The Near Term Economic Effects of Peak Oil

Duende

LoneSnark wrote:

Doly · Expert Joined: Dec 03, 2004 Posts: 4034

patience · Expert Joined: Jan 04, 2008 Posts: 1521

The farmers that patronize our repair shop tell me that they can't make ends meet if they had to go back to crop rotation and legume plow-down, manuring, etc., because of the higher yields of chemicals and fertilizers. The bottom line for them is dollars, to meet the loan payments.

I foresee that as ag inputs get more expensive, a lot of farmers will go under. If we have true deflaton in ag commodities (don't see that) they are toast, like the 30's. That means a lot of idle land, because bankers are poor farmers-happened in the 30's, prob'ly more due to overproduction in ag then.

Organic inputs are the only sustainable way, but I don't see it coming to the corporate farm soon. To the small, solvent farm, yes, and quickly. Maybe that will help save our soil. The problem I see looming in this is, years of chemical farming have polluted the soil with pest- and herbicides, depleted the nutrients, and filled the soil with seeds with herbicide resistant weed seeds. Converting back to organic would be fraught with problems for a while.

Revi · Fusion Joined: Apr 25, 2005 Posts: 3255 Location: Maine

LoneSnark wrote:

Gerben

LoneSnark · Intermediate Crude Joined: Nov 15, 2007 Posts: 508

There you have it. When the price of inputs goes up marginal farmers go bankrupt; since bankers are poor farmers this means production will fall slightly. Since ag. product prices are inelastic this will drive ag. price way above input prices, restoring profitability and ending the bankruptcies. Many bankrupt farms will probably go back into production.

Like I say constantly, it is rediculous to believe airlines and urban-commuters will ever out-bid farmers for oil.

patience · Expert Joined: Jan 04, 2008 Posts: 1521

If we have any sort of serious price increase in gasoline this year, those suburbanites are gonna howl at the poiticians to "do something". And you know the sort of things THEY do, interfering with the market. If gas goes to $3.50 or more by summer, I think it will be an election issue.

I'd look for talk of price controls (guarantees a shortage). Further out, expect some form of rationing, which is where I see the big problems. A few spot shortages on the media nationwide, and the fan begins to turn brown. If/when rationing happens, the farmers could get hit hard, since their usage is pretty inelastic, and there are enough registered voters in the 'burbs to outvote the farmers.

LoneSnark · Intermediate Crude Joined: Nov 15, 2007 Posts: 508

I don't think so. While I might be wrong, I think people have learned the lesson of the 1970s. Prior to that Americans really had very limited experience with price controls.

I read everything I could find written about Hawaii's price control scheme as it was taking place and was very surprised to see just how much rhetoric it took to pass. Legislators could not call it price controls, almost as if it was a bad word. Legislators came up with reasons why what they were doing was not price controls (only upperbound wholesale prices in relation to mainland prices), to little avail. People said they were going to gas-up early to avoid the gas-lines 'price controls' were going to bring.

Ultimately politicians were so affraid of being blamed for shortages that the scheme was unenforceable and had to be abandoned. Maybe the harsh reception was due to it being an island economy where the rare shortage is inevitable even without price controls. Or, just maybe, people are wiser today. I can only hope.

patience · Expert Joined: Jan 04, 2008 Posts: 1521

Lonesnark, I dearly hope you are right! I guess I just have a dim view of public understanding, and even worse view of politicans.
IMHO, the best possible near-term is to let the market sort it out. At least then we'd have popular demand for some practical answers.

MrBill · Expert Joined: Sep 15, 2005 Posts: 5394 Location: Eurasia

Patience, it sometimes takes a while for the 'free market' or 'market economy' to sort stuff out on its own. If there is political interference in that process then it can take longer or lead to market distortions and other unintended consequences.

Take farmland from near where our farm is. Due to high off-farm incomes farmland is trading at levels that cannot be supported by agricultural production alone. Even with ag prices at generational highs at the moment and forecasts of shortages predicted to come. Worse those forecasts are driving the price of farmland even higher due to speculation.

Basically, if Dad or Gramps is running the family farm, but Junior is working in the oilpatch then there is extra income coming into the household, and that means they can afford to outbid their neighbors for any farmland that comes up for sale. Also, as there are rural-urban housing shortages those quarters are being bought-up as building sites for houses, so their value reflects housing prices and not the land's agricultural value.

But what the genuine farmer cannot afford to do is to pay those inflated prices if long-term he has to generate enough of a return on that land to pay back his or her credit using only income generated from the farm. So in the short-term he may be out bid.

The wrong public policy solution is to keep farmers on their land if they paid too much for it in the first place. Or to artificially impose either income support or price controls. Investors and speculators - including farmers - have to be allowed to make financial mistakes and face the economic consequences without government intervention. Otherwise we end up calling it a market failure when it is really a public policy failure.

Long-term high energy prices will lead to higher food prices. Those high farmgate prices will compensate farmers for the higher cost of their inputs. There is no reason that they would force farmers out of business, so long as prices are free to rise to their natural equilibrium. The proper public policy response to high food prices therefore is to subsidize the urban poor that do not benefit from higher food prices. Ideally that would be through tax rebates and other neutral policies that do not distort the market and lead to a misallocation of resources.

Better zoning laws and keeping agriculture land agricultural instead of allowing greenfield development and urban sprawl would help. Also disallowing tax breaks and other goodies for hobby farmers.

But like all individuals some farmers will make production mistakes or be poor planners. Especially when it comes time to make trade-offs between production and economic decisions. Ego also plays a role. Bigger is better. And keeping up with Farmer Jones down the road with that new tractor. Farming is a business like any other. Thankfully there are more good farmers than bad ones left in the business after a decade of low prices. They will sort it out! ; - )
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patience · Expert Joined: Jan 04, 2008 Posts: 1521

Welcome back, Mr. Bill! Yes, it does take the market time to work properly, and unfortunately, our govt. policies are too often wrong headed, and virtually always politically motivated rather than for the common good. What I've heard says Canada is doing a better job with that, than the US.

The time lag of markets is what concerns me about farmers at the moment. Another thread here tells of a pinch of high fertilizer prices. Farmers are all to often undercapitalized, and at the mercy of speculative prices. My definition: Farming (noun)-The only business that buys everything retail, and sells everything wholesale. Markets have successfully applied the divide and conquer rule here, leaving individual farmers in the weakest of bargaining positions.

True, those who bought land overpriced need to be weeded out. I agree with all your policy ideas generally. Currently, the past many years of inflation have, however, put most farms and businesses in a bad debt position, which may soon have to be serviced with deflated currencies, or, more likely, have their needed operating lines of credit cut off or called in as banking weathers its' own storms. In the past, we've seen price and cost whipsaw situations, and the looming credit debacle could be the worst of all.

I agree that commodity prices will probably hold up, but input costs could soar to untenable levels. Farm profit margins, especially those operating on credit are very vulnerable here. I expect that only the strongest will survive in farming, if the financial worst comes to pass. Like you said, the poorly managed will fail and deserve it. My concerns are for those in the middle ground, who bought into a business model that had worked for a long time, right up until all of a sudden, it doesn't anymore.

evilgenius

No matter how you look at it food prices are going up. Farmers will benefit because the cause of it, PO, will also stop competing farmers from half-way around the world from continuing to compete. If farmers are able to position themselves to sell locally or very close to their farms they will do well provided anybody lives around them. In the UK there have been several radio stories about local and post PO farming. Not everybody is onboard with it by any means but at least the seed has been planted.

A farmer in a place like Colorado, where I'm from, might be a good 100-200 miles from any kind of big market. That kind of a farmer, if they are looking ahead, might want to get a biodiesel still and the requisite storage tanks. They will need to have the capacity to fuel their trucks and their equipment, if they can't switch to electric by then. The cost would be worth it if they kept the acreage for the biodiesel low because of the huge return coming on the food they will be able to sell at high rates in the starving cities.

The only potentially out of control cost that has the potential to derail everything would be that of the cost of the muscle to protect the enterprise.
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"Hope encourages men to take risks; men in a strong position may follow her without ruin, if not without loss. But when they stake all that they have to the last coin (for she is a spendthrift), she reveals her real self in the hour of failure."

MrBill · Expert Joined: Sep 15, 2005 Posts: 5394 Location: Eurasia

patience wrote:

shakespear1 · Light Sweet Crude Joined: May 13, 2005 Posts: 1557

Wrong place Sad

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Men argue, nature acts !
Voltaire

"...In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."

Alan Greenspan

Revi · Fusion Joined: Apr 25, 2005 Posts: 3255 Location: Maine