The economics of food: There is no such thing as a fair market

The film is well made, just 18 minutes, and is worthwhile to watch. I think they have done a great job and I am very much in favour of localized food system as my regular readers will know. I also have much respect for Helena Norberg-Hodge as well as for the makers of the film.

The film makes the case that we need to look into the economics of the food system to understand the food system and why people eat what they do. I am totally in agreement, I have even written a book of 400 pages (Global Eating Disorder) with that as the main message.

I still want to offer a friendly critique, or an expansion, of how the film analyses the drivers in the economics of the food system.

The film introduces the concept of comparative advantage* as a major driver of the economics of food. Governments supposedly use that principle to orient their agriculture production towards exports, which, in turn leads to the globalised food market.

I agree to some extent, but I believe competition in general is the main factor at play and not the theoretical concept of comparative advantage*. Trade policies of countries can, perhaps, to some extent be based on ideas of comparative advantages, even though that concept is mostly localized in economic textbooks rather than in real world policies.

Farms, farming and food systems agents are, however, not shaped by comparative advantages at all, but by competition and competitive advantages, which is something quite different. We can also clearly see that also countries which have not had any active export orientation for their farm sector follow more or less the same trajectory in their food markets. The difference is not between exports or imports but between countries that have an open market, or a more regulated one. In an open market (i.e. there are no tariffs, quotas or other major obstacles to cross-border trade) the world market price will rule and farmers are essentially competing with all other farmers in the world even if they sell only locally or regionally.

In the film, the main culprits are governments that have used “our taxes” to in various ways subsidizing and supporting the big companies (the other culprits) and monoculture farms. For sure, that has taken place and is taking place in many countries. But, even in a totally “free and fair” market, the consolidation of farms (and other actors in the food chain) in bigger units, specialization and mechanization will result in that bigger farms have a considerable competitive advantage over small diverse farms. In a similar way, on the retail side, huge retailers can easily outcompete local shops by economies of scale. And these huge retailers will buy from large farms (more often from large traders that dominate commodity markets) and food industries. As a matter of fact this applies to the whole economy and can be observed in all countries with a market economy, regardless of politics.

This can easily be observed in most countries. While governments often interfere a lot in staple crops or other strategic crops, some sectors of the food chain is mostly little regulated. For example, fruits and vegetables are very little regulated in the EU-market and even if the subsidy system also includes these crops, the importance of the subsidies on the production is almost none (as turnover per hectare is very high and subsidies are mainly paid per hectare). The same kind of consolidation is taking place in this sector as in any other agriculture sector. The biggest tomato producer in Sweden has 60 percent of the Swedish production. Some 60 percent of the carrots in the US are produced by just two companies.

A hundred years ago, Sweden had 400,000 farms, almost all of which had dairy cows. Now we have 2,500 dairy farms left. These process of consolidation worked already when Sweden had a rather closed and regulated milk market, because it is a result of competition and technological change** as such. It took on a higher speed when Sweden joined the EU in the early 1990s, as competition grew. Also in the industrial stage, the concentration has been brutal and there are very few dairy processing units left, and most of them are specialised in a narrow range of products. All this happened despite the fact that the dairy sector is controlled by farmers’ cooperatives. Even the cooperatives themselves consolidated and grew fewer and bigger. Earlier, there were hundreds of them, now there are 2,5 left (one has sold the processing to Lactalis) of which the biggest one, Arla, merged with the biggest Danish cooperative and is one of the top ten dairy companies in the world (the third biggest dairy company in the world, Dairy Farmers of America, is also cooperative).

To reduce this basic tendency of a market economy to the malevolence of governments and multinational is missing the real driver and risk, as in this film, to recommend solutions which are not addressing the root cause of the problem. The film does make a call for redirecting government efforts into the support of small scale, diverse farms and local food webs. I couldn’t agree more. I would still argue that it is even more important to change the underlying market forces that drives farmers into competition with other farmers.

Some believe that markets where independent farmers can sell their stuff to consumers represent an ideal; that it is by the interference by governments or big corporations that free markets become corrupt. This is the also impression you get from the film. But free markets are never fair, powers are never equal, capital will be accumulated by some and not by others. The forces of competition are by themselves as much a problem as government rules and big corporations’ monopolist tendencies. Essentially, we need to decommodify food, unmarket food, converting the food system from transactions to relations. And even if there are markets in a conventional sense, they need to be localized, regulated and shielded from competition in various ways – which they were, historically.

The film also make the case that the external costs of the food system is so high, that in a fair market, organic, regenerative or agroecological food would be as cheap or cheaper than conventional foods. I agree. The external costs of the agri-food system are estimated to be to at least the same as the value of the total output. There are, however, many weaknesses in the concept of “true cost accounting”, if you actually would implement it in the market place. It is quite a dubious concept both from a pure scientific angle (very difficult and subjective to measure) and from a moral and political angle (including even more of nature into the market by the means of monetary valuation). So, it is all good to point to these huge external costs as an argument against industrial agriculture, but it is not desirable to include it in the market prices. If anything, such accounting, like all other certifications, will just add a disproportional burden on small scale farmers.

I hope Jake, Maren and Helena are not offended by this friendly expansion of the arguments of the film.

Go ahead watch the film, it is good!

* Comparative advantage states that greater gains from trade arise when each participant devotes a larger share of its labor and other productive resources to the activities with the lowest opportunity cost and obtains other goods and services through trade. Comparative advantage differs from absolute advantage, which concerns being more productive overall, and competitive advantage, which concerns outperforming rivals in a marketplace (Wikipedia).

** Competition and technological change are twins and drive each other, Technological innovation makes some production cheaper or better, which forces other producers to keep up. Competition as such forces farmers to adopt new technologies to survive. This is the agriculture technological treadmill, in a nutshell.