Tuesday, March 13, 2012

Globalization and the dairy farmer

Adam Davidson has a really nice account of the impact of globalization and financial market engineering on the humble dairy farmer. He writes about how milk production went from being a local to an international market by chronicling the travails of one small New Jersey milk farmer Robert Fulper,

For most of the 20th century, dairy farming was a pretty stable business. Cows provide milk throughout the year, so farmers didn’t worry too much about big seasonal swings. Also, at base, dairy-farming economics are simple: when the cost of corn and soybeans (which feed the cows) are low and milk prices are high, dairy farmers can make a comfortable living. And for decades, the U.S. government enforced stable prices for feed and for milk, which meant steady, predictable income, shaken only by disease or bad weather...

But by the early aughts, to accommodate global trade rules and diminishing political support for agricultural subsidies, the government allowed milk prices to follow market demand. People in other parts of the world — notably China and India — also became richer and began demanding more meat and dairy products. Animal feed, especially corn and soybeans, became globally traded commodities with all the impossible-to-predict price swings of oil or copper. Today Robert can predict his profit or loss next month with all the certainty that you or I can predict the stock market or gas prices. During my visit, Robert said that his success this year will be determined by, among other things, China’s unpredictable economic growth, the price of gas (influenced, of course, by events in Iran and Syria) and the weather in New Zealand (a major milk exporter), where a drought can send prices skyrocketing.


Faced with such uncertainty and globalization, financial market innovation could not have been far away,

In the last decade, dairy products and cow feed became globally traded commodities. Consequently, modern farmers have effectively been forced to become fast-paced financial derivatives traders... There are ways to manage, and even profit from, these new risks. The markets offer a stunning range of complex agricultural financial products. Dairy farmers (or, for that matter, anybody) can buy and sell milk and animal-feed futures, which allow them to lock in favorable prices, hedge against bad news in the future and so forth. There’s also a new product that combines feed and milk futures into one financial package, allowing farmers to guarantee a minimum margin no matter what happens to commodity markets down the road.


However, the impact of these innovations, ostensibly aimed at hedging dairy farmers against the risks arising out of globalization, have not been on expected lines,

The Fulpers, like most people, are too busy with their day jobs to truly monitor the markets. But dairy farming has its own 1 percent: that tiny sliver of massive farms, with thousands of cows, that make the biggest profits and are better equipped to pay agriculture-futures experts to help them manage risk. They continue to invest and grow. Unable to keep up with the changes, many smaller farms have gone out of business in the past decade.


This story has parallels across sectors and countries. As countries open up their borders and globalize, occupations and livelihoods become exposed to greater risks. Inflation (for consumers), price volatility (for producers), and job losses (for employees) are some of the commonplace sources of the resultant uncertainty that adversely affect all three categories of people. In order to mitigate them, financial instruments get concocted and peddled. However, irrespective of their real utility, these products, by their inherent nature, are out of bounds for the vast majority of people who are worst affected by the vagaries of globalization.

So, in its balance sheet, globalization has the potential to leave vast numbers at the bottom of the income ladder deeply vulnerable. It therefore becomes important to carefully calibrate the pace and sequence of opening up individual sectors within national economies so that its negative externalities can be minimized. One of the most powerful policy levers to promote such calibrated globalization is to establish a universal social safety net.

In the final analysis, a cushion against the external shocks inflicted by globalization for those affected - both by way of a universal social safety net and some livelihoods training support - is the best insurance policy for globalization itself.

1 comment:

Market Research Companies said...

Your post really helpful for my research and developed.


Dairy Market in India