Food production versus the invisible hand

25 Jan 2019

 Aerial

The “invisible hand” is the unobservable market force that helps the demand and supply of goods in a free market to reach equilibrium automatically. The phrase “invisible hand” was introduced by Adam Smith in his book The Wealth of Nations, published on 9 March 1776, during the Scottish Enlightenment and the Scottish Agricultural Revolution, and had its genesis in those social and economic transformations. We are going through a similar transformation, driven by technology, artificial intelligence and robotics, a well as by worker shortages in some areas and the increasing impacts of climate change.

Adam Smith’s idea was that the market forces would sort out the supply of goods and services.  When it comes to supply of food, arguably, this concept has not worked well for a number of years.  Largely, food pricing is determined by supply and demand.  When an equilibrium is reached, economists will advise that the perfect market prices has been reached.  But nature, and now climate change, have significant parts to play on the supply side of the equation.  Around Christmas in New Zealand, for example, there was a media report of a supermarket running out of some fresh vegetables.  The problem was the then prevalent weather conditions were not conducive to growing vegetables, and the supply was not supplemented by imports. 

Adam Smith’s concept also relies on a free market where there are no undue anti-competitive influences.  Anyone with disproportionate power in the supply chain can influence prices and change the supply dynamics.  Because of competition law, farmers cannot collectively work out what to grow and when, not only to maximise their returns, but also to provide the food people need when they need it.  Even in the United States, the home of competition and the world’s largest market, the US Government advises farmers what food crops to plant.  There have been recent complaints in the US that the Government got it wrong (largely because of climatic factors) and this has cost farmers a significant loss in income.  In New Zealand, as one of the smallest markets in the world and in all likelihood too small a market for pure competition law to operate, there is no such government guidance. 

Another US example is corn.  It uses more land than any other US crop, some 39.3 million hectares, which is an area about the size of California.  Corn uses large quantities of water and fertiliser.  US Government subsidies between 1995 and 2010 totalled US$90 billion and the crop insurance scheme in 2020 paid out US$20 billion due to drought.  Today’s corn crop is mainly used for biofuels (roughly 40 percent of US corn is used for ethanol) and as animal feed (roughly 36 percent of US  corn; plus distillers’ grains left over from ethanol production are fed to cattle, pigs and chickens). Much of the rest is exported.  Only a tiny fraction of the national corn crop is directly used for food for Americans, much of that for high-fructose corn syrup.  It is a very large monoculture that is subject to both climatic, biosecurity and economic impacts.  Farmers keep growing corn because of the money they earn.  The pure competitive forces have been disrupted by the subsidies but even without these subsidies, corn would be a cropping choice for many US farmers.

As the world population grows and climate change makes it more difficult to grow our food where we once did, the day of relying on market forces to determine what is grown, when, and where may well be over.  The invisible hand will need to become very visible so that we can feed ourselves sustainably protecting the environment for the future.

- Mike Chapman, CEO