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Apr 23, 2014
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Economic Sense

RSS By: Matt Bogard, AgWeb.com

Matt's primary interest is in the biotech industry and ag policy.

I, Chicken?

Jul 19, 2013

"I was really shocked when I bought my first ever whole chicken tonight. Five bucks? For a whole chicken? KFC charges five bucks for one breast and one wing. How can a farmer breed, hatch, raise, feed, house, butcher, package, and ship a chicken for five bucks? Blows my mind."

 
This was a very insightful observation made by a friend of mine. The subject of economics in a lot of ways is just a collection of stories consisting of observations and insights like this. This particular insight speaks directly to the concepts of comparative advantage from Ricardo and specialization and trade from Adam Smith- read more about these economists at the Library of Economics and Liberty.
 
Because of the principle of comparative advantage,  you choose to buy the chicken from the retailer at $5 as opposed to raising it yourself or even sourcing it locally at a much greater cost in terms of money, time, and perhaps the environment.  Because of the principle of comparative advantage we often don’t raise most of our own food or make our own cars or many of our own clothes or even source most of these things locally either. The concept of comparative advantage and the associated gains from specialization and trade lead to an increase in the size of the ‘economic pie’ which can be used to make everyone better off. 
 
 
Getting a chicken at your local retailer for $5 is also a testament to the market’s ability to solve the the fundamental problem of economics, the knowledge problem. This is a problem that exists because the necessary information for allocating scarce resources does not exist in concentrated or integrated form, but is incomplete and dispersed among individuals. Through markets, prices bring all of this incomplete and dispersed information together in a coordinated manner, producing a ‘spontaneous order’ as described by economist F.A. Hayek.

 We get $5 chicken because a spontaneous order comprised of specialized farmers, feed and nutrition specialists, veterinarians, pharmaceutical companies, breeders, packers, processors, supply chain managers, and retailers all cooperate to bring healthy, sustainable, and affordable food to your table. Modern food supply chains, made possible by companies such as Cargill, ADM, and retailers like Wal-Mart, have not only allowed us to get foods cheaper than we can produce ourselves or source locally, but may have also helped to reduce our impact on the environment.  
 

Another way to think about the knowledge problem and the concept of a spontaneous order in relation to $5 chickens is to admit that no single person really knows how to make a chicken any more than a pencil, as illustrated so perfectly by Leonard E. Read in his famous essay ‘I, Pencil.’ Milton Friedman does a good job summarizing the essay in 2 minutes in the following You-Tube video: 

 

 
 
It is also important to recognize that $5 chicken owes a great debt to entrepreneurial driven technological change and economic growth, and this is truly mind blowing. As economist Robert Lucas said "once you start thinking about growth it's hard to think about anything else."
 
Think, "I’Chicken."


 

 

Should the Polluter Pay? The Coase Theorem and Cross Pollination

Jun 26, 2013

Since the recent finding of biotech wheat there has been a lot of discussion about the cross pollination of biotech and non-biotech varieties and the impacts. Some think we need a drastic regulatory overhaul. This reminded me of a post I did some time ago about biotech alfalfa. There is a lot we can learn about how markets can work to solve many of the concerns that anti-gmo advocates have with biotechnology. For the sake of this discussion, lets view biotech cross pollination of non-biotech crops as an 'externality.' (despite the evidence that the risks are slight take for instance biotech alfalfa.) An externality in the most simple terms is an unintended consequence that nobody is compensated for. 

Traditionally when it comes to environmental externalities, the general philosophy was that 'the polluter pays'. A factory polluting the air or water should pay for the damages that are caused. In a much simpler case, if you build a house next to me and you don't like the smell of livestock waste coming from my property, the traditional philosophy would hold that you could have the government stop my operation. (or in the case of biotechnology, the grower or biotech company pays for damges of cross pollination, or is prevented from growing such crops)

The economist Ronald Coase brought additional insight to this issue. 

1) yes it is true that my operation is harming you via air pollution. (odor)
2) however, in stopping me via government or legal intervention (or taxing my waste production) you are harming me.

 

The reciprocal nature of the ‘harms’ is probably the most profound insight we get from Coase. Who is harming who, and who is doing the most harm? Who’s responsible for dealing with it? How should the costs be shared?  This kind of information is very difficult for regulators or voters to grasp, because in economic terms, interpersonal comparisons of utility are not possible. We are all different with differing wants, needs, desires, tastes, preferences, goals etc. Determining the optimal level of pollution or ‘harm’ is one formulation of what economists refer to as the ‘knowledge problem’ which can only be solved by ‘local knowledge’ held by individuals, not bureaucrats or even voters.

Coase says that the issue is that no one owns the air that surrounds my livestock operation and your home. There then follows a dispute over how the air should be used- to absorb livestock odor, or to provide a scent free atmosphere in your back yard. Whenever the cost of one's behavior is not factored into a price by which a choice can be valued, I can harm you without compensating you for it. ( i.e. an externality exists) or in other words, if we don’t bear the full cost of our behavior, we might harm others without intention.

One way to ensure that we bear the full costs of our behavior is through well-defined property rights. If I own rights to the air, then I can choose to pollute the air, but you can bargain with me to pay me to pollute less.  If you own rights to the air, then you can prevent me from polluting it, or I can bargain with you about managing my pollution.  Regardless of who ‘owns’ the air, individuals can bargain to work out a solution that works for both parties and damages can be awarded if one person harms another.


The assignment of property rights and the potential for bargaining results in behavior that is changed or altered to account for the negative impact our choices have on others. This is the essence of what is known as the Coase Theorem. The bargaining process between individuals utilizes the local knowledge, preferences, and circumstances related to each individual in a way that voting or government regulation cannot.

How might this apply in the context of biotech cross pollination with non-biotech and organic crops?  Some favor a regulatory approach, limiting planting options for biotech producers. This is contrary to the Coase Theorem and  fails to allow for the bargaining that takes advantage of local knowledge to solve the knowledge problem.

The agriculture industry offers some of the greatest examples of how technological advances and market forces lead to self-correcting or internalization of externalities.  The adoption of biotechnology has led to reduced groundwater pollution, increased biodiversity, and reduced greenhouse gas emissions. All of which has occurred in absence of  and in spite of  taxes and government regulations. Of course, that takes the power and prestige away from regulators, and empowers property owners and market forces. In any case, what the Coase Theorem tells us is that there is no case for arbitrarily giving one party a regulatory trump card. The principle of ‘polluter pays’ is not always optimal nor does it take full advantage of all of the information available to solve society’s complicated problems related to the environment.


References:

Matt Bogard. 2012. "An Introduction to Game Theory: Applications in Environmental Economics and Public Choice with Mathematical Appendix"  http://works.bepress.com/matt_bogard/22

The Problem of Social Cost. R. H. Coase. Journal of Law and Economics, Vol. 3 (Oct., 1960), pp. 1-44

Towards a Theory of Property Rights.
Harold Demsetz .The American Economic Review. Volume 57, Issue 2. May, 1967

The Economics of Welfare
Arthur C. Pigou Macmillan and Co. London, Fourth edition, 1932. First published: 1920.

Modern Sustainable Agriculture.  Matt Bogard https://www.youtube.com/watch?v=D4ZL7w9q9Jc

Modern Sustainable Agriculture- Annotated Bibliography. Matt Bogard. http://ageconomist.blogspot.com/2011/02/modern-sustainable-agriculture.html

 

Big Ag Meets Big Data: Part 2

May 06, 2013

By Matt Bogard

I just came back from the SAS Global Forum conference where 'big data' was an ongoing theme, which reminded me I needed to post the second installment of my Big Ag and Big Data series. Previously I discussed the role of social media in producing ‘big data’ and tools that may be used to get the most from this data in the ag industry. In this second installment I’m going to discuss other sources of ‘big data.’

I recall once about 10 years ago attending a UK College of Agriculture field day in Princeton Ky, and someone made the comment that went something like this

"these events are good because on the farm we don’t have time to set up experiments, collect data, and analyze to figure out best practices. We can’t stop and measure and record and report about everything we do."
 
It’s certainly true that extension services will continue to conduct valuable research and it will probably remain a fact that producers aren’t going to necessarily have the time and resources to reduce their operation to a collection of well-crafted scientific experiments. However, every decision made on the farm is a trial of sorts, and with modern technology it is much easier to collect and log data about your operation, and some companies are now figuring out ways to take this farm level data and turn it into powerful analytical tools that can boost productivity and efficiency. In a recent article ‘Building Big Data: Farming Big Data Goes To The Cows’ the following statement is made:
 
 "The major problem we keep on seeing — especially in bigger, modern farms — is that there's a lot of data being created and not being used, on how they're performing, what they're doing."
How is this data being generated? Lots if it is generated via your equipment including GPS:
 
"Next generation farm equipment like combines and tillers are going to be able to take soil samples as they move along, perform analysis on those samples, and feed the results of the analysis back to the manufacturer for crunching on a macro scale. This will result in a better understanding of what is happening in that entire area and make it possible to adjust things like the amount or types of fertilizer and chemicals that should be applied. If the farm equipment manufacturers figure out how to harness all this information, this kind of big-picture analysis could change the commodity trading markets forever." – from 4 Examples of Big Data Trends. Spetember 27,2012. VmwareBlogs.
 
 And how might we use this data?  Well some seed companies are already combining farm level data, public data, and their own proprietary data to develop some pretty powerful analytical tools. As discussed recently in an AgWeb technology article Steyer seeds offers a great example with its ACRES tool which is based on a complex form of decision tree:
 

"After they sign up, customers start by selecting their fields from Google Earth maps. Back-end programming then pulls up a wealth of information – everything from soil type to yield potential. As farmers enter in additional information about their farm, such as crop rotation, traits used, etc., the ACRES algorithm spits out recommendations, which users can accept or tweak as needed." AgWeb - Unlock Your Farm Data

Another company, Climate Corporation is also taking advantage of massive amounts of data useful in agricultural applications:
 
"We took 60 years of crop yield data, and 14 terabytes of information on soil types, every two square miles for the United States, from the Department of Agriculture," says David Friedberg, chief executive of the Climate Corporation, …We match that with the weather information for one million points the government scans with Doppler radar — this huge national infrastructure for storm warnings — and make predictions for the effect on corn, soybeans and winter wheat." –New York Times
 
We’ve seen lots of efficiency, environmental, and productivity gains in agriculture related to GPS/GIS and biotechnology.  But with every trip across the field more and more data is being generated. Combining these technologies with ‘big data’ definitely will have its benefits, if not continue to revolutionize the industry.  
 
References and Further Reading:

Climate Corp. Updates Crop Insurance via High Tech. BloombergBusinessWeek. By Ashlee Vance on March 22, 2012.  http://www.businessweek.com/articles/2012-03-22/climate-corp-dot-updates-crop-insurance-via-high-tech
 
Big Data Goes to the Cows
 
Big Data in the Dirt (and the Cloud) October 11,2011. NYT. Quentin Hardy.
 
4 Examples of Big Data Trends. Spetember 27,2012. Vmware|Blogs.
 
Data analysis, biotech are key in agriculture's future sustainability
By Sarah Gonzalez
© Copyright Agri-Pulse Communications, Inc.
 
Unlock Your Farm Data
February 15, 2013
By: Ben Potter, Farm Journal Technology Editor

 

 

Consumers have a right to know!

Apr 05, 2013

By Matt Bogard

My recent discussion about labeling biotech foods may have led some to believe that I'm against informing the consumer about what's in their food. I'm not. Let's pose a hypothetical. Let's label biotech foods on the premise (supported by evidence or not) that recombinant DNA technology presents uncertainty about food safety.

What kind of label then should we put on conventional foods? Most research indicates that non-biotech foods pose nearly identical if not other more certain risks. In fact biotech ('GMO' if you must) crops actually reduce some of these risks. What about exposure to chemical weed killers? Roundup Ready biotech crops have lead to a substitution away from much more toxic and environmentally persistent chemistries toward much safer options. Biotech corn with the Bt trait actually reduces the ear mold toxin fumonisin which is known to be carcinogenic and related to throat cancer. The Bt trait in general has greatly reduced or eliminated the use of many very toxic chemical pesticides.

Researchers in the journal of Ecological Economics have found that "Bt cotton has reduced pesticide applications by 50%, with the largest reductions of 70% occurring in the most toxic types of chemicals." And that " Bt cotton now helps to avoid several million cases of pesticide poisoning in India every year."

In the journal Nature Biotechnology, Henry Miller and Gregory Conko go so far as to say that companies that purposefully exclude biotech ingredients could be liable for increasing consumers exposure to these types of risks.

This is a case where government interventions that require labeling could actually do more harm than good. Labels help consumers concerned about fat and sodium make healthy choices, however sensational 'GMO' labels could be misguiding and lead consumers  to actually make choices that are either worse for them, the health of producers, or the environment.

Consumers certainly have a right to know about what's in their food. They also have a right to not be misguided by the improper application of food labels. Our farmers and educators are in the best position to inform consumers about the very specific and complicated processes and technologies involved in food production as opposed to some blunt uninformative term on a label that could easily be manipulated for political ends or sensationalized by media.

References:

Comparison of Fumonisin Concentrations in Kernels of Transgenic Bt Maize Hybrids and Nontransgenic Hybrids. Munkvold, G.P. et al . Plant Disease 83, 130-138 1999.

Indirect Reduction of Ear Molds and Associated Mycotoxins in Bacillus thuringiensis Corn Under Controlled and Open Field Conditions: Utility and Limitations. Dowd, J. Economic Entomology. 93 1669-1679 2000.

"Why Spurning Biotech Food Has Become a Liability.'' Miller, Henry I, Conko, Gregory, & Drew L. Kershe. Nature Biotechnology Volume 24 Number 9 September 2006.

Genetically Engineered Crops: Has Adoption Reduced Pesticide Use? Agricultural Outlook ERS/USDA Aug 2000

Will including the words ‘Genetically Modified’ on food labels really serve to inform the public?

Mar 29, 2013

By Matt Bogard

 

The Role of Information Asymmetry

 

Whenever one party has better information about their product or service than the buying public, information asymmetries may exist.  Proponents of proposition 37 claimed that their initiative was to reduce information asymmetry and improve the functioning of markets, as stated in this recent Forbes article:

 

"Free markets only work when there is transparency and people are able to make decisions based on information, which does not exist in the case of GMOs. If Prop 37 is enacted, and, armed with this information, a significant enough number of consumers decide not to buy these products, the onus will be on the companies to conduct more research and produce better data."

 

Will including the words ‘Genetically Modified’  on food labels really serve to inform the public or create more confusion? This form of labeling won’t do any thing to decrease information asymmetry in and of itself. The actual language in the law may in fact make it worse. This is made clear on page 10 of a report by  Northbridge Environmental  Management Consultants (The Genetically Engineered Foods Mandatory Labeling Initiative Overview of Anticipated Impacts and Estimated Costs to Consumers):

 

"The Genetically Engineered Foods Mandatory Labeling Initiative (A.G. File No. 11-0099 – hereinafter the Initiative) would have a substantial impact on California consumers. The Initiative would change how many of the foods they eat are produced and would make that food more expensive. At the same time, however, the Initiative would provide relative little by way of consistent and useful information to consumers because of the loopholes and exceptions in its language and the uneven ways in which it would apply to the same food consumed in different settings. "

 

 If informing consumers were the primary goal, then there are much more effectivet ways to do so, perhaps in the ingredients listing following industry standards (instead of using ‘genetically modified' if a product contains GMO corn, list instead ‘rCORN’, an idea I reluctantly entertain here) If it alarms otherwise apathetic consumers, are they really going to invest the time researching the safety of biotech foods  to close the information gap or are they going to turn to the unqualified opinions of celebrities and activits?  I would bet that the special interests are counting on consumers weighing heavily the opinions of celebrities and conspiracy theorists, and therefore letting the information asymmetries associated with biotech direct them to their own products.  In this way, Prop 37 is specially designed by special interests to take advantage of information asymmetries and exploit the fears of the public in an effort to drive market share or punish companies that they have philosophical or political issues with.

 

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