Why Low Food Prices Hurt the Economy and the Poor

dollar menuFood in America is ridiculously cheap. According to this 2014 article in CA: A Cancer Journal for Clinicians, entitled Obesity and Economic Environments, “Americans are spending a smaller share of their income (or corresponding amount of effort) on food than any other society in history or anywhere else in the world, yet get more for it.

American politicians would argue that low food prices help the poor and the economy; the poor now rarely go hungry and the economy is boosted through higher sales and exports. At least that’s the theory, but it is an extremely short-sighted one. The May 16th cover article of The Economist, entitled: “The great distortion,” explains how mortgage subsidies (e.g. allowing borrowers to deduct mortgage interest from their taxes), though a tempting way to spur home sales, actually hurt the economy by exacerbating financial crises and ironically, also disproportionately hurt the very group of people they are supposed to help: the poor. This article might as well have been talking about American agriculture subsidies and the low taxes on energy (for industrial food production) because the very same economic principles apply.

Cheap Oil

Oil fuels the transport and processing of foods. Though not technically a subsidized commodity, oil in America is taxed so little that it’s virtually the same thing. That’s because oil’s price doesn’t cover the cost of externalities, or negative spill-over effects of one’s consumption on other people. This fundamental economic concept means that, if I’m polluting your air with the oil I’m buying, then my cost for that oil should include the cost to clean up your air or to cover your medical bills.

When energy is cheap, people are motivated to transport food longer distances and process it more heavily with machinery. This, combined with low raw material prices (food additives, which are also produced cheaply thanks to cheap oil)  leads to the upside-down market pricing we see today, where a couple of organic, unprocessed local potatoes at the farmer’s market ($0.75-$1.50) can sometimes cost more than a serving of fully prepared, packed and heavily marketed McDonald’s french fries ($1.00), which come from potatoes usually grown thousands of miles away and made with 18 other ingredients. Though the economies of scale achieved by McDonald’s massive size play a role, American energy and oil subsidies play a much bigger role.

Subsidized Corn Hurts the Economy

Corn is subsidized by US taxpayers to the tune of ~$20 billion per year. Other crops, like soy, are also subsidized, but for simplicity’s sake I’m focusing only on corn. The subsidies come in a few different forms, one of which is price loss coverage (PLC). If the price of corn drops below a threshold, the government steps in and makes up the difference with payments to farmers.

These subsidies encourage farmers to produce more corn than the market would naturally demand. Greater supply pushes prices down further.  The food industry then can capitalize on this cheap corn, as they have done. Food processors now use corn as an input to nearly everything: animal feed, sweeteners, fillers, food colorings, texturizers, flavorizers and a shockingly vast number of other uses, which Michael Pollan describes in The Omnivore’s Dilemma. The large-scale food processors are the main beneficiaries of these subsidies.

Our food industry’s over-dependence on these two commodities (or three commodities, if you want to also lump in soy) puts the economy at risk, just as your 401K would be at greater risk if the majority of your retirement money were invested in a just 2 or 3 company’s stocks, two of which are in the same industry. The price of corn, oil and therefore most of our foods can fluctuate wildly based on 1) natural events, like droughts or disease outbreaks, 2) Wall Street speculators, who trade corn futures in the same way that they trade oil and gold – often due to hyper-sensitivity to market events, and 3) based on the actions of OPEC, the oil cartel. As you can see from this chart, the price of corn has seen a 400% fluctuation over the past 10 years, with a low of $2 per bushel to a high of $8 per bushel in late 2012.  No doubt this contributed to the doubling of the price of milk in the 5 year period starting January 2010, since corn is the major component in feed for factory farm cows (which, btw, is not tolerated by their bodies very well and makes their milk much more susceptible to pathogens so that it can’t be consumed raw – but that is not the subject of this post).

Is volatility in food and its raw material inputs such a bad thing? This paper points to several research studies that show that oil price volatility “has several damaging and destabilizing macro-economic impacts that will present a fundamental barrier to future sustainable economic growth if left unchecked.” In other words, when companies notice that a raw material’s price fluctuates wildly, they not only buy less of it at a time, but they end up buying less overall. That hurts the economy in the long run.

How Low Food and Fuel Prices Hurt the Poor

In light of these two subsidies, it’s totally understandable why people cook less than ever before. There’s little economic motivation. It’s often a better financial decision to work another hour or two, even at a minimum wage job, and outsource shopping, prep, cooking and cleanup to the fast food restaurants. In other words, for those who are scraping to make ends meet, cooking could be out of reach.

This really is a shame. Michael Pollan devotes an entire chapter in Cooked, A Natural History of Transformation, to answering the question, “Why cook?” especially when it’s not necessarily always the best financial decision. Some of his answers:

  • Industrial cooking has taken a substantial toll on our health and well-being…the decline in home cooking closely tracks the rise in obesity and all the chronic diseases linked to diet.
  • The rise of fast food and the decline in home cooking have also undermined the institution of the shared meal, by encouraging us to eat different things and to eat them on the run and often alone…the shared meal…is a foundation of family life, the place where our children learn the art of conversation and acquire the habits of civilization: sharing, listening, taking turns, navigating differences, arguying without offending.
  • The idea that food has any connection to nature or human work or imagination is hard to credit when it arrives in a neat package, fully formed. Food becomes just another commodity. An abstraction. And as soon as that happens, we become easy prey for corporations selling synthetic versions of the real thing – what I call edible foodlike substances. We end up trying to nourish ourselves on images.

It probably doesn’t need to be pointed out that low food prices also correlate with obesity. The above-referenced article on Obesity and Economic Environments concludes that, “The obesity epidemic has been fueled by historically low food prices relative to income…There appears to be reasonable evidence that weight outcomes are responsive to food and beverage prices.” Since the poor are consuming more of the available cheap food per household than others, they bear the majority of the health burden.

What If Subsidies were Eliminated and Energy and Food Prices Went Up?

This is a very hard concept to swallow, I know, because on the surface it would appear that rolling back subsidies would disproportionately hurt the poor. But let’s step back and try to take a longer-term view. Of course it’s hard to predict what all of the consequences would be, but I believe that humans are incredibly adaptable. I am willing to bet that we would observe some of the following positive changes:

  • More people would go into farming, seeing that they might be able to earn a better living than farmers of today. Perhaps this very important profession would become respectable again.
  • Truly sustainable farming practices – those which primarily harness the sun’s energy and output more calories of energy than they taken in with fossil fuels – would have economic advantages over fossil-fuel-intensive industrial practices, like those that need constant fertilizer and pesticide inputs. These new practices might induce a broader move toward rotational agriculture and away from highly input-intensive single-crop farms (monocultures).
  • Many of the poor who live in rural areas or so-called “food deserts” that are on or adjacent to now-valuable farmland would see a boost in their home and land values as well as better-paying food-related job opportunities. They would also have access to healthier and cheaper foods, since they are closer to where the foods would be produced (especially if the nearby farms moved to rotational methods and more product diversity).
  • More people would grow food-producing plants in their yards, compost food scraps and devote less of their precious real-estate to lawns and swimming pools.
  • Instead of lemonade stands, neighborhood kids might sell backyard fruits and veggies.
  • Fewer acres of potential farmland would be replaced by golf courses, resorts, office complexes and track housing developments.
  • Big cities might provide financial incentives for farms to operate closer in to cities. We might see more Agriculture Reserves, like the one in Montgomery County, MD near Poolesville.
  • The rules prohibiting backyard hens in most residential neighborhoods would loosen.
  • There would be more pressure than ever on companies to offer employees the option to telecommute. Telecommuters could then incorporate meal prep into their day (e.g. get that pot roast into the oven at lunch break).
  • Cooking, hunting and fishing would become popular again and parents might consider these just as important life skills to teach their children as ballet and soccer. Reconnecting with these deep-rooted instincts of humans might just increase people’s happiness and health (and we would hopefully also solve the deer and rabbit overpopulation problem in neighborhoods like mine!).
  • Higher food transportation costs would reduce the variety of foods available in each city/town, which isn’t necessarily a bad thing: more variety means more eating. I think we greatly overstate the importance of variety in our diets. The founder of the National Dental Association, Dr. Weston A. Price, showed that the healthiest populations in the world in the 1930s actually had the least variety in their diets compared to their urban brethren.*
  • Less processed food combined with individuals being more hands-on in managing their own nutrition should result in a significant reduction in healthcare costs, freeing up more government funding for nutrition assistance for the needy (SNAP). The elimination of the tens of billions of dollars that go to farm subsidies could also be re-allocated to SNAP.

Industry Leaders and Governments Have it Wrong

Milan, Italy recently hosted the 2015 Food Expo. Food thought leaders from around the world gathered to showcase technologies that offer, “a concrete answer to a vital need: being able to guarantee healthy, safe and sufficient food for everyone, while respecting the Planet and its equilibrium.

One of the scrolling messages at the show is that “the gap between supply and demand is mainly caused by increasing food consumption, climate variability, expansion of agro-energy production,  and financial speculation.” Interestingly, they neglected the elephant in the room, which is  market manipulation by governments. Yes, I’m talking about the subsidies I mentioned above, which lead to suppression of prices.

I find it especially comical that the US pavilion showed crops growing on the side of a building, further promoting the idea that land is far better used for construction projects than for agriculture, which should just be an afterthought. I’m sorry, but gardening on the side of a building is not the answer.

 

Footnote:

* Dr. Weston A. Price studied the diets and health of various isolated (non-westernized) populations on every continent in the 1930s. Few of the groups  he studied had much variety in their diets. For instance, the Australian Aboriginees lived on lands that were in perpetual drought, so they had virtually no plants in their diet. The natives of Alaska (Eskimos) faced a similar lack of edible vegetation. Nevertheless, each of these isolated populations had dramatic lower rates of degenerative diseases (heart disease, cancer, diabetes, dental caries, etc) compared to the industrialized populations living very close to each of them. In several cases, Dr. Price observed the deterioration of their health starting just one generation after increasing the variety of their diets with the addition of refined flour, sugar and dairy.