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Thursday Sep 06, 2012

'Short-term demand skews value of farmland'

Agriculture is not plagued by locusts or drought, but by unfortunate consequences of the law of demand, a law that sets the price for the land we have and ultimately determines its use.

While input costs play a role in determining the minimum price that producers are willing to accept for their goods, ultimately the consumer price of an item is determined by the size of its demand. But demand is a momentary calculation or emotion, and not one felt over the long term. It rarely takes into account the future implications of the purchase nor does the decision-making process reach beyond the consequences for the individual demander.

In its definition, the size of demand is determined by those willing and able to purchase the product, however, its outcome is inevitably weighted more towards the decisions of those able than those willing. And while mostly this free floating and flexible ability of demand is quite good at distributing resources to where they are needed most and keeping the world efficient, on the way it has some important victims. One of these is food security.

The demand for agricultural goods simply does not take into account its importance for the global population.

Take, for example, the drought in the US, which has wiped out two thirds of grain crops. This rapid decrease in availability has caused demand levels relative to supply to sky-rocket and the price has quickly followed, with maize prices more than doubling since August 2010.

This problem is not restricted to the US. To those reliant on US maize, through purchase or aid, the prices are now far higher. But even to those who were previously self-sufficient in their maize production, the price available on the international market incentivises producers to export or to increase their price locally. The dynamics of demand is the mechanism through which a drought in the US can become a problem in grain producing Swaziland.

Another example in a similar industry is that of biofuels - possibly the largest public deception of the 21st century. Under the guise of reducing reliance on oil and decreasing greenhouse gas emissions, fuels made from biological matter such as plant crops have grown in popularity as an alternative form of liquid fuel. The result: a new demand for agricultural land that in many cases is willing to pay far higher prices than food consumers. The obvious choice for farmers is to move their crops away from food production, or increase their prices to match biofuel opportunities.

A case closer to home is the use of precious arable land. In 2009, only 11.82 percent of South Africa's soil was arable and some of the most pristine of this lies in the Stellenbosch region of the Western Cape. It is also one of the most desirable places to live and while a house can be built on almost any soil, it is often the areas with the richest soil that attract the highest residential prices. It would be unreasonable to expect someone to preserve a few square metres of their land for an apple crop in the interests of mankind while millions can be made by selling it to a property developer or house owner.

However, with 7 billion mouths to feed and an estimated 2 billion more to come in the next 40 years, the real value of arable land will need to take precedence over all other priorities. If not, we can expect to face rising food prices, decreasing real income and an ever growing number of people slipping into a bracket where they are fighting to meet their basic needs.

Pierre Heistein, convener for UCT's Applied Economics for Smart Decision-making course.

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