January 30, 2008 By: <a href="/about">Hamish Rickerby</a>

Intervention multiplies like lies

The Economist published a story called "The end of cheap food".

It has a couple of interesting quotes:

  • The Chinese consumer who ate 20kg (44lb) of meat in 1985 will scoff over 50kg of the stuff this year. That in turn pushes up demand for grain: it takes 8kg of grain to produce one of beef.
  • This year biofuels will take a third of America's (record) maize harvest. That affects food markets directly: fill up an SUV's fuel tank with ethanol and you have used enough maize to feed a person for a year.
  • Increasing productivity means you need fewer farmers, which steadily drives the least efficient off the land.
The first two are interesting for their "facts". The last is interesting because countries in the EU (as I have had it explained to me by British colleagues) will pay farmers to leave land fallow - ie, not grow crops or farm animals - this is in a drive to keep prices up in Europe - sort of a reverse subsidy. Local suppliers used to be encouraged to produce with subsidies, now foreign suppliers are discouraged (and this is particularly strange in my opinion because a country is giving away money offshore to not produce anything, whereas they could stimulate their own economy by spending the money internally - however this in turn will likely increase efficiency of farms, due to more funds available to farmers for RnD activity). What I find interesting (and surely obvious to all) is that increases in technology and production methods will yield greater productivity, increasing the supply, and thus, depressing the price even more. This will in turn require more intervention in terms of subsidies for supply in europe, and subsidies for lack of supply in other countries.

And of course, this all hurts the developing nations - they struggle to produce food in a manner that is as productive as the west due to lack of technology and advanced production methods.

The point I want to get across here is that subsidies aren't good for anyone when viewing the global economy. Subsidies at home encourage oversupply. Subsidies offshore (for lack of production) artificially raise global prices and is fighting a losing battle due to advancement of production methods and technology.

My view is that if you can't survive at a free market price, then you should seriously consider exiting that market and doing something else with your capital. Subsidies are not a long term solution. (Re)Investment is.