Crops, speculation and starvation

Farmers are having a hard time in Europe. Production (“yield”) is falling due to drought:

  1. In this video [in Dutch], an organic farmer near Amsterdam discusses the low yields of crops in drought-hardened clay soil. (We are in his CSA.)
  2. Meanwhile, English farmers complain that householders are not being told to use less water. The farmers think that hosepipe (outdoor-watering) bans would “free” water for suffering crops. Sadly, I think the water companies oppose the hosepipe ban because they earn far more from selling water to households. Farmers would pay them little or nothing in the current system (raise prices! water markets!) so food security is getting short shrift.

I could easily find many more examples from around the world, since various chaoses (droughts, floods) are disrupting agriculture everywhere.

The traditional hedge against food insecurity is storage (“after 7 years of fat, come 7 years of lean”), but markets are more efficient for storage if they can replace local losses at a reasonable price.

The criterion of “local losses” vs “market supply” is usually easy to meet, as global agricultural production is, by definition, far greater than any local production, but it weakens if/when many crops are failing in many places and/or politicians “protect” their citizens by banning exports that could help other citizens. As of June 2022, 34 countries were doing this.

The criterion of “reasonable price” brings me to the title of this post, i.e., to the role of speculators in markets.

In general, market traders and speculators help markets by smoothing spikes in supply and demand. They buy when prices are low and sell when prices are high; they arbitrage between markets where prices are not well matched (usually due to legal or logistical barriers); they bet on future scarcity… and thereby reduce it.

But some speculators go farther, pursuing profits in ways that can destabilize markets:

We spoke to experts, whistleblowers and industry veterans, who expressed concerns that current levels of speculation may be driving and exacerbating price increases. Experts also helped to identify how structural weaknesses have remained unaddressed since the 2007-2008 food crisis, and how attempts by regulators to curb excessive speculation since then have withered in the face of determined industry lobbying.

In the past, I have dismissed these types of claims, since speculators — who often trade “paper” commodities without any intention of taking physical possession of the underlying good — do not represent “final” (in-the-mouth) demand. I assumed that a speculator buying @ $50 per unit would have to sell @ $30 per unit if that price represented physical demand, but my “equilibrium” thinking was wrong. Here’s why.

If the speculator buys at $50, then there’s less supply for other buyers. If that supply is greater than remaining demand, then prices will fall in equilibrium (when everything is lined up and matched); if supply is lower, then prices will rise in equilibrium.

But what about “before equilibrium”? At that point, buyers are not sure of where prices will end up. They are not sure of supply (more drought? more trade restrictions?), and demand can rise if others are buying due to panic, new crop failures and/or greater risk aversion (i.e., buying to store), so it’s easily possible that prices can keep rising.

Few buyers will be able to hold out for lower (hoped for) equilibrium prices when there’s a risk of (a) higher prices and/or (b) falling short in meeting known future needs.* So those buyers will jump in “early” and “high” to avoid the chance of a future disaster.

In these cases, the speculators can make a killing.

tl;dr: If speculators “mop up” supply by purchasing at low prices at the start of a crisis, then they can resell for profit before they are forced to take delivery (the “chicken game” in game theory). If buyers are afraid of losing out to faster buyers (a “prisoners dilemma” in game theory), then some will  buy quickly, at “spectator prices,” to avoid the risks of even higher prices  — or no food at all.

Market note: Unlike the case with a non-perishable commodity like silver whose supply and demand is not time sensitive (remember the Hunt Brothers), food is perishable (hence the haste and angst over Ukrainian crops) and overall demand (“hunger”) is easier to predict, so the speculators can forecast demand, supply and shortfalls.

None of these “squeeze the hungry” trades are ethical, but they are legal. Although it might be tempting to regulate them, such actions can easily backfire (law of unintended consequences) or fail (food is traded in global markets without a single regulator).

What if some traders denounce speculation, as a means of helping the poor? That won’t help as long as others don’t care — or care more about their poor  (another prisoners dilemma) — so that’s no solution.

My one-handed conclusion is that fragile food markets and volatile prices** mean that many people will spend more on food while others go hungry or starve.

H/T to PB

* Governor Gray Davis signed long-term contracts in the middle of California’s 2000 energy crisis, locking the state into  high prices for a decade or more.

** Don’t mix up cause and effect here! Far too much food is used as biofuel and animal feed. Excess emphasis on industrial agriculture increases crop-risk-failure. Climate chaos is disrupting all farms. This “speculators-will-fuck-you” post wouldn’t exist without those three causes increasing risk!

Interesting stuff

  1. Read: An increasingly popular retirement plan is figuring civilization will collapse before you have to worry about it or (for a brighter side?) listen to Why the end of civilisation might just be the beginning of a better one
  2. Read: The Age of Algorithmic Anxiety
  3. Read: Atmospheric levels of PFAS (a chemical byproduct) now exceed the EPA’s maximum health standards. PFAS are now, like carbon, a global public bad that will affect everyone, everywhere. Since PFAS include 4,700 chemicals that are used everywhere in everything it will be hard to reduce or regulate their use, but it’s possible, since it means going back to pre-1960 manufacturing methods (e.g., “no plastic”). Is it probable? Not in my opinion. What’s the likely future then? Maybe mass sterility. #theProblemSolvesIteself :-\
  4. Read: Lessons for improving public health with good urban design (e.g., ventilation in and between buildings) have been forgotten in an attempt to squeeze more people in less space. That’s probably a false economy when one considers the resulting spread of diseases. Related: Using AI to re-imagine streets, mostly by replacing cars with people-friendly spaces. Also related: An experiment adding trees to squares [in Dutch] that are normally without dropped temperatures by 5-6C (e.g., from 28 to 23C). Start planting!
  5. Read: “Social” media is straining and killing our sense of social reciprocity. It’s better to talk with friends instead of “liking” their posts.
  6. Listen: How McCarthy led to Trump (via Roy Cohn’s advice to “lie aggressively).
  7. Watch: Why Many Cities Suck (But Dutch Cities Don’t)
  8. Watch: Gas stoves are worse then you think — and the industry is even more evil than I imagined…. <sigh>
  9. Watch: How North America fucks up transit (and land use)

H/T to PB

It ain’t easy doing the right thing

… when that costs you something.

So anytime that someone claims it’s easy, or a win-win, then I’d suggest replying with: “No, it’s not easy, but I’ll do it because it’s the right thing to do.”

That’s why humans everywhere are familiar with some version of the Golden Rule: Do unto others as you would have them do unto you.

Ignorance of this reality, whether it’s willful or hopeful, is counter-productive. Some people do look out for others, of course, but those others are often family, friends or people with whom we have an ongoing (reputational) relationship. Those others are not strangers, people on the other side of the planet, or those not yet born, which is relevant to most discussions of local and global commons.

This post may seem obvious to most of you, but maybe not so obvious is how its lesson explains war, theft, violence, bad behavior and even just laziness.

In all these cases, you’ve got people taking benefits for themselves and leaving costs to others, e.g.,

  • Stealing.
  • Violence.
  • Rape and war.
  • Littering.
  • Cheating.
  • …and any other activity with negative externalities (everything from eating meat or fish to emitting carbon or excess consumption).

How can we steer people away from their default desire to have something for nothing? Moral education is a good start, but many people lack such intrinsic motivations. That leaves extrinsic motivations such as rules, regulations, taxes and social stigma.

My one-handed conclusion is that humans who cannot be “civilized” need to be “caged” in some way, for the good of the community.

Interesting stuff

  1. It’s hot, so people are (temporarily) thinking about climate chaos: Read about heat waves and the accuracy of climate models. Also read about the problem with air conditioning (as opposed to being poor and/or building for the local climate).
  2. Listen: What So Many People Get Wrong About The Energy Transition
  3. Listen: This podcast on Putin (there are many many people working on “understanding Putin,” so he’s getting the same treatment of his hero, Stalin) offers a sad but insightful analysis of his personality: A lonely guy who was recruited by the mafia before he started working for the KGB. A man who never personally experienced Soviet failures (Chernobyl, Afghanistan, the economy), and thus incorrectly blames for Soviet collapse on outsiders, when it collapsed from within. A man who’s death cannot come soon enough. Listen to it.
  4. Read: Amsterdam’s mayor on the “right” kind of tourists
  5. Read: How Tokyo allows small innovations in a sprawling metropolis
  6. Read: When the Dutch ran into an American billionaire
  7. Read: Taking back roads from cars
  8. Longread: How to confront the growing threat to American democracy. Related: How US gun sellers turned male angst about their masculinity into sales (and mass murders) and how social media DOES undermine democracy (“people are more willing to commit violence when they are immersed in a community they perceive to be morally homogeneous”)
  9. Read: Why houses are so expensive (interesting that 20 years inflation in the US is 72% but 22% in NL)
  10. Listen: Good discussion of the origin and dynamics of conspiracy theories

H/Ts to CD, DL, ED and PB

New paper: Teaching water economics

I’d love to get your thoughts/feedback on this paper, which distills around 15 years of my teaching experiences — successful and not — into advice:

Abstract: Economic theories and tools provide only partial insight into the many complexities affecting various uses and flows of water. To usefully teach water economics, it is therefore necessary to understand and cooperate with other disciplines. Many economic concepts can be used to understand different facets of water (mis)management, but these concepts are often pushed far away from their basic (classroom or textbook) models. Institutions, history and culture play a big role in understanding those deviations and how to address them. Water economics courses can use case studies to organize these complexities and uncover useful results.

Addendum: Interested in the fight between cars and citizens for streets? Read taking back roads from cars (via CD).