Enough (hunger)

I’m currently reading Enough: Why the World's Poorest Starve in an Age of Plenty, based on a trusted recommendation, and am finding it surprisingly substantive for a book written by two WSJ journalists. I’m about halfway through and will post more when I’m done, but two quick thoughts for now.

First, I had not appreciated at all the bizarre distortions created by the U.S. food aid system (aid is required to come from U.S. farms) and the “Iron Triangle” of farmers, shippers and charities which upholds is. The resistance to spending just 25% of food aid budget on locally produced food (which would be much more cost-effective) is astounding (it was quashed in Congress four years running from 2005-2008).

Second, everyone (Bono, Tony Blair, the authors, etc.) fixates on hunger in Africa specifically, but there are more undernourished people in South Asia than in Africa, and Africa has less than 30% of the billion undernourished people in the world. The lion’s share are in Asia (despite the Green Revolution!). So it’s good to keep that in perspective.

Update: Right, so apparently I posted on the latter less than two weeks ago, in response to an NYT article on the same topic.

Why farmers oppose climate change legislation

Michael Roberts explains why bad for yields does not mean bad for farmers' profits.

So, in response to Grist and the position by the American Farm Bureau on climate change, one may wonder: Why would farmers oppose the climate bill if they have so much to lose from potential global warming?

There is a simple answer: a big hit to crop yields does not imply a big hit to farmers' profits. In fact, if the rest of the world is unable to make up for U.S. losses, a big hit to yields is probably a very good thing for farmers profits. At least for the corn-soybean guys in the Midwest.

You see, the demand curve for basic grains is very steep. We've estimated an elasticity of about 0.05 (also see this paper). So if yields worldwide get cut by 50%, and no additional supply comes online to replace that loss, prices will go up 1000%, and farmers revenues will go up 500%. Farmers' profits will go up by a lot more than 500%.

So, while climate change is looking bad for buyers of basic grains, like North Carolina hog farmers and the urban poor in developing nations, those who grow basic grains will do very well. The incentives are very clear: opposing climate change legislation is good for corn growers' pocketbooks.

Food industry consolidation

Agricultural input markets tend to be fairly consolidated. The seeds market, for example, is dominated by 4 big players. 6 companies control >75% of the crop protection market. Fertilizer saw the CF/Terra/Agrium takeover drama unfold over the past year, and PotashCorp controls something like 60% of the world's potassium supply.

Farming itself is incredibly fragmented (part of the reason farmers are generally not hugely profitable, heavily-subsidized ones in the U.S. and Europe excepted). Downstream of farming has the ABCDs of food trading (ADM, Bunge, Cargill, Dreyfus), and increasing consolidation among food processors as well. The latest example is Brazilian meatpacker JBS's $2.5bn bid for bankrupt Pilgrim's Pride. $2.5bn is a lot of money for a bankrupt company, and unsurprisingly the combined entity would be huge:

Combined, Pilgrim's Pride and JBS's U.S. unit -- which includes sales at the JBS business in Australia -- would have posted about $20 billion in revenue last year. Tyson's fiscal 2008 revenue was $27 billion.

I predict this is not the last consolidating move in the food sector.

Consolidation generally means two things - economies of scale, and margin pressure on the more fragmented steps of the value chain. In this case, that is farmers, which is concerning because the majority of yield upside in the world is for poor smallholder farms in South Asia and Africa, and the majority of the world's very poor and undernourished people live in rural areas and have livelihoods connected directly or indirectly to farming.