In many regions around the world, crop yields are only a fraction of US levels — even in agricultural zones with similar climate, soils and other production conditions. In the US, it is common to see a gap of about 20 percent between test plots and actual yields in the same area. In many other regions, these gaps are 40 percent to 60 percent. The bottom line is that there is huge potential to increase production in many parts of Eastern Europe, Africa and South America.
To the extent that higher commodity prices benefit farmers in these regions, they will respond by increasing their production, which will eventually reduce scarcity, increase stocks-to-use ratios and attenuate the higher prices. In fact, to the extent that developing countries permit higher prices to go to their farmers, the result could be a significant stimulus to economic growth in rural regions of developing countries — where most of the world’s poor live.
One problem is that developing countries often attempt to isolate their domestic markets from world prices, particularly price increases, in order to protect their more politically powerful urban citizens. This policy can stymie rural development and diminish poverty alleviation.
The short and long-term stories are simplifications, but they nonetheless convey the essence of some critical drivers of price changes. Biofuels policies in the US inevitably lead to larger price responses to supply shocks in the short run. In the long run, the higher prices that result could become an engine of economic development in the world’s poor rural regions. That distinction could make a huge difference to millions of people.
Wallace Tyner is a professor of agricultural economics at Purdue University.
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