CAN THE MARKET END THE FOOD SHORTAGE?

World Economy and the Hog Cycle

By Peter Muhlbauer

[This article published in the German-English cyber journal Telepolis, 5/17/2008 is translated from the German on the World Wide Web, www.heise.de/tp/r4/artikel/27/27934/1.html.]

According to neoclassical theory, increased demand leads to a higher price and becomes an incentive for more production. However only the first part of this model functions in reality as in the textbook.

Investments in the food branch are actually increasing – because financial investments were largely discredited by the banking crisis. Vast speculative money now flows [1] instead in soy, corn, rice, wheat and sugar. The prices of agricultural products (listed in the S & P Agricultural Index [2]) have risen around 45 percent within a year. With cocoa certificates, investors can realize price explosion of more than 43 percent in the year 2008 alone, 35 percent for wheat and 30 percent for rice. The possibility of a “bubble” exists because speculators orient themselves more and more in the actions of other speculators and are only marginally interested in demand.

Theoretically the message is that producers of products should invest more because higher prices beckon for their products. However this only happens very restrictedly. In the structured agricultural areas of the third world, agreements ensure higher prices with the many producers.

Specific prerequisites must be fulfilled for consumers and producers so they act “rationally” in the sense of neoclassical theory. Firstly, they must have a certain freedom of action. Their conduct may not be determined by immediate distress. The extreme case of un-free conduct is farmers forced to consume their livestock or their seed to avoid starving to death. Another frequent effect also falls in this category. Many third world farmers must do without fertilizing because the prices of oil [3], gas and fertilizers (largely produced out of these raw materials) [4] have soared even more than food prices. Therefore the next harvests in these countries will probably turn out lower than the present harvests. [5]

Secondly, one presupposition often faded out in price formation models massively affects behavior: information. When producers sense a higher price for their products, this does not mean they can expect higher prices in the future. In the last decades, many have experienced intensely falling prices for agricultural products through the dumping practices subsidized by the EU bureaucracies. These producers act cautiously before putting their capital (when possible) in long-term investments – in reclaiming new production surfaces through irrigation.

LINKS

(1) www.sueddeutsche.de/finanzen/artikel/878/174357/
(2) www.godmode-trader.de/front/index.php
(3) www.mrci.com/ohlc/ohlc-06.php
(4) www.br-online.de/bayerisches-fernsehen/unser-land/landwirtschaft-landwirtschaft-heute-duengemittel-preis-ID1205489946315.xml
(5) www.sueddeutsche.de/wirtschaft/artikel/881/172373/
Telepolis Artikel-URL: www.heise.de/tp/r4/artikel/27/27934/1.html