The Global Supply and Demand for Agricultural Land in 2050: A Perfect Storm in the Making? by Tom Hertel

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1 The Global Supply and Demand for Agricultural Land in 2050: A Perfect Storm in the Making? by Tom Hertel DISCUSSANT COMMENTS FOCUSING ON OPERATIONAL IMPLICATIONS ROBERT TOWNSEND

2 Key messages of the paper The impact of population and per capita income growth, biofuels mandates, climate change (and other exogenous shocks) on commodity (food) prices and agriculture land use change will be conditioned by the extent of global economic responsiveness (price elasticities). The lower the global economic responsiveness (lower elasticities) the higher the impact on commodities prices and agricultural land use change. The impact on commodity price changes will be higher than the impact on land use change. Implication: dampening long run commodity (food) price escalation requires greater global economic responsiveness (higher price elasticities). While lowering the exogenous shocks (eg. Biofuels mandates, climate change) will also lower commodity price and land use effects, the focus of my discussant comments are on economic responsiveness

3 Derived framework used in the paper Interpretation: Commodity (food) price impacts of exogenous shocks to commodity demand (e.g. due to biofuels mandates), to yields (e.g. due to climate change), or to land supply (e.g. due to urbanization) is mediated by three elasticities: the intensive margin of supply response, the extensive margin, and the price elasticity of demand. The smaller the elasticities (the denominator), the larger the price change. Interpretation: Agricultural land use change from exogenous shocks to commodity demand (e.g. due to biofuels mandates), to yields (e.g. due to climate change), or to land supply (e.g. due to urbanization) is also mediated by three elasticities: the intensive margin of supply response, the extensive margin, and the price elasticity of demand (however with a larger denominator than the first equation above suggesting less land use sensitivity to economic response, than for prices).

4 How can global economic responsiveness (resilience of the system) be improved? Implication of the framework used is to focus on increasing the three identified elastisities: Elasticity of substitution between variable inputs and land Price elasticity of demand for aggregate agricultural output Elasticity of land supply with respect to agricultural output prices

5 Raising the elasticity of substitution between variable inputs and land Evidence of the historical magnitude Between land and fertilizer: for US ( ), lower for South Africa Decomposition in direct factor substitution and technological change (induced innovation on land saving technologies) shows latter effect about twice as high historically as former effect Some operational implications Improve the performance of factor markets Market infrastructure (roads, information), organization (farmer organizations) and policy (competition, input trade, price) Invest in agriculture R&D Ensure long-run responsiveness of public research systems to focus on land-saving technologies

6 Raising the price elasticity of demand of aggregate agricultural products Evidence of historical magnitude The paper references the following elasticities: Tanzania -0.65, US Suggesting that the price elasticity of demand for food will likely go down over time. However some factors may be accelerating the decline. Factors that may lower global own price elasticities of demand for aggregate agricultural products Trade barriers, mandated demand (e.g. biofuels mandates), share of institutional investor demand in commodities/land (who s demand is driven by relative volatility and diversification, rather than own price levels). Some operational implications Improve agriculture trade to ensure food moves from (low demand) surplus areas to (high demand) deficit areas Promote responsible agriculture investment to ensure local benefit from foreign investments (to offset potential impact on raising longterm global food prices through lowering global demand elasticities)

7 Raising the elasticity of land supply with respect to agricultural output prices Evidence of historical magnitude Historical estimates are sparse Factors that may lower the elasticity of land supply with respect to commodity prices Restrictions to land sales and rental markets Others? Some operational implications Improve performance of land sales and rental markets

8 A note of commodity price volatility Higher price volatility may lead to a decline in the magnitude of the (above mentioned) elasticities (or at least a reduction in their summed total), thus contributing to long-term commodity price escalation. This suggests a continued focus on ways to dampen and better manage price volatility at global, national, and local levels.

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