Sixty years ago, many people argued that poor countries had to reduce their dependence on exporting products from mines and farms because the prices of these primary commodities were locked into inevitable permanent decline relative to the manufactured goods the same countries had to import.
At the same time, U.S. farmers complained that their product prices were too low compared with things they had to buy and called for policies that would return farming to “parity,” the same relative prices that had prevailed in the years before the first world war.
Six decades later, countries dependent on agricultural and mining exports are doing quite well, thank you, and better than many industrialized countries. Here in the U.S., North Dakota, still a resource-dependent state, leads the nation with its low unemployment. Much of this stems from oil drilling in the Bakken Formation, but farming also contributes.
High grain prices are one factor fueling a farmland price boom marked enough that Yale economists are writing op-eds about it for yuppie on-line magazines. I just got a notice of the latest tax assessment for my 211 acres of so-so farmland in southwest Minnesota. The increase in value over this year is greater than what I earned last year selling 104 columns to three newspapers.
This all raises a question: Were the naysayers about the inevitable decline of primary commodity production all wrong? Did they send poor countries down a mistaken path?
The answer poses a paradox. The critics were right about the long-term decline of primary product prices, but producing these products remains highly profitable.
The factor that resolves this paradox is increased labor productivity in farming and mining. These industries can be profitable over the long run, but they cannot employ nearly as many people, relative to output, as they did when I was a kid.
Minnesota just had good news about taconite. After a disastrous drop by more than half from 2008 to 2009, expected shipments this year will return to pre-recession levels. All mines are running at capacity, and prices are higher than ever. And some mines are hiring.
However, the number of people hired — about 100 so far, in addition to 3,600 called back after all the mines closed for part of 2009 — tells the story. In 1980, output per worker was about 4,000 tons. In the boom just before the 2009 collapse, it hit 13,000 tons. This year, with 3,700 workers producing more than 39 million tons, it will be some 11,000 tons per worker.
That three-fold increase in output per worker is an example of why mining coal and iron along with copper, tin and other metals can be profitable even though inflation-adjusted prices of these products have declined over time. (Current taconite prices near $200 per ton are exceptional but well above those needed to make Minnesota mines profitable in the long term.)
Farming tells a similar story. During the Great Depression, nearly a third of all U.S. households got their living primarily from farms. In the early 1950s, when cries for “parity not charity” were at their height, that figure was still a fifth. Now, it is under 2 percent, and the bulk of total U.S. farm output comes from a fraction of 1 percent of the population.
Agriculture in Australia and Canada is as mechanized as it is here. In Argentina and especially in Brazil, higher fractions of the population still farm, but the farms that produce soybeans, wheat and corn approach labor productivity levels of the U.S. Brazil, a major beef exporter, has surpassed our country in slaughterhouse capacity, and their newest facilities are more capital-intensive than most here.
Writing this, I anticipate emails reminding me that farming and mining always have been cyclical, that a bust follows every boom and that prices of mining companies and farmland can fall as well as rise. That is all true. Moreover, Robert Shiller, the Yale economist who correctly called the housing price bubble and predicted its collapse, is correct in identifying an unprecedented bubble for U.S. farmland prices as a whole.
That does not, however, belie the fact that increased productivity in primary commodity production can maintain profitability in those sectors even as real prices decline over time. Even after the current boom fades, farming and mining will remain profitable for someone.
All of this omits reasons for the boom. Increased demand from Asia is one factor, but that story is a decade old. Excess liquidity, largely created by the Federal Reserve, is another possible though highly disputed factor. (Product prices aside, low interest rates push up prices of farmland and other assets, just as British economist David Ricardo predicted 190 years ago.) But the role of easy money is a complex story that needs a column of its own.
© 2011 Edward Lotterman
Chanarambie Consulting, Inc.