Externality Driven Food – What Does it Mean for The Future of Agriculture?

Brian Buhr, Professor and Head

Applied EconomicsUniversity of Minnesota

In the 1990’s Agriculture Became “Consumer Driven”

Delivering a Particular Attribute in Demand by Consumers.

“Listening to What the Consumer Wants”

Example: Marinated Pork Loins

Consumers Gain Direct Benefit From Attribute

So, What is Externality Driven Agriculture?

Externality: Actions You Take That Affect Others.

Traditional Agricultural Externalities:

Fertilizer Run-off – Hypoxia in the Gulf

Row cropping – soil erosion Antibiotics in Livestock –

Potential Resistance Manure – Odor, Phosphorus,

Nitrogen

Externalities Can Also Be Positive!

Antibiotics – Reductions in Infectious Disease – herd immunity/complete suppression.

Fertilizer – Increased Productivity --> Greater Wildlife Habitat, Reduced reliance on highly erodable soils.

Manure – Less reliance on fossil fuels for fertilizer needs.

Sustainable/Organic Agriculture Is Offshoot from Externality Driven Agriculture.

Key Point:Potential ReductionOf True Externality

..But Is There Any Direct Benefit to Consumers?

2000’s externalities are beginning to include preference and ethical externalities.

Raising the issue of the business and organization of food production

• Size of Firms

• Business Organization

• Methods of Production

• Do these really directly affect consumer?

In Case You Think It’s Just “Factory Farms”

Obesity Caused by Corn? Why Does Corn Dominate Diet? Changed Corn From Real Food? What’s Wrong With Corn? Why

Avoid it? Cheap Food Is a Problem, Pay

More?

A Great Grey Area of Real, Perceived and Ethical Externalities: Which Is It?

A Ignored Externality: The Economic Externality – Cost of Food Example

Sow housing load = $3.1 billion (Buhr)Ban antibiotics load = $1.04 billion (Hayes et al.)COOL load = $179 million - $1.7 billion (Brester et al. and Lusk et al.)

Total policy load = $5.5 billion in pork from what amounts to PERCEIVED externalities with NO REAL SCIENTIFIC EXTERNALITY!

Food Cost Increases Imposed By Preferences or Ethics are Very Regressive On Poor

Food Expenditures By Income Category

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

$5,000 to$9,999

$10,000 to$14,999

$15,000 to$19,999

$20,000 to$29,999

$30,000 to$39,999

$40,000 to$49,999

$50,000 to$59,999

$70,000 andMore

Income Category

Fo

od

Ex

pe

nd

itu

re S

ha

re o

f A

fte

r T

ax

In

co

me

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Fo

od

Ex

pe

nd

itu

res

pe

r P

ers

on

Food Expenditure Share of After-Tax Income Food Expenditure Per Person

20% of HouseholdsSpend >20% of Budget on Food 50% of Households

Spend >14% of Budget on Food

Changing Food Composition: “Value Added”

Organic, etc.?

Key Implication: World Hunger and Food Prices

Attributed to Two Crises:

Food and Fuel Crisis (2006-2008)

Global Economic Crisis (2009)

“The State of Food Insecurity in the World, FAO 2009.

Countries buying land/water/resource base.

ftp://ftp.fao.org/docrep/fao/012/i0876e/i0876e.pdf

The Ethics of Efficiency: Egalitarian Food

All People Have Equal Access to Safe, Nutritious Food.

New Policies Driven by Small Vocal Minority and Appealing to Wealthy– Leveraging Retailers

‘Voluntary’ Food Price Increases are a Regressive Tax: 10% Increase Food Cost 3.5% tax on low

income 0.8% tax on high income

Hidden Tax – If you don’t support policy you pay for higher food costs anyway. Consumer Choice? E.g., WTP pST free (Buhr, JARE): 50-86% of respondents no

WTP.

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

wheatmaizerice

Average Annual Yield Growth Rate, by periodPeriod   Maize Wheat   Rice

1967-1996   2.15% 2.02%   2.00%1997-2006   1.24% 0.78%   0.85%

Global Average Yields Are Declining Increasing Pressures of Food Security and Costs

Source: Philip Pardey, U of M

Ag R&D Spending Rate is Declining – We’re Increasing Costs by Preferences and Reducing Potential to Grow Adequate Supplies

* Growth rates adjusted for productivity-based R&D over the 1976-2006 period are in parentheses.

1950

1951

1952

1953

1954

1955

1956

1957

1958

1959

1960

1961

1962

1963

1964

1965

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000millions of 2000 dollars

Public Ag R&D

Total Ag R&DPrivate Ag R&D

Public Ag R&D

Total Ag R&D

1.1

1.1

1.0

1.9 (1.4)

1.5 (1.0)

1.6 (1.1)

4.7

3.8

4.2

1951-1969 post-1970 post-1990Average Annual Real Growth (Percentage)

Source: Philip Pardey, U of M

A Need to Communicate Across the Left and Right Brain of Agriculture and Food

• Activists• Wealthy Cons.• Ag largely Absent

• Agriculture• Activists Largely

Absent• Consumers

Absent

• Agriculture• Poor

Consumers• Activists Absent

• Wealthy Cons.• Activists• Ag. Present on

needs

Ethics/Environ

ment

Science/Product

ion

Economics/

Efficiency

Preferences/Needs

What Does This Mean?

The new battle over food and hunger is not being waged on science/policy issues but rather ETHICS.The Agricultural Community is Not Effectively Engaging in This Discussion but Activists Are.Agricultural Community Typically Engages the Cost Efficiency and Science Arguments Which Are Often Self Serving.YOU must begin to clearly articulate the ETHICS of food production methods and if agriculture finds ethical conflicts it must articulate them and address them.

Get Busy, The Clock is Ticking!