Science is a process that involves the discovery and identification of verifiable facts about the physical and social world. Some of these facts are widely accepted over a relatively short period of time, while others take centuries or more.
By both examining the agricultural sector, including the production, marketing and consumption of agricultural products, we have identified what we believe to be a set of scientifically verifiable characteristics of food production, marketing and consumption.
At the population level, food consumers – all of us – consume roughly the same number of calories whether the prices are high or low. The food mix can change, but the total number of calories consumed remains very stable. This is called the low price elasticity of demand.
Having said that, we must recognize that some people are practically excluded from the food market and therefore do not provide a significant level of effective demand for agricultural products. The size of this group depends on the price level, the higher the price, the lower the effective demand of this group.
Globally, the number of people in this group is conservatively estimated at 800 million, although that number can easily exceed 1 billion. With an estimated world population of 7.9 billion, around one in eight people belong to this group.
When the price of agricultural products increases, so does the size of this group.
On the production side of crop agriculture, economists generally agree that agriculture suffers from low price elasticity of supply in response to low prices. In other sectors, when prices fall, companies reduce their level of production to maintain profitability.
When crop prices fall, farmers tend to keep all of their cultivated areas in production. Whether the acreage is owned or leased, there is little incentive for any given farmer to reduce the number of acres they plant.
Farmers can change their crop mix to favor a crop with a slight price advantage, but they avoid making decisions that drastically reduce total production enough to affect prices.
But let the prices rise and farmers will convert pastures and marginal acres to produce another bushel, bale, or quintal at the higher price. Once in production, it takes a long time for farmers to reduce those acres.
So how do you explain this counterintuitive behavior? First, the resources used in agricultural production have limited alternative uses, and if they are converted to an alternative use such as housing development, this resource cannot be returned to agricultural production.
Second, the fixed costs in agriculture are large relative to its variable costs and relative to the fixed costs of most other industries. Farmers use disposable income to pay for variable costs of production, but in times of reduced income, they may only cover part of the fixed costs, with the rest being delayed or refused.
Third, temperate zone farmers can only make their production decision once a year. In the northern hemisphere, if farmers delay their decision to plant in May because of the price, they cannot change their mind if prices rise in July. By comparison, an auto factory can idle for weeks and restart when demand at a remunerative price returns.
Fourth, most farmers provide a significant amount of the labor force required for their operations, and there is no benefit in idling. As a result, operators’ labor costs are often overlooked because a spouse has a job in town with income and medical insurance.
But not all of the challenges farmers face are on the farm. One is the position of farmers in the market.
The main products they have to buy – machinery, seeds, agricultural chemicals – are controlled by an increasingly limited number of companies. They have few places to turn for lower input prices.
And, when they go to sell their products, the number of buyers is also limited. As a result, they have minimum pricing power at both ends of the production and marketing system.
A good agricultural policy must be based on science and take into account these verifiable facts. Failure to take these characteristics into account when developing agricultural policy inevitably leads to ineffective policies, higher government costs, and increased economic pressure in agricultural areas.