Foodstock 2012


A steady stream of Lincoln town cars delivering confident executives.  Unbridled enthusiasm in the air, record attendance, and eager attendees seeking pictures with the keynote speakers.  An assassinated former president was reincarnated with impressive accuracy to provide for audience entertainment.  Professional videos were prepared to tout the industry’s successes.

Mortgage bankers convening in 2007?  Nope, the scene I describe was from the USDA’s Agricultural Outlook Forum in late February in the Washington DC area.  Attendance at last week’s event exceeded two thousand, and included farmers, politicians, regulators, agribusiness executives, bankers, and academics from around the world.

Might the collective confidence of the event’s attendees indicate an irrational exuberance that is destined to reverse?  Was the widespread enthusiasm and economic success (farm income exceeded $100bn in 2011) sustainable?  Was the “life is good” attitude indicative of a bubble before it bursts?

I have been a student of booms and busts over the past 20 years and have developed a set of indicators for identifying bubbles.  Two in particular seem relevant to the study of agricultural conditions today.  First, there is a always a believable story of how “it’s different this time” and the inevitable (over)confidence and invincibility that accompanies such a feeling.  Second, moral hazard (via government guarantees or downside price protection) makes for a “heads I win, tails you lose” risk environment.  With respect to agriculture, both of these indicators suggest the situation is not sustainable.

It was hard not to notice the celebratory tone that hailed the many impressive accomplishments of US agriculture.  In many ways, the success of agriculture has generated a sense that good times will continue indefinitely.  I was gently (and regularly) reminded that the USDA touches every American since we all eat food.  It was repeatedly mentioned that Lincoln referred to the department as the “People’s Department” and that while 50% of Americans lived on farms in 1862 (the year Lincoln established the USDA), today 2% of Americans live on farms that produce a surplus that is exported to a hungry world.  Record land prices drew some discussion of bubbly dynamics – but rationalizations of how “it’s different this time” seemed to win the day.  Demand from emerging middle classes in the developing world provided strong support for the belief that we are in a new era of agricultural prosperity (i.e. that it’s “different this time”).

As is typical of most bubbles, past trends are extrapolated into the future to paint a picture of continuing good times ahead. The pinnacle of last week’s events was a plenary session moderated by Secretary of Agriculture Vilsack that included 7 former Secretary’s of Agriculture discussing the future of agriculture in America.  It was noteworthy that the 8 members on stage included republican and democratic appointees, lawyers, farmers, and legislators.  While the event was truly a “love-fest” in that everyone was praising everyone else about how great a job everyone was doing, there were some noteworthy exceptions from former secretaries who commented on the sustainability of US agriculture and implied heavily that the current good times were unlikely to continue indefinitely.

Clayton Yuetter, Secretary of Agriculture from 1989-1991, noted “the antidote to high prices is high prices; the antidote for low prices is low prices.”  While an appealing intellectual construct, USDA supports policies that contradict this perspective.   The counter-cyclical and marketing loan programs both allow for farmers to not consider prices when making planting decisions.  Lower prices don’t deter production as government subsidies effectively create the moral hazard-induced asymmetric risk-reward trade-off.

Given these two very concerning dynamics, it is not surprising that John Block, Secretary of Agriculture from 1981-1986, suggested the USDA’s “strength and power and influence in the halls of government and in the nation” are at risk in a time of budget cuts.  He even suggested the USDA change its name to the “Department of Food, Agriculture, and Forestry” in order to maintain control of the food programs (~70% of the annual budget, includes food stamps, school lunches, and other nutrition programs) and the forest service (manages ~193 million acres and employs more people than any other group within the USDA).  His specific rationale: USDA would be at risk of losing its cabinet level status without the size and breadth of these two programs.

Why should cabinet status drive inappropriate organizational structure?  Birthdays are wonderful times to celebrate the past, but they are also appropriate times to reconsider plans for the future.  As the USDA turns 150 this year, we should consider if the food and nutrition programs actually belong in it.  Might these programs be more appropriately placed in the Department of Health and Human Services? Or, as mentioned by Secretary Block as a risk, perhaps the Forest Service should be relocated to the Department of the Interior.  Frankly, even the underlying agricultural subsidy programs should be reconsidered.  Should American taxpayers be providing subsidies to an industry that posted record profits in 2011?  The time to reduce or remove subsidies is now, while prices are high and pain of removing them minimal.  Further, the Farm Bill should be rewritten from scratch, not modified incrementally from Depression-era policies that in many cases are no longer relevant.

Reorganizing the USDA and rewriting the Farm Bill might remove some of the hot air supporting the bubble dynamics in agriculture today.  The USDA has inadvertently contributed to overconfidence and moral hazard, much to the detriment of taxpayer resources.  The fiscal tightening that appears necessary might best begin by grabbing the “low-hanging fruit” (pun intended!) at the USDA.  The time has come to return the People’s Department to the people.

Vikram Mansharamani is a Lecturer at Yale University, a TIGER 21 Scholar, and author of Boombustology: Spotting Financial Bubbles Before They Burst.

Food Bubble Is Expanding US Waistlines


In the housing boom that lasted from 2001 to 2007, highly motivated investment bankers capitalized on historically low interest rates, abundant liquidity, government- sponsored housing finance, political encouragement to make housing accessible to all, and mortgage-interest tax policies to create a securitization party of unrivaled scale and scope.

The hangover from this toxic cocktail continues to plague the global economy: The world still struggles with too much debt, the threat of deflation and the painful prospect of more deleveraging.

Similar dynamics are at work in the global food system: Forces are combining to create another dangerous bubble. This food bubble, like the housing one, has grown from a system that is focused on generating efficiencies through high volumes, which generate lower prices and increased consumption. The commoditization of loans and crops, supported by government policies to keep prices low, has led to overconsumption of credit and food — resulting in a highly leveraged society, and a national obesity epidemic.

Just as bankers created loans for standardized mortgage pools, most farmers now produce predominantly for commodity markets. And just as bankers stopped caring about their customers’ financial health, or even their ability to repay loans, farmers, under the heavy influence of government programs, have increasingly stopped growing food for the benefit of the people who eat it. In fact, industrial farming is generally not even producing “food,” but rather inputs for what author Michael Pollan calls “edible food-like substances” — processed foods.

Bushels of Corn

Consider corn. While some of it is actually consumed as food (for example, “on the cob”), most is converted into animal feed, ingredients for processed food or feedstock for ethanol. The price of most corn grown in the world is based on qualitative variations from the benchmark No. 2 grade corn. By the U.S. Department of Agriculture’s definition, a bushel of No. 2 grade corn weighs about 54 pounds and contains no more than 5 percent damaged kernels and less than 3 percent broken corn and foreign materials. Just as unsophisticated buyers blindly bought AAA rated mortgage securities, so does the corn industrial complex readily accept all No. 2 grade corn. Similar dynamics exist for other commoditized crops, such as wheat and soybeans.

U.S. government policies have promoted the production of high-volume commodity foods. These policies date to the early 1970s, when poor harvests in the Soviet Union and bad weather in the American farm belt caused crop prices to skyrocket. U.S. News & World Report and Time magazines dedicated cover stories to food inflation and its social impact.

To prevent grocery prices from soaring 20 percent or more, Earl Butz, the secretary of agriculture in the Nixon and Ford administrations, made a series of policy changes designed to lower food prices. He did away with some loans to farmers, government grain purchases and incentives for leaving land idle during times of low crop prices. And he replaced them with direct payments to farmers to make up any difference between the market price and an artificial price floor.

Rather than discourage farmers from growing more crops when market prices were low, the new policy motivated them to produce more, regardless of price. The floor, which has been regularly adjusted, set a price at which farmers could effectively sell an infinite supply. Ballooning crop volumes drove prices lower, which, in turn, increased consumption.

Similarly, in 2001, when the Federal Reserve lowered short- term interest rates — to fight the deflationary forces from the popping Internet bubble — the price of money was driven lower, and that increased the use of debt.

Price of Calories

In the past 30 years, food prices have fallen, on average, 1 percent per year, according to an analysis from the Department of Agriculture’s Economic Research Service. During the same period, the daily average calorie consumption in the U.S. has risen about by an average of about 400 calories, or about 18 percent.

There’s reason to think that the low price of food has led people to eat more of it, and especially the kinds of foods that are subsidized by U.S. agricultural policy. Consider that overconsumption is not spread evenly across food groups, but rather predominates among processed foods containing ingredients such as corn, wheat and soybeans, whose prices are heavily influenced by government policies.

Flour and cereal products account for 39 percent of the total increase in average American food consumption since 1980 – - about 155 additional calories — while whole foods not supported by agricultural subsidies are not being eaten much more today than before: The average American’s intake of fruit rose by a mere 6 calories over the past three decades, and calories from vegetables were flat.

In 2004, a dollar could buy more than 1,000 calories of cookies or potato chips, or 875 calories of soda, but only 250 calories of carrots or 170 calories of fruit juice, according to Adam Drewnowski, a professor of epidemiology at the University of Washington and director of the Center for Public Health Nutrition in Seattle. In other words, agricultural subsidies cause the least healthy calories to be the cheapest.

Given that about 3,500 calories is equivalent to a pound of body weight, it is easy to see that extra calories are a major contributor to our obesity epidemic — alongside inadequate exercise and a poor diet. Furthermore, given the strong linkages between obesity and cardiovascular disease, diabetes and other illnesses, our industrial food system appears to be no more sustainable than our pre-2008 housing-finance system.

Another unintended consequence of producing food in such large volume is that the bigger the yields per acre, the fewer nutrients the crops contain. Donald R. Davis of the Biochemical Institute at the University of Texas in Austin has looked at the evidence regarding the relationship between yield and nutrient content. The studies comparing high-yield and low-yield varieties of corn, wheat and broccoli show, in his words, “uniformly inverse associations between yield and nutrient concentrations.”

Food and Health

In a time of strained budgets and rising medical costs, we must think more broadly about the health effects of our food system. To ignore the connection between agricultural policy and public health would be as wrong as to ignore the link between housing policy and financial regulation. Presidential campaign debates and the renewal of the farm bill in 2012 may offer a platform for the conversation. Let us begin by redesigning agricultural policy to minimize incentives for overproduction and encourage the production of healthy calories.

Two agricultural subsidies, in particular, should be greatly reduced or eliminated: the marketing-loan program and the countercyclical-payments program. The marketing-loan program, which allows farmers to borrow using their crops as collateral, effectively enables farmers to lock in a minimum price via non-recourse loans. If market prices are lower than the government-set target price, farmers are not required to pay back the full loan amount. Yet if prices are higher than the target price, they keep the difference. Countercyclical payments act as their name suggests: When prices are lower, subsidy payments are higher — enabling farmers to again lock in minimum prices. Both subsidies focus disproportionately on commodity crops.

These programs create de facto price floors, allow farmers to ignore crop prices when deciding how to allocate land, and effectively encourage overproduction. From 1995 to 2010, the Department of Agriculture spent more than $50 billion on these programs. Eliminating them would save enough money not only to subsidize the farming of fruit, vegetables and other healthy foods, but also to sponsor education programs on how careful eating and exercise can reduce or prevent obesity. Acting now could help keep today’s cheap food and expanding waistlines from adding to tomorrow’s high health-care costs.

(Vikram Mansharamani, who teaches a seminar on financial booms and busts at Yale University, is the author of “Boombustology: Spotting Financial Bubbles Before They Burst.” The opinions expressed are his own.)

To contact the writer of this article: Vikram Mansharamani at (Twitter: @mansharamani)

To contact the editor responsible for this article: Mary Duenwald at

(Originally published in Bloomberg View 2012.  Reprinted with permission.  The opinions expressed are those of the author)

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