Policies of Scale: Efficient Global Policy

Our Agriculture and Energy Policies: A New Malthusian Catastrophe?

Thomas Malthus (1766-1834) is best known for his theory of population growth in which he postulates that population growth will be limited by food production, and that because the two grow at different rates, one is beholden to the other and will be limited by it. He writes:

“Population, when unchecked, increases in a geometrical ratio. Subsistence increases only in an arithmetical ratio. A slight acquaintance with numbers will show the immensity of the first power in comparison to the second.”

Essentially, population increases geometrically: 1, 2, 4, 8, 16, 32, and so on. Yet food production only grows arithmetically: 1, 2, 3, 4, 5, 6, and the like. The problem then becomes quite clear; food production cannot keep up with population, limiting its growth. And indeed, this theory helped explain limited population growth for the following 150 or so years until industrialization and the Green Revolution led to rapid increases in food production capability.

The problem with Malthus’ theory, easy to see now, is that it does not take technology into consideration. With technological advancement, mankind was able to make geometric food production gains to keep up with the increasing caloric needs of a growing population.

A new “Malthusian Catastrophe” may be on the horizon, however. The trouble won’t be inadequate food supplies in the same way it was in Malthus’ day, but rather an inability to produce and balance distribution of resources for two competing needs: food and energy.

This problem is global, and as one can imagine, some regions are better positioned to prevent a Malthusian Catastrophe than others. With cooperation and coordination, chances are few countries will face this situation. Yet each country faces its own specific challenges in ensuring that adequate food and energy are produced. In the following paragraphs, I will address issues relevant to the US, though be aware that a post like this could be written for every country.

The US is facing an increasing supply constraint of essential agricultural products like corn. Corn is a great example of understanding this resource war between food and energy, and is the most important crop as it represents 90% of US feed grain production. This country has placed a heavy emphasis on biofuel production, a major destination for corn, while many routine household food products contain significant amounts of corn-based products, increasing demand for corn in both sectors.

This demand has motivated many a farmer to convert land to corn production. While total land devoted to feed crops declined by 10% between 1963 and 2007, the amount of land dedicated to corn rose by 36%. This year’s draught exposed the conflict over competing usages of corn. Lower corn yields meant that a greater portion of production had to go to producing the mandated amounts of ethanol, leaving less available for food production, driving up food prices worldwide. When this year’s numbers come out, Neil Conklin, president of Farm Foundation, believes they will show that 40-50% of 2012’s corn production will have gone to energy, a new high.

This chart (page 44) shows mandated consumption of biofuels in the US from 2009 to 2022 and their composition, which means US farmers will have sufficient motivation to dedicate increasing amounts of their crops, corn and otherwise, to energy production; 40-50% will not be an unusual figure in the future given current corn acreage.

Energy demand in general will rise as well. Historically speaking, the better the economy is doing, the more energy we consume (although the rate of growth is declining significantly). As the goal of economic policy is prolonged growth, we must assume energy demand will also grow so long as the economy continues to expand. As we’re discussing agriculture here, we’re concerned about alternative energy sources. The Energy Information Agency produces annual projections. Notice that the most substantial growth comes in renewables:

Meanwhile, the US population remains the world’s fastest growing among industrialized nations, meaning the caloric needs of the country are not insignificant. Despite a rapid rise in obesity, however, average caloric intake has remained relatively stable since over the last 15-odd years, with 2008 consumption nearly the same as 1999 consumption. Still, even stable intake applied to a growing population means rising food production requirements. Worldwide, the Food and Agriculture Organization predicts that production must grow by 70% by 2050 in order to feed the world population that year.

Beyond the domestic market, agricultural exports are an important income stream for the US agriculture sector, and an important import for many countries. Agriculture is one of the positive areas of our trade balance, having logged seventy straight months of positive trade balance. For 2013, the USDA forecasts record export value on strong demand from Japan, Canada, and Europe, and rising commodity prices.

A key, then, to meeting agricultural demand is what it has been before: technology. If demand of corn and other agricultural products is rising across competing markets, production must rise in order to avoid a Malthusian-type catastrophe where population growth drags from malnutrition. Technological progress led to rapid population (and standards of living) growth before, and it can be leveraged again to ensure population and resource sustainability.

The productivity challenge we face is a very difficult one. There are two ways in which to increase production. The first is by extensive growth, or the increase in inputs. Extensive growth ramps up existing inputs for quick productivity gains, but it produces diminishing returns and is unable to meet geometrically scaling needs, to use Malthus’ terminology. The other way to increase production is through intensive growth, the expansion of scales of production. One way to measure intensive growth is with Total Factor Productivity (TFP), which accounts for output not caused by the traditional inputs of extensive growth (labor and capital). Essentially, TFP measures output attributable to technology.

The United States Department of Agriculture measures the total factor productivity (TFP) of American agriculture, and the numbers are not promising. This is especially concerning because TFP is what has historically driven long-term progress in agriculture. The pace of TFP improvements has slowed steadily and dramatically. Between 1970 and 1990, annual productivity growth in wheat, maize (corn), and rice was 2%. Between 1990 and 2007, it was 1.1%. Between 2007 and a projected 2014, it will decline to 0.8%.

TFP growth in industrialized countries has accounted for essentially all agricultural growth over the last 50 years worldwide, according to remarks by USDA’s Keith Fuglie at a Farm Foundation event on Wednesday. Lately, China, India, and especially Brazil have really ramped up their productivity while Sub-Saharan Africa is experiencing anemic growth. There has been a very positive productivity recovery in the former USSR states driven primarily by TFP. Within countries, even, there are large discrepancies between states or provinces. The Great Plains states, for example, are doing significantly better than other agricultural states.

TFP does not improve overnight; the lag time between investment and payoff is substantial. Significant growth in US spending on agricultural research and development and transportation and irrigation infrastructure in the 1970s and 1980s did not pay off until the 1990s and 2000s. Brazil began making significant investments in the 1970s and 1980s and are now the second largest agriculture player in the international market, but only relatively recently did they enter the realm of heavy global hitters.

Yet today, investment in the agriculture sector is declining in developed countries while it is increasing in developing countries according to Fuglie. Private R&D tends to follow public R&D when it comes to agriculture, as public R&D produces the basic science the private sector than uses to create advancements (think public funding for biotechnology in the 1990s). Fuglie emphasized that there is substantial evidence (see this and this for two examples) that links investment in research to long-term productivity growth and warned that stagnating investment in America has only begun to show its potential for reduced TFP growth. In general, countries that invest the most in terms of amount per agricultural worker do the best job of feeding their people.

So productivity growth is lagging, but our demands on it are multiplying in variety and rising in aggregate. This is a reincarnation of the Malthusian theory of population where eventually a tipping point is reached and populations can no longer support themselves. When approaching this point previously, technology was our way out. There is no reason technology cannot help this time, too.

There is an on-going debate about how to stimulate productivity growth. Is the solution more government R&D funding, is it fewer market—distorting policies like the ethanol mandate? The consensus in the National Press Club room on Wednesday where the Farm Foundation helped the OECD launch its Agriculture Policy: Monitoring and Evaluation 2012 report was more supply-side policies and decoupling of policy from production.

According to speakers from the Farm Foundation, OECD, USDA, and the World Bank, efforts need to focus on enabling efforts to support innovation and stimulate productivity, and should be approached from the supply side where less market-distortion occurs. I’m no agriculture expert, so I will refrain from attempting to make specific recommendations on how to improve agricultural productivity. I do encourage you to read the new OECD report which includes detailed analysis and recommendations.

The election means the farm bill awaiting passage in Congress likely will wait until after the election or even 2013, but now is a good time to start thinking about where we are going with our agriculture and energy policies. If the farm bill expires this year, we will revert to the 1949 bill. This would mean a return to bigger bonuses for some farmers and less, or none, for others, depending on products cultivated. The current bill expires at the end of September, but many of the kind of market changers from the 1949 bill will not go into effect until January 1, 2013. This is big, for the industry, the consumer (some are warning of $38 milk), and the economy at-large (the USDA says that one in twelve US jobs are linked to the farm). Meanwhile, both presidential candidates are stuck on the misleading and unhelpful concept of energy independence that lacks intelligent thinking about energy policy.

Malthus was an important voice in the development of economics and public policy during his life. Today many forget him because the theory he is best known for missed what for modern times became a very obvious fact of life. Yet the crossroads we face with our agricultural needs in feeding people and fueling their standards of living with energy means our ability thus far to stave off the Malthusian catastrophe needs to be revisited.

7 Responses to “Our Agriculture and Energy Policies: A New Malthusian Catastrophe?”

Milo JonesSeptember 21st, 2012 at 6:33 am

Two weeks ago I published an essay on this very question (see: Essentially, I asked the neo-Malthusians to answer a simple economic question: “Why won’t the price mechanism work?” Are you reading this post by the light of a whale oil lamp? If not, it is because the cure for high prices was high prices, which led substitution effects and innovation to produce solutions resource shortages. Please – explain why “This time is different” (otherwise known as the most dangerous phrase in all of economics).

Oh, and why didn’t you mention the Simon and Ehrlich bet, which was prompted by similar fears when the book The Population Bomb came out some 40 years ago…?

ThomasGrennesSeptember 21st, 2012 at 1:46 pm

Malthus' hypothesis that increases in real wages and income per capita would be limited by population growth was supported by worldwide data until the Industrial Revolution. Beginning with England, a set of countries began long-term economic growth that has only been interrupted by periodic recessions. Population growth in the currently rich countries remains low. and it is below the replacement rate in some countries. Recent experience for the affluent countries strongly contradicts Malthus. However, some countries have not yet had an Industrial Revolution, and their current per capita incomes are no higher than they were in 1750. The experience of these countries supports Malthus. On the subject of food, eliminating all subsidies to ethanol would be a small, but wise beginning.

Relative to Milo Jones point on the bet between Ehrlich and Julian Simon, there was a subsequent bet with the same outcome as the first one. The people who bet that natural resources would become more scarce lost again. New York Times columnist John Tierney and the wife of the late Julian Simon renewed the bet and won, as described in
"Economic Optimism: Yes, I'll Take That Bet", New York Times. December 27, 2010.

spiderSeptember 22nd, 2012 at 5:02 am

Not a single mention of habitat loss, or coral reefs disappearing, or collapse of fisheries, or global warming, or impending extinctions of megafauna. Just a lot of bullshit about what to do to keep population and economy growing.

If one read Simon's book one would know that the weakness in his arguments was his refusal to accept that the finite supply of land was a problem we would have to face sooner rather than later.

Ed Dolan EdDolanSeptember 22nd, 2012 at 6:58 pm

This post raises, but does not really address, some interesting economic issues. Several of them, as Milo Jones notes, concern prices. It would be interesting if Menenberg could address them in future posts:

1. What is the relationship between energy per dollar of GDP and energy prices? Menenberg says "As the goal of economic policy is prolonged growth, we must assume energy demand will also grow so long as the economy continues to expand." Why is that? Is it because energy demand is insensitive to prices, or because he predicts that prices will not rise?

2. Menenberg sees a competition for land between energy production and food production. Is there any economic basis for producing energy from food? How much net energy does corn-based ethanol contribute? I've heard claims that it is very little. Is the conflict between food and energy deeply rooted in economic reality, or is it artificially driven by inept policy?

3. Part of the rising world-wide demand for food is driven by substitution of meat for plant-based foods. How sensitive is that substitution to the relative price of meat and vegetable based foods? Is that even something that has been studied systematically? Could rising meat prices reverse the trend toward more meat consumption with rising incomes? In other words, what is the relative importance of price-elasticity and income-elasticity for meat?

The whole food-energy nexus is an interesting one, but this post barely scratches the surface.

Jim PivonkaSeptember 25th, 2012 at 11:39 am

Thumbs up. I have a caveat, though, with respect to the competition for land between energy and food production.

With respect to that part of the corn crop fed to ruminants (cattle), the "competition" between food production and energy production is a chimera. Energy production, here, does not compete with, it actually reduces the cost of useful nutritive components of corn available to cattle feeders.

The carbohydrate starch in corn is a waste product for cattle, and possibly unhealthy for them. The ruminant stomach contains organisms which digest cellulose. When the starch is stripped from the corn and used to produce energy, the useable nutritive components, cellulose and protein, are left behind as by product, once referred to as distillers grain. It is a superior component of cattle feed, and its price to feeders has dropped since its availability has been increased by ethanol production. There is no absolute competition between the use of corn for ethanol production and its use for cattle feed. The increase in land values, corn price, and land planted to corn vs. other crops is due to the new value placed on a former waste product – corn starch.

There are, in practice, limits on the use of ethanol production by product in lieu of corn in feeding cattle. One is transportation costs of the by product from distillery/refiner to the feedlot. Another is the relatively low value of the starch component, even with subsidized ethanol production – it's cheaper to throw it away in feeding it to cattle than to get it distilled into useful fuel. There are dietary issues as well; changes in feedlot practices and feedstocks are necessary when incorporating the nutrient rich by product into the feed stream.

The main competition here is the third mentioned by Ed Dolan. The substitution of meat for vegetative foods in the human diet. Price may be the solution. It may be as big a problem, and as hard to reduce, as our desire for transport fuel. We do seem to love our meat.

Ken ArlissSeptember 25th, 2012 at 3:17 pm

Some aspects seem to missing. An increasing number of people demand an increasing amount of housing and housing starts are an important measure of an economy's well being. The only place to build housing is on prime agricultural land, which is then lost for food production. This loss is a major gain for farmers who can make more money selling the farm than they could ever hope to make working it. This is especially true in Canada where the amount of agricultural land is limited and the climate limits both the growing season and what can be grown.

The US is expanding faster than any other country. They have enough education to use birth control but I have forgotten the politicians who have apoplexy at the thought of birth control and abortions. The only way to overcome the shortage of agricultural land is for people to live in city high rise apartments.

Do not forget we share the earth with other fauna who have just as much right to live as us