Thu, May 22, 2008 - Page 9 News List

The brighter side of high prices

The public response to sudden increases in essentials is often one of real concern; yet in the past this situation spurred innovation

By G. Pascal Zachary  /  NY TIMES NEWS SERVICE

ILLUSTRATION: MOUNTAIN PEOPLE

Corn prices are at record high levels. Costs for other agricultural essentials, from wheat to coffee to rice, have surged, too. And many people are stunned, even frightened, by all the increases.

But some entrepreneurs and analysts — recognizing that relative price increases in specific goods always encourage innovators to find ways around the problem — say they see an opportunity for creative solutions.

“When something becomes dear, you invent around it as much as you can,” says David Warsh, editor of Economicprincipals.com, a newsletter on trends in economic thinking.

Joel Mokyr, an economic historian at Northwestern University, adds: “All of a sudden, some things that didn’t look profitable now do.”

Smart people won’t shift their efforts to agricultural problems, however, if they think that price increases are only temporary, says Henry Kressel, a managing director at the private equity firm Warburg Pincus and a pioneer in laser research.

“When you have a sudden blip in prices,” Kressel says, “it doesn’t give rise to entrepreneurial activity.”

Consider the periodic surges in prices for computer memory hardware. Because its price is declining over the long run — a result of new technologies and automation — innovators tend to stay away from the field, leaving it to a few large, established companies.

For decades, declining prices for food had the same chilling effect. In the US and Europe — the world’s two biggest consumers of new technologies — food was plentiful and relatively inexpensive. Innovators turned their attention elsewhere.

With higher food prices possibly here to stay, clever people can now try things that simply weren’t cost-effective before.

“I don’t pay attention to inflation, but I do pay attention to big problems,” says Bill Gross, chairman of Idealab, the business incubator based in Pasadena, California. “If you can beat the price of the big gorilla in the marketplace, there’s big opportunity.”

One clear “big opportunity” lies in changing the relationship between food and energy. Fertilizer lets farmers raise production but is energy-intensive to make. Transporting food great distances also requires much energy. So does processing. Finally, some foods are now being valued in relation to oil because of their potential use in fuel.

For some years now, innovators have trained their attention on alternative energy; they are now likely to concentrate on food production as well.

For Americans, that would be going back to the future. Seventy years ago, farming was the technological high frontier.

In the 1930s, after the Great Depression wiped out so many small farmers, the federal government introduced “price supports,” which lifted the return to farmers on basic crops. Higher prices got the attention of innovators in farm equipment, seeds and other so-called inputs.

Sally Clarke, a historian at the University of Texas, has found in a study that higher prices enabled Midwest farmers, then reliant chiefly on animal-drawn plows, to justify investment in tractors, raising efficiency. A study in the 1950s by the economist Zvi Griliches on American farmers’ adoption of more productive varieties of corn showed how higher prices reduced the cost of adopting new technologies.

For the new agricultural innovators, these are early days. It will take time for the pipeline to fill with ambitious projects. Monsanto and BASF are among the relatively few big companies that remain active in agricultural innovation. And the most creative researchers can’t immediately drop their other projects in response to price signals.

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