Thursday, April 24, 2014

The oddities of the wine market

Jens Beckert, Jorg Rossel and Patrick Schenk at Cologne's Max Planck Institute have been looking at variations in the price of wine. Or more specifically, as the title of their paper states 'Wine as a Cultural Product: Symbolic Capital and Price Formation in the Wine Field'. For their study they analysed data from 110 wineries and 1,071 wines (it's not clear if they sampled any of them) as well as data on wine consumers in four German cities.

There are some real oddities in the wine market. Even expensive wines don't cost more than €10 a bottle to produce but, although chemically the same, a bottle of wine can cost 1.99 euros or 300 euros. 'These price differentials are justified by alleged quality differences between the wines. However ... it turns out that the price differences are largely unrelated to different production costs and to the sensual experience wine connoisseurs report when tasting the wine in a bland tasting ... even experts are not able to differentiate between wines based on objective characteristics and cannot rank wines according to their price'. Moreover, each time a new vintage comes along, the taste changes.

There are some generalisations one can make about price. Wines made of high status grape varieties (Riesling, Pinot) are usually more expensive. Dry wine is more expensive than sweet and semi-dry wine. Red wine is more expensive than white and rosé. Older wine is usually more expensive than that of a younger age.

Wine producers can develop symbolic capital that can be turned into profit. Wine producers that produce wines that are 'difficult' to drink because the consumer must first learn to appreciate them and 'work' on developing taste can accumulate such capital. This sounds like a formula for the consumer to be conned and a passport for pretentiousness - which does bring to mind an advert currently shown on British television in which a wine buff is mocked for such pretension.

It's an interesting paper, but there is relatively little about supply and demand which is always a key factor in any market, even one as unusual as that for wine.

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Thursday, April 10, 2014

Cows to get climate change fix

If it was April Fools Day one would think this was a joke, but a White House climate change initiative is searching for a 'cow of the future' whose greenhouse gas emissions would be cut by anti-methane pills, burp scanners and gas backpacks.

Methane is a particularly potent greenhouse gas with a global warming effect that is twenty times greater than carbon dioxide and cows emit a lot of it. A typical cow emits 250-300 litres of methane a day. The 88 million cattle in the US produce more of it than landfill sites, natural gas leaks or fracking. However, contrary to a common misconception, 97 per cent of the methane gas is released by the front end through burps, not through emissions from the back end.

Supplements such as basil can cut methane production in cows. In Argentina, scientists have created backpacks that collect gas via tubes plugged into cows' stomachs. That sounds as if it would raise animal welfare issues to me.

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Tuesday, April 01, 2014

Climate change report emphasises food supply effects

The latest UN report on climate change emphasises food supply effects: Climate change.

The report argues that climate change has negatively affected wheat and maize yields both regionally and on a global basis. The effects of climate change on two other important food crops, rice and soya beans, have been smaller in the most important producing countries. There may be some positive effects on crops in cooler climates in future. However, the overall outlook for wheat, rice and maize production in tropical and temperate regions is expected to be more negative than positive.

The last assessment by the UN's Intergovernmental Panel on Climate Change in 2007 was more sanguine about how climate change was impacting on food production. Unfortunately, the suggestion that the CAP might incorporate a climate change pillar was rapidly dropped in the last set of reform negotiations.

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Friday, March 28, 2014

The politics of grains

Few commodities are more politicised than grains. They were the first products to be covered by the Common Agricultural Policy. The US has run export subsidy schemes for them in the past. International trading houses like Cargill are involved.

Fear has gripped the wheat market with prices soaring as investors buy against the backdrop of the crisis in Ukraine. Concern about freezing weather in major growing areas in the US has also helped to push up prices by about 20 per cent since the end of February. Ultimately this could boost inflation by affecting prices of goods in the shops.

The so-called Black Sea grain region of Russia, the Ukraine and Kazakhstan accounts for a fifth of world exports. Exports from this area are particularly important in North Africa and the Middle East.

In the longer run, production in Ukraine could be affected by higher prices for inputs because of the weakness of the hryvania and difficulties for farmers in accessing finance. If Russian tanks actually came charging across the steppes of eastern Ukraine, even more disruption would occur. On the more positive side, exports of Ukranian wheat to Europe could increase.

In Britain, 'Nimbys' are using food security arguments to reinforce their case against building on 'green belt' farmland. However, it is important not to panic. Global production forecasts are of 700m tonnes, only slightly down from 709m in 2013/14.

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Friday, March 21, 2014

Commodity prices under pressure

Commodity prices in agriculture are facing upwards pressure. It's nothing like the price spike of 2008, but the bearish mood that prevailed at the end of last year has disappeared. The structural pressures of increased demand and little effective increase in supply rate remain in place, even if the rate of growth in Chinese demand has weakened as the economy slows. Stocks are relatively plentiful, but demand from emerging markets is increasing.

In some cases, weather has been a factor. Dry weather has affected sugar production in Brazil, and there are concerns about dryness in India and Thailand, two leading producers. At the same time the sugar reform in the EU has had an effect. Sugar beet producers do not withdraw too hastily as it is a good break crop and they have sunk cost investments in the crop, but a 9 per cent fall in production is expected this year. Farmers in East Anglia have been complaining for some time about reduced margins. Cocoa prices have risen in anticipation of an El Nino effect in West Africa later this year.

Rising global demand is sustaining dairy prices, although the impending end of quotas in the EU may boost production and push them down again. Coffee has seen particularly big rises because of drought concerns in Brazil with prices of higher quality beans up by as much as 70 per cent. These may filter through to consumers by the end of the year.

Any price increase is particularly a concern in developing countries where food forms a much larger part of household budgets, but under conditions of austerity and reductions in real wages, consumers in developed countries are also very sensitive to food price inflation. In Britain, hard discounters such as Aldi and Lidl are undercutting mid-market retailers like Sainsbury's and Tesco. More up market retailers like Waitrose are less vulnerable, while good performance by the food arm of Marks & Spencer has offset disappointing returns in clothing.

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Thursday, March 13, 2014

Yes, we have no bananas

The famous song of this title dates from 1923: Bananas. Bananas have been a hot topic in agricultural trade negotiations: I have a book on the subject on my shelves. They are an enjoyable fruit which provides an energy boost and are the biggest fruit of the planet in terms of production volume. During the Second World War they were not imported and youngsters didn't know how to eat them when they first encountered them. I can remember them being on ration.

Bananas have been controversial because they are largely produced in the Global South and exported in large quantities to advanced countries (although most of them are consumed in the producer countries or nearby). The trade has been dominated by a few large companies and margins for producers have been squeezed. There are also big fungus disease problems on the horizon, although mainly confined to Asia at present (also fortunately it is not wind borne and scientists are attempting to find means of control). The EU only produces bananas in relatively small quantities in Greece and the Canary Islands.

Now there has been a back to the future deal in terms of a merger between Chiquita of the US and Dublin-based Fyffes. The latter company dates from the late 19th century when it was set up to grow bananas in Jamaica for the British market. After hurricane damage, it was bought by the US-based United Fruit Company, but they got into trouble after their involvement in the Guatemalan coup in 1954. That didn't stop them sending their banana boats to help in the disastrous Bay of Pigs invasion of Cuba in 1961.

United Fruit was taken over by United Brands in the 1970s and changed its name to Chiquita. Fyffes was sold to Fruit Importers of Ireland in 1986. Chiquita has tend to focus on margins and quality, while Fyffes has been more of a mass market brand. Now they have come together in a $1 billion dollar merger designed to address declining profit margins. The new company will be called ChiquitaFyffes.

European retailers are increasingly using bananas as loss leaders and forcing producers and distributors to absorb wholesale cost increases. The Fairtrade Foundation has warned that the merger is like to squeeze producers further, although it will account for only 14 per cent of the world market, but 30 per cent of the European market. No challenge on competition law grounds is thought likely.

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Friday, March 07, 2014

Is milk white gold?

There is currently a supermarket war going on using milk as a loss leader. Farmers have been reassured that it will not affect the price that they are paid, but some are concerned about the treatment of liquid milk as a commodity. With the impending lifting of quotas, many EU farmers, not least in the Netherlands, are planning expansion. But in a world that could be awash with milk, despite increasing demand in China, milk could turn out to be 'white gold' but fool's good.

Moreover, any country expanding its production will be up against New Zealand which has an ideal climate for dairy production and years of accumulated expertise in production and marketing. But is New Zealand really the Saudi Arabia of milk?

A recent report in the Financial Times struck a note of caution: White Gold.

The Pink 'Un noted that since 1980, the dairy herd has more than doubled to 6.5m cows while the number of sheep has halved. At least 300,000 hectares of land has been transferred to dairy use from other types of farming and forestry over the past decade, causing a jump in agricultural land prices. The dairy industry is driving the boom in capital investment with NZ$1bn dairy plants under construction along with other spin-off infrastructure projects.

But there are risks in being so dependent on a single sector which now accounts for almost a third of total exports, particularly when it is a commodity. It makes New Zealand look like a modern version of a company town. Some see parallels with Ireland before the financial crash with an economy based on debt and credit, low savings rates and current account deficits. Irish dairy farmers prospered under the CAP, some of them building new mansions with porticos. They survived the crash with the CAP providing a safety net which Kiwi farmers do not have.

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Different versions of food futures

Earlier this week I went to a very interesting workshop on future global food systems. As is inevitably the case, two different versions of the future emerged.

One view is that in order to feed a growing world population (of which anything between 1 billion and 3.5 billion are under nourished and 0.83 billion underweight) we shall have to continue to rely on intensive systems of food production and make greater use of new technology.

An alternative view, which was developed rather more in the discussion, was that we were going to hell in a handcart and the present system of production is unsustainable in terms, for example, of the demands it is making on soil and water and its contribution to climate change. We rely on too narrow a range of plant and livestock species and overlook crops which could be safely grown several times in one year (although whether people find some of these crops palatable is another question).

Of course, how one moves to a different system is a more challenging question and it struck me that there was an element of naivety in some of the suggestions put forward. Urban agriculture such as growing mint in a suburb of Rotterdam may have educational benefits, but it is not going to start to feed large cities. If diversity is the enemy of capitalism, as was argued, how is one going to get round that given the structural and lobbying power of big business? How can one cope with the power of supermarkets which tend to make cosmetic changes in their offer to reflect concerns? One answer that was suggested was to convert consumers into citizens in relation to food, but that has its challenges.

I would suggest that sustainable intensification offers a possible way forward. I know that it is greeted with scepticism both by environmental lobbyists, who see it as a stalking horse for GMO, and by farmers who tell me that they don't understand what it is. What it involves is an acknowledgment is that we are going to have continue with intensive farming (although not everywhere) but it has to be done in a more sustainable way by using inputs in a much more careful way. Drone technology, for example, opens up new possibilities in precision farming, making it possible to avoid the over use of fertilisers.

One also has to recognise that business is not a homogeneous entity signed up to a common agenda and that some businesses are concerned about the possible impacts of unmitigated climate change, notably the insurance industry which plays a key role in the Aldersgate Group which is a coalition of businesses, NGOs and others: Aldersgate .

Where I would agree with many of the speakers is that the analysis of power relations is of crucial importance in understanding how systems of food production operate.

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