The Price of Sustainability, Part 1 – Food

After a quarter-century of embracing and benefiting from supply-side economics, Western society caved into the vanity of extremist and converted to the cult of sustainability.  In just a few short, tumultuous years, our economic and cultural landscapes have shifted from opportunity and plenty to scarcity and doom.  Commodity prices have exploded as the “balance” of supply and demand idolized in sustainability worship for the sake of resource protection created public panic and financial windfalls for the “old money” cartels tired of losing ground to the creativity economy of the 21st century.

In a way, it all started with food.  At least that is what we can deduce in part from realities now visible in financial analysis (per Karen Richardson and Wall Street Journal Online):

As global food shortages threaten to ignite social and economic instability from Nigeria to India, the popular aversion to genetically modified foods is turning into more of a luxury for the wealthy than a practical option for the masses.

This trend is evident in the share price and earnings growth of Monsanto, the world leader in agricultural biotechnology by market share. Its stock has soared 22% this year, trading at a breathless 37 times estimated 2008 per-share earnings. On Wednesday, the company is expected to report a third-quarter profit of $1.39 a share, up 35% from a year earlier.

The global food “crisis” was created in part because of the rise of demand for organic crops perpetuated by the sustainability movement.  Acres that could have been dedicated to high-yield agriculture were transferred to lower-producing organic operations, given the recognized market premium for the product.

A few years ago, perhaps just last year, the move made sense.  Food costs had become a relatively small share of overall household spending for industrialized nations, and creating a premium with respect to the perceived (and for the most part, actual) quality of organics was an easy way to increase profits.

It does not look like, however, that the policy collective, those businesses who chose to change their systems or the public change agents who encouraged the actions on “collective good” principles, carefully considered the externalities of their decision with respect to food or other actions linked to sustainability.  Price explosions in the energy market, another sphere of economic influence heavily impacted by the sustainability movement and ill-prepared to handle growing demand in developing countries, cut into the “discretionary” incomes of many who could have afforded earlier to buy premium foods.  The ethanol mandate reduced food crop yields further, constraining supply in a manner that not only increased base food prices, but also made scarcity of availability for some parts of the world a distressing reality.

Luckily, it does appear that market forces are starting to correct the situation, somewhat.  Increasing food yields, a movement that created the comfortable production levels that existed prior to negative impacts created by sustainability-influenced policy, has regained importance on the world stage.  At the same time, reductions in demand for premium goods, as evident in losses by their focused retailers (see below, same WSJ article) will refocus supply efforts in a direction that will return stability to wholesale and consumer prices.

It stands in stark contrast to Whole Foods Market, the supermarket for all things organic. It is a price taker that can’t easily pass higher costs to its customers. From 2001 to the end of 2006, the company’s earnings grew an average annual rate of 25%. In 2007, earnings were down more than 10%, and they’re falling further.

Engineered food is clearly getting an upper hand.

Not all is right, of course.  Balancing supply and demand and eliminating surpluses has made the overall food market more susceptible to its biggest enemy: weather.  Midwest floods and their impact on grain production will only worsen the current situation before it gets better.  At the same time, unless the U.S. reverses its course on the ethanol mandate, an artificial demand not involving food will exacerbate corn prices and availability.

This case study, and the immediate nature of change in climate from comfortable surplus to scarcity and hyperinflation due to policies and actions encouraged by the sustainability movement.  Hopefully, corrections can be made with similar speed in order to ensure the stability of one of our most important commodities.

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