Regulating demand is no easy task

by Robbin Johnson
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The government may regulate food demand in more subtle ways in the future.

The U.S. agricultural community has long understood that government — through laws enacted by Congress or rules promulgated by the Executive branch — may influence food demand in important ways. This has been most evident over the past decade. First, congressional mandates for corn-based ethanol drove fuel use of corn from negligible levels to 40% of the crop in 2012. More recently, the Environmental Protection Agency has been dampening down the mandates for second-generation biofuels. The two regulatory moves together have amplified the roller-coaster ride of commodity prices over the past decade.

Governments, however, may regulate demand in more subtle ways as well. Several of these will bear watching in coming years.

One obvious public lever on demand is international agreements. For example, the rapprochement the Obama administration has orchestrated with Cuba could stimulate demand for grains and oilseeds, if the Cuban economy shakes off its communist fetters and opens to market forces. The Trans Pacific Partnership (T.P.P.) the administration is trying to negotiate as part of its “pivot to Asia” holds even greater promise.

Both of these arrangements stimulate food demand in two ways. The first is the more obvious but often the less important of the two. It operates by removing barriers to trade. Some of them may have blocked imports generally. Others simply may have favored other regions over the United States. The reduction or removal of such barriers phases out trade diversion; that is, their reduction or removal takes away discrimination against U.S. shipments in favor of either domestic production or imports from others.

The second, and often more important, effect is that such agreements raise the rate of economic growth in the affected economies. For countries like Cuba and many in Southeast Asia involved in T.P.P., higher economic growth rates provide a large stimulus to food demand. At per capita income levels between $1,000 and $3,000 per year, this may mean strong demand growth for livestock and dairy products and for the grains and oilseeds needed for their production. This is the wheelhouse of the U.S. farm economy. As countries consume more meat, milk and eggs per capita, they often become larger customers for U.S. farm-product exports.

This may be especially important for a country like Iran, where the pending nuclear agreement could lift economic sanctions that dramatically have slowed that nation’s economy. With 80 million people, most living at global middle-income levels, a return to economic growth could be a real stimulus to food demand and to U.S. farm-product exports.

Another but more indirect set of demand regulators is the prospect for a climate-change agreement this December. Effects on food demand are likely to be both more uncertain and more mixed. Will it stimulate more crop-based fuels, or will it create more competition for cropland from wind and solar power sources? Both ramifications probably turn even more importantly on the implications of such a deal on fossil-fuel use, what replaces fossil fuels and what the resulting impacts on economic growth rates are. With global economies still sluggish in the wake of the financial turbulence in 2008-10, negotiators are likely to avoid constraining growth rates nearby, but the longer-term consequences could be less certain and potentially more disruptive.

A third way in which governments may regulate food demand is through taxes, dietary guidelines or disclosure rules. All of these are currently in play. Advocates for “soda pop” taxes may be found in many states. New dietary guidelines are to be finalized and issued this year. Labeling battles are raging at the state and federal levels affecting “genetically modified organisms” (or G.M.O.s), added sugars, general ingredient labeling, country-of-origin labeling and the like. Emissions regulations also may affect demand and product competitiveness.

Some of this demand for regulatory changes is anchored in science and changing understanding of health effects, like the ban on partially hydrogenated oils. Some is an understandable but incomplete response to rising obesity rates, like the issues around added sugars; this makes final outcomes and effects harder to predict. And some reflect value judgments that lack scientific grounding but have acquired high emotional appeal, like G.M.O. labeling; food industry responses are harder to shape until more clarity emerges around likely regulatory outcomes.

All of these governmental measures that may affect food demand pose very different challenges than farmers and the food industry are used to from the marketplace. For one thing, it is often the case that the primary drivers behind these measures are unrelated to their effects on the food marketplace. This makes it harder to predict their food-demand effects. In addition, whether some of them — like the T.P.P. or the Iran nuclear deal — happen at all has little to do with their food-demand effects. It is just this uncertain potential for disruption, however, that makes it unsettling and important to watch.

After all, no one said the food industry would be boring.

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