Tag: Agriculture

I’m Sinking in the Quicksand of my Thoughts

The winter 2016 issue of Resources Magazine is out, featuring some germane pieces for my courses on the “real” costs and benefits of federal regulations, and the Impacts of Biofuel Mandates on Food Prices and the Emissions.

The first piece is an interview with Richard Morgenstern on his news study where he retrospectively evaluates the costs and benefits of regulations.  Clearly, Morgenstern has been interested in this area for some time, having published “On the Accuracy of Regulatory Cost Estimates” in the Journal of Policy Analysis  and Management back in 2000, a stalwart in the ECON 444 course.   One of the main takeaways is that this exercise is something that is not regularly done and is surprisingly hard to complete.  The forthcoming study Morgenstern talks about evaluates nine policies.

The second piece, as the title suggests, tries to isolate the impact of biofuel mandates on food prices.  The US Environmental Protection Agency has a Renewable Fuel Standard (RFS) that requires a certain portion of vehicle fuel to contain “renewable” sources.   In practice, this generally means corn ethanol, and as a result the demand for corn is much higher than it would otherwise be (more than 40 percent of US corn is used to produce ethanol).

This is chock full of partial-equilibrium analysis.  The increase in the demand for corn should lead to a movement along the supply curve, and a simultaneous decrease in the supply of other substitutes in production.   Meanwhile, as world income has gone up and many in developing countries are eating diets more dependent on animal protein.   This further increases the demand for cereals for animal feed (for reasons I will let you infer).

Ujjayant Chakravorty has developed a global land use model that isolates the effect of the RFS on food prices and emissions.  Here are the key findings:

[I]f there were no biofuel mandates, food prices would increase—by about 15 percent in 2022 compared to the base year 2007.  When we superimpose the US and EU biofuel mandates, world food prices go up by 32 percent.

Our results highlight the impact of increased meat and dairy consumption on the projected growth of food prices. Put another way, if diets were kept constant, food prices would actually fall over time without energy regulation. Then, with the biofuel mandates, they would rise by only 7 percent in year 2022.

Ironically, the RFS doesn’t do much for global carbon emissions.  Follow this logic:

An important conclusion from our analysis is that under no scenario do we get a major reduction in global carbon emissions. Under the RFS, US emissions fall by about 1 percent; however, that leads to a lowering of global crude oil prices and an increase in oil consumption overseas. Moreover, because of all the new land being farmed, the RFS also causes an increase in carbon emissions. Aggregate global carbon emissions (from both direct burning of fuels and land use changes) increase from 13.4 billion tons of carbon dioxide equivalent to 17.8 billion tons in 2022.

Emphasis mine in both cases.

As a colleague of mine used to say, if you want to grow fuel, grow fuel.  Don’t grow corn and turn it into fuel.

If the topic interests you, check out the symposium on agriculture in the Winter 2014 Journal of Economic Perspectives.

GMOs, Blood, Sperm, Human Milk…. not necessarily in that order

Here are two upcoming talks that are certainly of interest:

What you need to know about GMOs

Tuesday, April 7 in Warch Campus Cinema.  7 p.m.

Explore the benefits and drawbacks of GMOs in a panel discussion led by Professors Beth De Stasio and Dave Hall. They will cover the facts and myths of GMOs and how they affect human health and the environment.

For a recent economics survey article on GMOs, see Geoffrey Barrows, Steven Sexton, and David Zilberman. 2014. “Agricultural Biotechnology: The Promise and Prospects of Genetically Modified Crops.” Journal of Economic Perspectives, 28(1): 99-120.

 

For Sale: Markets in Eggs, Sperm and Human Milk in Modern America  

Kara Swanson, Associate Professor, Northeastern University School of Law.Thomas Steitz Hall of Science 102 – Lecture Hall.  4:30 p.m.

Here is a recent interview with Professor Swanson in The Atlantic Monthly.  For a recent economics survey article on blood, see Robert Slonim, Carmen Wang, and Ellen Garbarino. 2014. “The Market for Blood.” Journal of Economic Perspectives, 28(2): 177-96.

The Informant is Back

Once again this year, the Economics Department proudly presents The Informant Tuesday, January 29 at 9 p.m. in the Warch Campus Center Cinema.  

The movie “comically” recreates the character of Archer Daniels Midlands (ADM) employee, Mark Whitacre, the principal informant in the notorious lysine price fixing scandal.  Lysine is an essential amino acid used to fatten up hogs and broilers. If you mix it in with corn, you don’t have to spring for the relatively more expensive soymeal, or so I’m told.

Well, I’ll let deRoos (2006) characterize the market for us:

Lysine is an essential amino acid for the lean muscle development of hogs and poultry. Being a chemical compound, lysine is as close as we get to a homogeneous product. Farmers can obtain the required nutrients either through the use of soybeanmeal, or through the combination of corn and lysine… Industry experts suggest that there are no substantial costs involved in switching between these two nutrient sources. The shadow price of the alternative feed source (henceforth the “ceiling price”) can be approximated by a weighted average of corn and soybean meal prices. In the demand estimation results below, we will characterise demand as being relatively inelastic… Firms face capacity constraints. There is a great deal of heterogeneity in firm capacities, locations, and costs.

Through 1990 the market lysine market was dominated by three firms with prices (as you can see) somewhere north of $1 / lb.  However, in 1991 ADM opened a massive production facility in Decatur, Illinois, doubling world capacity and pushing the price below $1 toward its (probable) marginal cost of $0.66 / lb.

Whitacre subsequently orchestrated a coordinated effort to fix prices among the four dominant producers (a CR4 of 95-97%), though there is some dispute as to what exactly happened. Nonetheless, price fixing is a per se violation of federal antitrust laws, so ADM was in pretty serious hot water as soon as Whitacre turned informant.

On the other hand, Whitacre was absolutely crazy himself. And the movie does a good job portraying the frustration and insanity of everyone involved in the situation as the events unfolded. It seems the best defense for ADM was to simply let Whitacre unravel and leave the prosecutors to deal with him.

Meanwhile, the economics of the case spawned a rather, well, let’s call it a rather spirited debate in the academic literature over the length of the conspiracy and the damages done.  These are well documented in the sources below, particularly John Connor and Lawrence White, who trade body blows over the appropriate theoretical model, the appropriate choice of the conspiracy period, and the proverbial “but for” price (that is, the price that would have prevailed “but for” the conspiracy).

A truly remarkable episode all around.

Pop some corn and mix in three parts lysine. We’ll see you there.

 

For further reading:

John M .Connor (1997) “The Global Lysine Price-Fixing Conspiracy of 1992-1995,” Review of Agricultural Economics, 19 (Fall/Winter), 412-427.

Nicholas deRoos (2006) “Examining models of collusion: The market for lysine,” International Journal of Industrial Organization, 24(6): 1083-1107

Lawrence White (2001) “Lysine and Price Fixing: How Long? How SevereReview of Industrial Organization,18 (1):23-31

 

Senior Experience Reading Option

As you know, or should know, departments must now offer a Senior Experience to fortify those of you who will be heading from this world into the next one.   Here in economics, we actually provide you with two options.  One is to augment a research paper,* and the other is to participate in a reading and discussion seminar — the Reading Option.

Suggested Cover

For this year’s Reading Option, we will be taking on The Nature of the Farm: Contracts, Risk, and Organization in Agriculture by Doug Allen and Dean Lueck.  Allen & Lueck — students of the great Yoram Barzel — lay out a transaction cost theory of farm organization, and then test this theory using mounds and mounds of data on farm contracts that they obtained from far and wide. Of central interest to Allen & Lueck is why, despite massive technological change, family ownership remains the dominant ownership form for planting and harvesting crops in America.  Yes, you read that right.

We are going to learn a lot about North American agriculture.

Our group will meet Tuesdays 2:30-4:20 or thereabouts.  Students should plan to read and think hard about one or two chapters per week, and will be responsible for writing a book review or some other short, crisp essay related to the course material.  If you are interested in sitting in without taking on the entire “Experience,” you should see me.  Sophomore and Junior majors are certainly welcome.

Co-author Doug Allen will be on campus Thursday, February 14 to discuss his work and help you with your own, so mark that on your calendar.  He will also give a public lecture as part of the Economics Colloquium.

Those of you taking the course can check out the course Moodle here.

For our first meeting on Tuesday, January 8, you should read the first two chapters, make sure to tackle the “economics vocabulary,” and be prepared to respond to the Fun Facts and Questions for Discussion.

Here is a selection of the vocabulary for our first meeting:

  • Stylized fact
  • Vertical integration, vertical coordination (see p. 184 if you need an example)
  • Principal-Agent Model (Agency Model)
  • Shirking
  • Moral hazard
  • Risk aversion, risk neutrality
  • Residual claimant
  • Endogeneity

If you don’t know what these mean, you might try asking someone.  If that doesn’t work, Google is your friend, as they say. I find the New Palgrave Dictionary of Economics to be an excellent resource (available to on-campus IP addresses).

See you in January.

 

*See Professor Finkler for details.