How the "Tragedy of the Commons" Can Become Even More Tragic

The "tragedy of the commons" is an idea put forward by Garrett Hardin in the late 1960's (http://en.wikipedia.org/wiki/Tragedy_of_the_commons), describing how commonly held resources are supposed to be stripped to nothing when those who use them act solely on self-interest instead of in the common good. The notion is that a community resource will be over-used when individuals apply their private profit calculation to how much of it they will employ.

Political Food for Thought: Organic Food Takes a Hit

I am sure there are some true believers really hitting the ceiling today after the release of the meta-study published this month in the American Journal of Clinical Nutrition entitled "Nutritional Quality of Organic Foods: A Systematic Review".  This journal is certainly not "in the pocket" of major agri-business interest nor is the institute which conducted the analysis: The London School of Hygiene & Tropical Medicine.  

Here is the money quote: “On the basis of a systematic review of studies of satisfactory quality, there is no evidence of a difference in nutrient quality between organically and conventionally produced foodstuffs. The small differences in nutrient content detected are biologically plausible and mostly relate to differences in production methods.”

The New Wedge Between Crops and Livestock: Government Policy

In one sense, there has always been a certain conflict between crops and livestock since they tend to benefit from each other when the one is not doing so well at least price-wise.  When crop prices are low, at least temporarily, livestock producers gain profits through lower cost of production.  When crop prices skyrocket, livestock producers tend to struggle until a passthrough occurs or some adjustments take place.  In the past however, there were good reasons for the two major arms of U.S. Ag to talk about their symbiosis and protect each other's interests.  That's when the vast majority of U.S. produced corn, for instance, was destined to be livestock feed.  That dynamic is changing largely due to government policy changes. 

Less Supply for Languishing Demand

     As demand continues to languish, Smithfield plants in the midwest and Tyson slowed kills as a means to boost prices at the wholesale level.  The strategy appears to have worked as the LS500 (Carcass Composite) price picked up over $10/cwt in the last 10 days but live prices remained stuck in the mid to upper $50 range. 

     USDA reports year-to-date slaughter down a little over 4%, just shy of 2.6 million head.  The biggest problem remains the export markets where May results revealed exports down over 30% from a year ago.  Japan was perhaps the biggest disappointment since its demand had remained firm until the recent report where the month over month decline was just over 13% and the year over year decline over 15% in tons shipped.  China and Hong Kong are returning to 2006-2007 levels and were down dramatically since the purchase boom of last year.

Tastes and Preferences

     We usually think about demand in the two dimensional way that we are restricted to visualizing it in with a graph.  That is, the amount demanded is a function of price.  In actuality there are several other factors which determine demand that are embedded in those graphs but not visualized.  For instance, we know that the level of income influences demand as does the availability and price of substitutes and something called tastes and preferences.  For instance, if you hate carrots, lowering the price is not likely to induce more quantity demanded, though we might show the demand curve for carrots for a group (like people in the U.S.) as a function of the price.

Russian Roulette with Three or Four Chambers Loaded

     The pig production business has always had its ups and downs but developments over the last few years have resulted in the structuralization of increased levels of price and financial risk.  By structuralization, I mean that these factors are now regular, recurring added risks that are no longer random, isolated events which no risk management process can adequately predict or mitigate effectively.  The factors include the predicted and now realized reduction in the average level of the stocks-to-use ratios for corn and soybeans placing feed prices in a continuing, annual, heightened state of price risk volatility.  Bob Wisner, retired crop extension professor from Iowa State University told World Pork Expo attendees that we will end up the soybean year with as little as 2.2 weeks of the supply remaining.  The cold, rainy corn belt conditions which delayed the corn planting period in the U.S.

Increasing Intended Production

It's time to get intensive. By that I mean we need to focus on existing but overlooked means to extract more value from our production. One way to do that is to focus on our revenue stream and the process which generates it so we become just as celebrated in our knowledge of this as we are for knowing our cost of production. Once that happens, we will have the components which make up profits (revenue and cost) and some really big changes will start to happen. But since almost no production workers have full access to the revenue numbers of the farm, they are continually focused only on cost of production and production metrics. Because of that, we still operate in a fifteen year old notion/and the "irrational exuberance" that believes if production rises and/or costs fall, we will automatically make more profits. The key error in this thinking is that pounds and pigs are not measures of value, they are measures of physical output and weight.

I Never Forecast Price but...

When you consider price movements in hogs, there are at least three regular patterns of price movements that are happening simultaneously and their interaction sometimes gives us an unusual outcome.  The three patterns are the seaonal, cyclical and trend patterns in prices that work together to nudge prices around a fairly predictable grand cycle though levels of prices, rather than their patterns of rise and fall are of course harder to predict.  I generally believe there are too many variables with too much variance to adequately provide a price forecast beyond a few weeks.  Since we live in the age of random shocks, all it takes is something like the H1N1 situation on top of a global recession to make price forecasting the terrible task that it always is.  There is a saying that price forecasters should know that seems especially appropriate and that is..."If you must forecast, forecast often." 

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