A few responses to Prince Charles

I just read the transcript of Prince Charles' speech on sustainable agriculture in DC last week. There are a lot of good ideas, and a few areas in which I think more can be said.

Ag subsidies: I believe there’s a strong consensus across many individual issues and disciplines that American and European agricultural subsidies are wasteful and counter-productive. The challenge is a political one – there are about 20 farm states, and it’s very difficult to get things done legislatively in other areas (health care, immigration, climate change, you pick) without the support of at least some of that bipartisan group of 40 farm senators. It’s not a rich-world-only issue, too – here’s a year-old WSJ article (subscription required) on how difficult it has been to repeal fertilizer subsidies in India despite 40 years of trying, and recent fertilizer subsidies in Malawi have become a darling case study of country-led agricultural development proponents, despite criticism by the World Bank and others.

Scale: I think Prince Charles is too blasé about dismissing the benefits of scale for cost and efficiency of agricultural production. Cost is important not as much to you and me, but definitely to the urban slum-dweller in Cairo or Mumbai who spends 2/3 of his or her income on food. And efficiency is important for the environment – less yield per hectare of land means more land under cultivation, and since there’s not much unused cropland around the world, this results in degradation and cultivation of ecologically sensitive areas like the Amazon, the Sahel, Indonesia’s peat swamps, etc. If we can replicate current yields at scale using organic methods, that would be great, but the burden of proof is still on those who claim this can be done.

Local production: Another attractive idea that I think is easier to apply to ourselves (living in not only the richest but also one of the most agriculturally productive countries), but runs into difficulty when generalized across the world. There is a lot of upside in smallholder productivity in Sub-Saharan Africa, but in other regions that import food today – I’m thinking of mainly the Middle East and China – it would be very difficult for them to produce more food domestically without exactly the kind of unsustainable drawing down of natural capital that Prince Charles rightly warns against. If we want the most holistic and least naturally destructive agricultural system at a global level, it has to include a significant component of trade between the most fertile parts of the world and the less fertile but more populated parts (unfortunately the two don’t match).
To close, a photo I took from an airplane of pivot-irrigated wheat in the middle of the Egyptian desert, with water drawn unsustainably from the underlying aquifer (we do this in the American West, too). We Americans are very fortunate for the fertility as well as the economic prosperity of our country, and not all countries have the agro-ecological potential to feed themselves in a sustainable way.

Meta-report on Potash takeover

Felix Salmon pulls together what he likes to call a report report report on the Conference Board of Canada's report on various Potash Corp takeover scenarios, and the media's coverage thereof. The punch line is that

A successful takeover of Saskatoon-based Potash Corp could slash the province’s revenues by at least $2 billion over the next decade while having little or no net effect on employment, according to a report commissioned by the province.

... but a takeover by Sinochem would be far worse, with potentially foregone tax revenues of more than $10 billion over the next ten years.

Potash Corp's CEO has been doing a lot of talking, but I find it impossible to believe that a Sinochem bid could ever be politically feasible, so unless another multi-national bidder emerges, he won't be independent for much longer. That said, the market is still trading higher than BHP's $130/share offer price so a critical mass of people does seem to believe someone else - or another higher bid from BHP - is still out there.

More food price volatility drivers

Upon further reflection on Chris Blattman's rare dud, here are a few more (slightly overlapping) potential drivers of food price volatility in the future. Please note that I'm not saying these will definitely cause higher food price volatility in the future, only that it is very easy to believe that they might.

• Biofuels and bioenergy: An additional source of demand growth - potentially very large - that could keep demand at the very edge of supply capacity.


• Stronger links to energy prices: Energy prices have always been linked to agricultural input costs since the most widely used fertilizer (nitrogen) is generally made from natural gas. More recently ethanol has become at times the marginal buyer of corn (Bruce Babcock at CARD did some nice research demonstrating that ethanol was the marginal buyer from late 2007 to mid 2008; I couldn't find a link to the paper, but all you need to do is look at the high correlation between actual corn prices and break-even prices for ethanol production). If this continues - and it may well, particularly when oil prices are high - then volatility in oil prices will be transmitted to food prices more than in the past.


• Speculation: That old bugbear; I personally am more skeptical about this one, as longtime readers will know, but the former head of IFPRI isn't, and objectively I'm no more likely to be right than he is.
  

Update: Michael Roberts responds and reprimands:

Here Chris seems to talking as much about climate science as economics or politics. He has also stepped onto a pet peeve of mine, common among some economists, which is ascribing personal views as truisms stemming from the branch of social sciences in which one specializes. It's not quite as bad as Steven Levitt pontificating about global cooling, but it reeks of that kind of professional arrogance. If you're an academic and are going to start asserting scientific truisms you need to be more specific about the underlying science.

He also points out a few factors not yet on my list, which I'll paraphrase here:

• Globalization is not irreversible: Think about how surprisingly globalized the world became during 1870-1914, only to regress drastically following World War I and the Great Depression.


• Shifts in comparative advantage due to climate change, which Michael is "convinced" of:
  

  That is, [climate change is] going to shift where things are grown. A lot. It's also likely to change global quantities, but that's hard thing to put a finger on (i.e., model convincingly). With that much change going on, we should worry at least a little bit, and probably a whole lot, about how the kind of turmoil these changes will cause. Loss of comparative advantage is just the kind of thing that brings about bad policy response.

• Uncertainty itself can exacerbate market volatility, and uncertainty about the future is high, not just about long-term commodity prices, but also about the direction of the world economy and shifts in agricultural production due to climate change.

Dead zones vs. oil spills

While ethanol producers have been quick to spin the Deepwater Horizon tragedy toward their own advantage, NRDC's Nathanael Greene has a quick rebuttal:

The nitrogen runoff from corn grown all along the Mississippi causes a huge dead zone in the Gulf every summer. As this map shows, the dead zone at least as large as the oil spill and it takes a huge toll on the marine life and region's economy every summer. With about a third of the corn crop going to make corn ethanol, it should be clear that more corn ethanol is not a real solution.

He's referring to this image from the NYT, which makes a side-by-side visual comparison easy; in fact, the hypoxic zone looks considerably larger than the oil spill to date.

A hypoxic zone is in some ways not as destructive as an oil spill - it will not cripple fragile marshland ecosystems, for example - but the impact on marine life alone is no doubt harmful for the coastal fishing industry that could be (and once was?).

It is not news that corn ethanol is hardly an environmental angel, but it is worth keeping in the public conscience as the Deepwater Horizon leak continues unabated and the inevitable public backlash builds in strength.

India's invincible fertilizer subsidies

Long but fascinating WSJ article on the history of fertilizer subsidies in India. A few choice quotes (and apologies for the lack of synthesis and commentary):

In 1967, then-Prime Minister Indira Gandhi imported 18,000 tons of hybrid wheat seeds from Mexico. The effect was miraculous. The wheat harvest that year was so bountiful that grain overflowed storage facilities. Those seeds required chemical fertilizers to maximize yield. The challenge was to make fertilizers affordable to farmers who lacked the cash to pay for even the basics—food, clothing and shelter. Back then, giving cash or vouchers to millions of farmers living all over India seemed like an impossible task fraught with the potential for corruption. So the government paid subsidies to fertilizer companies, who agreed to sell for less than the cost of production, at prices set by the government.

In budget crunches, subsidies on those fertilizers have been reduced or cut, but urea's subsidy has survived. That's because urea manufacturers form a powerful lobby, and farmers are most heavily reliant on this fertilizer, making it a political hot potato to raise the price.

With urea selling for a fraction of the price of other fertilizers, farmers began using substantially more of the nitrogen-rich material than more expensive potassium and phosphorus products.

In the state of Haryana, farmers used 32 times more nitrogen than potassium in the fiscal year ended March 2009, much more than the recommended 4-to-1 ratio, according to the Indian Journal of Fertilizers, a trade publication. In Punjab state, they used 24 times more nitrogen than potassium, the figures show.

Under the new plan, the government will offer subsidies to fertilizer companies on the nutrients, such as sulphur, phosphorus and potassium, from which their products are made, rather than the fertilizer products themselves. The idea is to provide incentives for farmers to apply a better mix of nutrients. But in a major compromise, the government left in place the old subsidy on urea—meaning farmers will still have a big incentive to use too much of it.

Hat tip to a colleague who first passed this on to me.

Yara buys Terra

Remember the never-ending CF-Terra-Agrium three-way fertilizer takeover saga? One of the protagonists has fallen to an unexpected outside bidder, Norway’s Yara. The rationale is interesting:

Energy-intensive fertilizer producers in North America have become increasingly attractive, Yara said, because of “structural changes” in American energy markets as a boom in unconventional gas output curbs natural gas prices in the United States.

Yes for now... the question is for how long that trend holds up.

Update: And CF swoops in to outbid Yara and claim the prize... going to show that it ain't over til it's over.

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.

Win-win renewable power opportunities

Given that wind power disturbs wildlife, wave power kills dolphins, and transmission to any sort of renewable energy creates all sorts of problems, one could be pardoned for thinking there aren't any win-win renewable solutions out there. I'm not saying these latest two are, but it's certainly encouraging to hear ideas that actually alleviate existing environmental problems (or, for the latter, seem to have a minimal footprint).

First, in the WSJ, entrepreneurs are looking to harvest the algae that flourish in the dead zones created by excess nitrogen fertilizer run-off in the Gulf of Mexico. The dead zones move around, so the operators would be a sort of modern maritime shepherds:

"This is the sea equivalent of traveling goats: you have algae, we'll bring the fish," [LiveFuels] says, referring to companies that rent out goats to eat up grasses on California hillsides to reduce the danger from wildfires. They would truck in the fish and release them into a cordoned-off area. Cages would be used to keep carnivorous fish out.

The idea is that the fish oil would be harvested and converted to biodiesel. I'd want to see a rough EROEI calculation of a fuel production technique that involved driving a boat trailing catfish cages before committing any capital, but the idea of capitalizing on the dead zones and reducing the algal blooms has a nice ecological elegance.

The second idea, in Green Inc., is to retrofit existing dams for power generation. What?!? That was my first reaction too. Turns out:

Only 3 percent of the 80,000 dams in the United States are used to generate power, according to Norm Bishop, a vice president at MWH, a water engineering firm. They were built for other purposes, such as flood control, recreation, irrigation or water storage.

Umm... if true, yeah!!! The 3% number seems absurdly small to me, though (maybe it's number of dams, rather than a better metric like cubic meters of water flow? i.e. Hoover Dam counts the same as a small dinky dam). And if my calculations are right, $1.9bn for 350 MW comes to about $5,400/MW, which is not nuclear but not exactly cheap. A utility in Ohio appears to be going ahead, though, so maybe the economics can be made to work...

More commentary on "The Phosphate Dilemma"

Over at U.S. Food Policy, Parke:

A reader asks by email how the train wreck can be avoided.

Some tentative thoughts: Best thing is to eat with lower environmental impact (especially less meat). Also, good environmental regulation of phosphate mining and remediation worldwide is wise, even if it then makes phosphate fertilizer more expensive. That higher price of fertilizer then feeds a response from farmers who can weigh the production advantages and cost disadvantages of increased application more wisely.

R:

Parke, is there any applicable thinking in academia on how to overcome the "race to the bottom"-type disincentives for country-level environmental regulation? (e.g., if everywhere else has strict environmental regulation, a given poor country has an incentive to avoid it if the lower costs mean they can produce more fertilizer and thus generate more revenue and employment)

Obviously this applies widely to extractive industries in general, not just phosphate fertilizer... maybe there are parallels from international labor standards?

Parke:

The most common U.S. center left answer to that question is to include labor and environmental standards as part of trade negotiations.

That's fine with me, but my attention is elsewhere.

The long-term solution to the "race to the bottom" is truly to lift the bottom. Good environmental regulation is a product of middle class democratic politics. There is an anti-trade and isolationist strand in progressive American politics, based on a deep pessimism that things will ever be any better in poor countries. That's not my strand. I hold out more hope for robust middle classes in India and China and Mexico, who can demand good environmental rules.

Recently, I loved reading about the modern Tata apartment design in Mumbia, India. Realistically or not, it generated a daydream about a million young people in Mumbia, wearing hip clothes, eating good (mostly vegetarian) food, living in tiny but fashionable apartments, flirting, watching cool shows and listening to cool music on small electronic devices, enjoying nightclubs, though being too poor to afford a car.

If that is the future we hope for Indian and Chinese youth, it would be just to try to envision something similar for our own children. I really am not sure our grandchildren will have a good world to live in, but if they do, it will probably look like that.

I like this vision in the long term. But that said, bringing about economic prosperity and vibrant democracy takes place on the timescale of decades, and it's possible to do a lot of environmental damage in a few decades. Indeed, some countries see some environmental degradation as central to developing their economies, and rich-country environmental regulations as a plot to stop them from doing just that. So there's still a need for innovative thinking and pragmatic solutions in the shorter term.

Comment on the "phosphate dilemma"

My comment on Parke Wilde's post at U.S. Food Policy on phosphate fertilizer production and its environmental impact.

Agree that the environmental footprint of phosphate mining is terrible, and the existing legacy in the U.S. is terrible whether or not current production is expanded (or even continued at current levels).

On the price side, phosphate fertilizer prices have fallen back to 2006 levels (see Figure 3):

http://cropwatch.unl.edu/archives/2009/crop7/fertilizer_prices.htm

Higher prices (past and future) will likely spur incremental supply coming from other parts of the world with lower cash costs of production and environmental restrictions (e.g. North Africa). Overall, the FAO predicts phosphate fertilizers will have surplus capacity by 2011/2012 (see first link and p15, 17 of second link):

http://www.fao.org/newsroom/en/news/2008/1000792/index.html
ftp://ftp.fao.org/agl/agll/docs/cwfto11.pdf

Unfortunately, the environmental problems from new mines will likely be similar, but receive even less attention than they would here in the U.S. Outsourcing our environmental footprint is obviously not a good solution at a planetary level.

Parke, I agree that using fewer environmental resources per person is critical; I think the key practical question here is how to incentivize that in the specific case of the global fertilizer market.

Parke:

Thanks, R, for the better data and the thoughtful comments. I've added another update to the original post, acknowledging the recent price data. Despite the embarrassment of encumbering the post with three updates (argh), perhaps the revised post shows off the efficiently collaborative nature of web-based writing.

Me:

That's the beauty of blogging - no shame in updating!