, the southern half of Illinois, which has average yields comparable to those in Mato Grasso, also has comparable exposure to extreme heat. (Northern Illinois is cooler and higher yielding than both Mato Grasso and Illinois). This can be seen from careful inspection of the maps below (click the figure for more detail). It turns out that there aren’t any soybeans grown in the hottest part of Mato Grasso. It’s not clear whether the commenters took into account the locations in Mato Grasso where soybeans are actually grown.

Look for more back-and-forth discussion on this interesting area, and the Schlenker/Roberts contribution in particular.

U.S. ag subsidy effects

Following up on this earlier post, I thought I'd post this comment sequence from Michael Roberts' Green, Green and Grains.

R: Your argument that ag subsidies don't boost production is very interesting. I don't understand how the conservation acreage is determined (or by whom) - is it centrally decided, or do farmers have the option in any given year of either growing crops or receiving a fixed (or varying?) payment for setting aside land?

Also, I think I saw you mention somewhere that most subsidies are not volume-related - is that true? If so would be interested to learn more.

Michael: Good questions. Conservation acreage is determined by legislation. I also know from first-hand experience that program administrators in USDA anticipate, even now, about how they might change the size and nature of conservation programs in the event commodity prices rise. Congress ultimately sets the acreage goals, but things change quickly when commodity prices change and bureaucrats know to expect this.

And yes, most payments received by farmers are not tied to the amount the produce. Most are tied to the amount and mix of crops they produced many years ago. The payments are attached in some sense to the history of the land, and so they transfer from one farmer to the next. These payments are called "direct payments" and "counter-cyclical payments."

It could be that some farmers plant particular crops today in anticipation of payments in the future. But since programs and prices change so much over time, only farmers very confident in their foresight might try to game the system in this way.

Subsidies that are connected to production volume come from the "loan rate program," which effectively servers as a price floor--the government pays farmers the difference between the price they receive and the "loan rate" should it turn out lower than the marketed price. The ostensible purpose of the program is to give farmers flexibility about when they sell their crop. But if they can't sell it for more than the loan rate, the loan rate serves as a price floor. Loan rates have been well below market prices for quite awhile.

One last point: The demand for commodities is really steep. Prices go up a lot if production falls just a little short. So, the purpose of farm programs is to keep farm incomes high then the best way to do this is to limit production somewhat. This helps to keep prices high. Paying farmer to produce too much really defeats the purpose because that steep demand curve means that extra supply will drive down prices a lot. So restricting production is the easiest way to keep farm income high.

R: Hmm. So who has the final say on conservation acreage for a given season? I have to imagine it's the USDA since it must be impossible to get Congress to turn on a dime in response to commodity prices...

Also, how are the top-down acreage targets cascaded down to thousands of producers? Is there any choice at the individual producer level, and how are they compensated for not growing?

And finally... if removing rich-world subsidies wouldn't materially shift world production or prices, why are developing countries so hung up on them in free trade negotiations like Doha? Do they simply misunderstand the mechanics and implications of the subsidies, or is there something else going on?

Michael: In some cases the USDA (the Secretary of Agriculture) has discretion for the amount of acres so long as it is beneath a target set by congress. That discretion can vary somewhat from bill to bill.

Today all the land is in the Conservation Reserve and the amounts in that program do appear a bit more "sticky" than more discretionary set-asides in the past (probably more environmentally beneficial, too). But when prices spiked last summer, there was serious pressure to reduce the size of the program, and they did. If prices staid high, I'm quite sure CRP would have further declined. Right now about there are about 34 million acres in the program and that is begin ratcheted down to 32 million. Before the run-up in prices the cap was 39 million acres. If prices staid high acreage would have fallen much more (I'd guess another 10-15 million acres).

Enrollment in CRP is up to the farmer. Most acres are enrolled in a competitive process wherein the farmers offer parcels with certain environmentally friendly covers, request a rental rate, and then all offers are scored and ranked. Some of the land is more targeted (like buffers for streams and lakes). For the targeted lands farmers are offered generous sums that they are unlikely to refuse.

I don't completely understand the trade negotiations. Clearly developing countries don't like us giving cash to our farmers. They like our conservation program (that's a "green box" program) because they keep prices high. The politics here must be very complicated. I've speculated here that agriculture may be something of a red herring to muck of the negotiations or other purposes. But I just don't know.

To make things stranger, I think developing countries as a whole would benefit more from lower commodity prices than from higher prices. The U.S. exports food to developing countries and this helps to feed more people in the world. But the hungry masses aren't the ones sitting at the trade negotiation table...

Anyway, on fairness grounds alone, I can see why people really don't like the big cash payments to farmers.

R: I had a quick look and both the FAO and IFPRI project world price rises in full trade liberalization scenarios. I'm guessing they are knowledgeable enough to know what they're talking about (what do you think?). So two hypotheses:

1) Are EU ag subsidies more volume-linked or otherwise production-increasing than ours?

2) Maybe there is also an effect from removing the domestic price controls (usually caps) in many developing countries?

Food prices are a double-edged sword. On one hand, it irritates me when people like Pollan root for higher food prices without acknowledging (or even realizing?) how they would increase undernourishment in poor countries, since most hunger is due to lack of purchasing power, not physical access. On the other hand, low ag commodity prices make it harder for agriculture to be an engine of economic development in rural areas of poor countries (where it is often 80-90% of the rural economy). So low prices are definitely good for poor urban food buyers, but their net effect on the rural poor is tricky to judge.

Interesting stuff, and great to have someone with such substantial academic and practical knowledge on the other side of the conversation.

Do U.S. ag subsidies really increase production?

Agricultural subsidies in the developed world are the perennial bogeyman of world trade negotiations. Michael Pollan also blames them for America's nutritional crisis, because they make food too cheap.

In reviewing Pollan's recent NYT op ed, Michael Roberts links backs to several interesting posts on why he doesn't think ag subsidies (aside from ethanol mandates) increases U.S. agricultural production. This is a pretty interesting argument, as it runs counter to the obvious intuition on subsidies.

His main point is that agricultural production appears to be driven by conservation policy and payments, not subsidies. I don't quite understand how conservation acreage is determined from his post, so I don't yet entirely understand his argument.

The other interesting point is that not all subsidies are volume-driven (so these obviously wouldn't effect production).

What would be the implications for world trade if this weren't true? Well, it wouldn't make rich-world farmers any more willing to give up their subsidies. But it might change our beliefs about the trade gains to be realized if the subsidies are eliminated (the standard argument is that African farmers would receive higher prices for their products if it weren't for these subsidies). Unfortunately, that argument alone is unlikely to effect any major breakthroughs at the international negotiating table.

Research: Higher temperatures TERRIBLE for staple crops

I knew Michael Roberts had a good blog; I didn't know he was working on monumentally important and relevant research on the impact of temperature on staple crop yields:

We set out to develop a better statistical model linking weather and U.S. crop yields for corn, soybeans and cotton, the largest three crops in the U.S. in production value. Our major new finding is that (by far) the best predictor of yield is a measure of extreme heat: how much temperatures exceed about 29C (84F) during the growing season. The threshold varies somewhat by crop--29C is the threshold for corn. Below this threshold, warmer temperatures are more beneficial for yields, but the damaging effects of temperatures much above 29C are staggeringly large.

They introduce a measure I had not seen before, but makes a lot of sense - "degree days above 29C".

A good measure extreme heat is degree days above 29C. This is calculated as (Degrees Above 29C x Days) summed up for all time (including fractions of days) at each temperature above 29C. The more degree days above 29C, the lower are corn yields. Historically, average degree days above 29C during the growing season were about 57. Under the slow warming scenario (we cut emissions to 50 percent of 1991 levels by 2050) this number is projected to rise to 194 by 2070-2099 and corn yields are estimated to decline by 46 percent [emphasis mine]. Under the fast-warming (business as usual) scenario, degree days above 29C are projected to increase to about 413, and estimated corn yields decline 82 percent [emphasis mine].

Their findings on adaptation are particularly troubling:

Somewhat surprisingly, we find no evidence that farmers in the warmer south have been successful in adapting to the higher frequency of temperatures above 29C. This is troublesome as we hoped to learn from warmer regions how farmers might adapt to more frequent temperature extremes.

What are the implications?

These big estimated impacts are important because the U.S. is by far the largest producer and exporter of agricultural commodities. This is especially true for corn and soybeans, which are two out of the world's four most important staples (the other two are wheat and rice). If U.S. yields go down a lot, it drives up prices of staple food commodities all around the world. Almost surely the poor in other parts of the world, particularly developing countries that import food, would suffer far more than the U.S. would.

And the caveats?

There are three major caveats: (1) CO2 fertilization may offset some of these negative effects--something still under significant debate; (2) Seed companies (Monsanto) might develop more heat tolerant crops in the future (but we find little evidence of adaptation in the past); and (3) Farmers will be able to offset some of the losses by shifting where they grow different kinds of crops.

There are more detailed findings in his post. I'll say again that this appears to be critical research that highlights the consequences of climate change for both the broad world food system and U.S. farmers in particular. In fact, it would be great if this were publicized more broadly and were able to shift the opinions of some obstinate agricultural states on the importance of addressing climate change.

Update: He answers my question on longer growing seasons:

R: Great research - love your approach and the conclusions are frightening (but better that we know, and have our eyes wide open).

One other mitigating factor I can imagine is longer growing seasons - any idea how much this could counterbalance the fall in yields? (probably not much, just curious)

Michael: R,

Thanks for your comment and good questions.

We did investigate adjusting growing seasons by moving everything back one month (see the supplement). This does offset damages a little (I recall about about 10 percentage points in the long-run worst-case scenario, but see the supplement for a precise number). We were wary about moving things much earlier since the sunlight and sun orientation would shift so much and the the model implicitly holds these fixed.

Commodity trends: ag vs. oil

As I mentioned in my previous post, Michael Roberts at Greed, Green and Grains had a thought-provoking post on commodity trends. His mini-thesis is that, over the last few years, "Price fluctuations have become much more a demand-related phenomenon than a supply-related phenomenon."

He summarizes how for the last few decades, oil prices were driven mostly by supply shocks (embargoes, wars, etc.), whereas (falling) agricultural prices were driven mainly by "remarkable yield growth." But today...

But today it's all about demand. Demand for all kinds of commodities from oil to food grains came from tremendous growth in China and India. Supply growth couldn't keep up. Agricultural commodities got an additional demand boost from ethanol, which also linked agricultural prices more closely to energy prices. Then, when the global economy tanked, so did commodity prices. And today speculation, instead of being about possible supply disruptions, is all about when demand growth will resume.

I agree with him on oil - demand certainly has tanked due to the recession. I am not so sure on ag. First, the 2007/8 run-up in world cereal prices was caused by a complex set of factors including some on the supply side, like droughts in Australia and rice export bans in Vietnam, India and Egypt. Second, food demand is not as elastic as oil demand - people for the most part keep eating in a recession (not to insensitively downplay unfortunate exceptions), and the RFS mandates which drive the majority of corn ethanol and biodiesel demand remained in place. Third, unlike oil (where supply proved fairly inelastic in the face of record prices), high food prices provoked an impressive supply response - according to The Economist, "farmers harvested 2.3 billion tonnes of cereals in 2008/09, the biggest crop ever seen."

In conclusion, while in oil a peak supply/Peak Oil dynamic may be in play, I don't think we are at Peak Ag yet (although the more one looks at water, soil degradation and climate change, the more one worries it may be closer than most people think). In the medium term, both supply and demand in ag are flexible and speculation will continue to be about both, and at what price they'll meet to clear the world market.