The inexact science of economics

Ronald Reagan, our former popular president, once stated his simple yet insightful interpretation of economics: “The government’s view of the economy could be summed up in a few phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it!”

We have witnessed in the last few months an economic whirlwind which has left most of us grasping for reason and stability and yearning for some simple Reaganomics to “right the ship.” Unfortunately, economists are so bewildered by the speed and scope of economic changes, especially as they are applied to agriculture, they don’t know whether to tax it, regulate it or subsidize it! Check out the trips ethanol, livestock and grain production have taken, and one understands why all those economic experts have been reduced to “I told you so” rather than pretending to accurately predict the future! (i.e. Hindsight vision is always 20/20.)

One financial resource book defined economics as “a body of knowledge or study that discusses how a society tries to solve the problems of unlimited wants and scarce resources,” and “because economics deals with human problems, it cannot be an exact science, and one can easily find differing views and descriptions.” It must be an “inexact science” that can rationalize $4 gasoline reduced to $1.50; $8 corn torpedoed to $3; $14 soybeans shrunk to $8; $90 live hog futures dunked to $50; and an ethanol industry, once thought to be the shining star of Midwestern agriculture, teetering on the brink of major financial troubles. As fuel and grains have become seemingly much “less scarce” and significantly lower priced, the inputs that are required to produce those crops have remained unbelievably high-priced. Fertilizer prices remain nearly 100 percent higher than a year ago (read: Doubled!), and seed is 40 percent higher. Fuel and chemical prices remain higher but not to the degree of fertilizer and seed. It seems the agri-business industry has a different perception of those “scarce” resources they are selling than the rest of the world. Just as the commodities they are converted to collapsed in price, world prices for fertilizer have crashed in recent weeks, which leads to a winter of “inexact” price discovery!

So what does this economic discussion have to do with pork production? Because the products of one branch of agriculture become the inputs for another, these wild price swings are difficult for our intertwined industries to accommodate. Although there may be disagreement on many economic principles, the laws of supply and demand generally work. The rapid escalation of crude oil prices and the explosive export grain demand (due to a weakened US dollar) led to a huge rally in grain prices. Thus, the prices for the inputs for other agriculture businesses (livestock and ethanol) became intolerable. They, in turn, have begun major cutbacks in production; poultry and pork production will be severely curtailed in 2009; and ethanol production will be down by 8 percent (from previous USDA estimates). The ethanol reduction will be from the bankruptcy of some producers (namely the VeraSun company) and the late or non-start-up of others. Also, the high price of fuel has led to a remarkable drop in gasoline demand. Worldwide fuel consumption has been reduced 12-15 percent on a monthly basis from one year-ago figures. Even as OPEC has tried to curtail production, fuel use has diminished. With robust feed and fuel demand gone, grain prices (especially corn) plunged. In time, livestock production will return; the ethanol production will stabilize; and ag input prices will become realistic again. Consumers right now can enjoy lower fuel and heating costs but will face higher meat prices in 2009. (Better buy that rib-eye, pork chop or those chicken wings today!)

The Obama administration has a huge task before it. The economics of agriculture is serious business but is secondary to the preservation of jobs, home ownership and retirement accounts. Without the stabilization of our nation’s economy, the demand for fuel and food will suffer. As Reagan would probably surmise, the economy has stopped moving, and we’ll probably be subsidizing for awhile! Hopefully the inexact science of economics can be applied in a way that can solve agriculture and our nation’s problems.

Bob Elliott is a Bureau County pork producer.