Food prices, speculators and marginal cost

Here’s a link to a rather lengthy article blaming high food costs on speculators and investors in industrial agriculture.  It discusses many of the problems currently facing agricutlure and the human suffering caused by high food prices around the world.

I don’t want to defend either group but here is an alternative theory that  high food prices can be explained by the economic principal that prices are equal to the marginal cost of producing the last item.

This principal can be illustrated with two examples – oil and telecommunications.

As the demand for oil has increased and the easily accesible oil has been extracted oil producers have sought out more difficult deposits. – and the price has gone up. If the price had not gone up or if governments had legislated  a top price,  producers would not extract the more expensive oil.  Therefore the cost of oil is equal to the cost of the last unit extracted.  The result has been windfall profits for all those producers who still have supplies of cheaper oil.

The opposite has happened in telecommunications.  As capacity has increased and costs have fallen the cost of making one more phone call is nearly zero.  In this case we have all benefited.

Agriculture is probably more like oil. As demand has increased farmers are using less productive land and more expensive inputs and costs are going up. As the marginal cost of the the last unit produced goes up so do all the prices and once again their are windfall profits.for somebody.

Food supply and pricing is complex – some people claim there is no shortage of food in the world. and it is hard to believe otherwise when one visits a supermarket or farmers market in British Columbia   But then we can afford to pay the cost of bringing food in from other places which many people on this planet cannot.

Agriculture is of course complicated by subsidies which distort prices and interfere with efficient operation of the market and this may be a big source of problems.

Now back to the article,

I suspect the authors of this article are using speculators and investors in industrial agriculture as scapegoats.  Generally it is easier to identify symptoms than it is problems and it is more satisfying to seek out scapegoats than solutions.

Speculators take the risk. of price movements.  When prices are going up there are fewer risks although generally prices go up and down even if there is a strong trend.   If they weren’t in the market then somebody else would take the risk and make the profits or losses

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