HISTORICAL TRENDS IN THE SCARCITY OF AGRICULTURAL PRODUCTS.

A large number of national markets for agricultural commodities are distorted by government policies, some severely so. But at a global level,market values are mainly determined by demand and supply. To be specific, long-term trends in real prices (which by definition have been corrected for inflation) reflect changes over time in the scarcity of food (see Box 4.2). Food supplies have gone up faster than demand in recent decades.
Consistent with this trend toward diminished scarcity, real prices have declined. In the United States, for example, the inflation-adjusted price of corn fell by three-fourths between 1950 and the middle 1980s and then remained low through the turn of the twenty-first century (Figure 4.3). Real prices for two other staples, rice and wheat, followed the same path. As can be seen in Figure 4.3, there have been exceptions at times to the general trend toward cheaper food.
The most important of these was a spike in cereal prices during the 1970s, which related mainly to events in the Soviet Union. Reluctant to cut food supplies to consumers in the face of poor grain harvests and the expanded feeding of livestock, communist Soviet Union added substantially to demand in international markets. At the same time, increased earnings from oil-exporting nations, which had benefited from a quadrupling of oil prices in 1973–74 as well as an additional tripling of prices at the end of the decade, were being deposited in international banks, which in turn made loans in Latin America and other parts of the developing world. Some of these loans were used to buy grain on international markets, thereby augmenting demand.
The food crisis of the 1970s brought home the lesson that food availability cannot be taken for granted, even in international markets in which supply interruptions in one part of the world are usually cancelled out by abundance somewhere else. Taken individually, none of the positive shifts in demand or negative changes in supply would have affected prices. But together, the combined demand-and-supply shocks were enough to affect market equilibrium dramatically, driving up grain prices by more than 100 percent in a little over a year.
Another lesson to draw from periods of unusually high prices, both during the 1970s and more recently, is that markets soon return to normal conditions. Just as prices can climb rapidly due to a ‘‘perfect storm’’ of unusually strong demand coupled with supply shortfalls, market values fall back quickly once unusual conditions end. After the 1970s, for example, grain values resumed their long-term downward slide (Figure 4.3).
The speed with which markets recover from shocks is not fully appreciated, in part because spiking prices receive a lot of coverage in the press and from public figures while the subsequent return to normalcy is all but ignored. Furthermore, warnings from the Club of Rome about imminent overpopulation and resource exhaustion amplified the distress aroused by the 1970s food crisis. In particular, the doubling of grain values seemed to confirm that mass starvation was just around the corner, as Ehrlich (1968) and others were contending.
In a sense, temporary abatement of the long-term trend toward cheaper food was fortuitous. As prices held steady, or even went up, incentives to adopt Green Revolution varieties of rice, wheat, and other crops were reinforced during the 1970s. This was true at the farm level, since individual producers were more receptive to new technologies when output values were high. It was also true for entire countries, which were more inclined to underwrite the research and extension needed to accelerate technological change if rising prices could be regarded as a signal of mounting food scarcity.

In contrast, technological improvement seems less urgent if farm products are cheap, as was the case for approximately two decades beginning in the middle 1980s (Figure 4.3). Support for agricultural research and development softened during this period, not coincidentally while real food prices were low.
Spurred for a while by high output prices and having the fundamental advantage of enhancing total factor productivity (TFP) in agriculture, the Green Revolution ultimately saved much of humankind from the cataclysm that many were forecasting in the late 1960s and early 1970s. As agriculture has intensified, increases in the supply of food consistently have exceeded those in demand, particularly in Asia. Per capita food supplies rose and, though little or no mention of it was made in the press, the long-term decline in commodity values that had stalled in the early 1970s resumed a decade later. As the century drew to a close, inflation-adjusted prices for the goods that nourish us had reached historical lows.
The easing of food scarcity that has taken place since 1950 is a remarkable achievement. Equally remarkable are the improvements in productivity that are primarily responsible for diminished scarcity, and which also have prevented farm profitability from declining (see box 4.3). Thanks to advances such as the adoption of hybrid corn in the United States and semidwarf crops in Asia and other parts of the developing world, it has been possible for agricultural TFP to multiply precisely as real commodity values declined by 50 percent or more.

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Box 4.2 
Trends in food scarcity during the late nineteenth and early twentieth centuries 
One of the first empirical studies of long-term trends in the scarcity value of products from agriculture and other resource-based sectors made use of a time series of prices and production costs in the United States from 1870 through 1957. The two economists who carried out this study noted that prices of farm products had fluctuated markedly. Going down when harvests were good and increasing when output fell short, market values also tended to fall during recessions and rise in wartime.
Having declined after the Second World War, market values in 1957 were little changed from levels 87 years earlier (Barnett and Morse, 1963, pp. 211–212). But while price trends indicated no major change in food scarcity, other evidence suggested that scarcity had diminished. For example, the labor and capital required to produce a unit of farm output went down, not up, from 1870 to 1957. Evidently, mechanization—the substitution of capital for labor—had coincided with a decline in production costs. The study’s two investigators also acknowledged the impacts of rising TFP—the difference between the value of crop and livestock output, on the one hand, and the costs of inputs other than labor, on the other (Chapter 3)—caused by the introduction of hybrid seeds and other innovations (Barnett and Morse, 1963, pp. 166–168 and 197–198).

Box 4.3 
Long-run equilibrium in agriculture

Productivity growth has eased the burden that falling prices otherwise would have created for farmers. In fact, the internal rate of return on the assets of commercial farmers has held remarkably steady, averaging 10 percent or so in the United States for many years (Hopkins and Morehart, 2002). This means that, in times past as well as today, $100 in productive capacity regularly has generated annual earnings of $10, year in and year out.
This level of profitability is about what one expects in a competitive market that, in addition to consistently aligning consumption with production, reaches what economists call long-run equilibrium. In this equilibrium, the internal rate of return is barely sufficient to maintain existing productive capacity without inducing any new investment (i.e., additions to capacity). A market is out of long-run equilibrium if returns are higher. However, this triggers investment, which augments supply and causes a price decline that in turn diminishes profitability. Conversely, below-normal profits result in disinvestment, which reduces supply and raises prices and profitability. Agriculture’s internal rate of return is compatible with the profitabilities of other sectors in which investments are comparably risky.
Staying in long-run equilibrium is more of a challenge than simply aligning consumption and output through price adjustments, as described in this chapter’s appendix. Since productive capacity is durable, economic decisions about replacing it, allowing it to depreciate, adding to it, and so on are based on expectations of market conditions in the future, which will affect the value of output that results from harnessing that capacity. If these expectations turn out to be erroneous, under- or overinvestment results. This causes profitability to vary, with the internal rate of return sometimes exceeding the level consistent with long-run equilibrium and other times falling below that level. The finding by Hopkins and Morehart (2002) that normal profitability has been sustained in U.S. agriculture is conclusive evidence of the capacity of competitive markets to adjust efficiently to major improvements in productivity that alleviate food scarcity.

By Douglas Southgate, Douglas H. Graham, and Luther Tweeten in the book "The World Food Economy", John Wiley & Sons,U.S.A., 2011,excerpts p.110-111. Adapted and illustrated to be posted by Leopoldo Costa.

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