Higher prices lead to lower prices

We are dealing with historically high grain and milk prices. Disappointing harvests, logistical problems due to corona, high demand after two years of lockdowns, labor market shortages and now also the effects of the war in the east on grain, energy and fertilizer prices. Should and can something be done about these high prices?

Economists often point out that high prices are the best remedy in combating high prices. The pig cycle is the best-known example. When prices are high, they expand. And when prices are low, fewer piglets are imposed, older entrepreneurs stop without successors, others consider it a good time for major maintenance. If the investments go in waves, a trough in the cycle can also last a long time. Because once the stable or the sugar cane plantation is built, those costs no longer matter in the decision to produce another round. Those are sunk costs. The balance between revenues and variable costs determines the decision whether or not to scale down.

Grain prices and economy
Such a mechanism also plays a role in the long term. I reread a standard work from 1960: The agricultural history of Western Europe 500-1850 by the Wageningen professor Bernard Slicher van Bath. He reconstructed grain prices over the centuries and looked at how the economy was doing. And that was, before industrialization, mainly agricultural economics. For example, from the year 1000 onwards, he saw a recovery of the economy that resulted in an agricultural boom in the High Middle Ages: high grain prices, cheap labour. It was a time of growing population, which made it attractive to reclaim large parts of the Netherlands or to reclaim the peatlands by clearing them of forest and draining water.

With the plague pandemic (early 14th century) Europe's population shrank, grain prices fell and there was a severe agricultural depression. Much less was reclaimed, peat areas even became lakes through the extraction of peat. This contributed to the growth of the cities and when the Golden Age begins to dawn after 1550, there is an agricultural boom with a lot of demand for more luxurious products and merchants invest in draining the polders so that agricultural land is added. After 1650 it goes down again, after 1750 it is much better and the years after 1850 are known to farmers as the champagne years with a lot of demand from the opening English market.

Mechanism kept doing its job
Although grain supplies from Ukraine and Russia are already increasing via the railways and American grain is also being shipped to Europe, the crisis is back. Slicher van Bath dropped out of college in 1850, when the railways and industrialization made agriculture subordinate to the economy. But the mechanism remained: the reclamation of the Haarlemmermeer and the Zuiderzee Works came about because of flood risk management, but high food prices helped. And the surpluses in the EU were one of the reasons for not reclaiming the Markerwaard after all.

Some studies predict a high demand for bio-based products and food for a growing world population for years to come. However, just as with the high prices of 2008, there may be a rapid turnaround. Bottlenecks can be avoided, new techniques (from precision farming to insects and vertical farming) can be introduced and land from Russia to Zimbabwe can be better utilized. Economic history shows that high prices are rarely permanent, because they prompt investment.

In the short term, it is therefore better as a society to take these high prices for granted, and especially help people with low incomes by supplementing their income. The prices then continue to act as a signal for investors who increase the supply, which leads to lower prices.

Krijn J. Poppe

Krijn Poppe worked for almost 40 years as an economist at LEI and Wageningen UR and now holds a number of advisory and management positions. For Boerenbusiness he dives into his bookcase and discusses current developments on the basis of studies that have become classic.

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