Shortage and storage

May 7, 2008 | 38 comments
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With the recent spike in food prices, a three year old post demands new life. Here it is:

Clearly, were there to be a famine, a one year food supply in the basement would look really good. What may be slightly less obvious is that the presence of food storage, even if nobody ever uses any of it for an emergency, can stop a famine from ever actually happening.

To see this, let’s take a very brief detour into the research on famines and hunger. It turns out that some locations can suddenly have widespread starvation even when the actual amount of food in the country has not changed much at all. There are a few reasons why this can happen, but the most interesting story is basically the same as what causes stock market bubbles, expectations. Suppose you hear a rumor that the crop is going to be very poor this year, and so there may well be a food shortage. Well, the smart thing to do would be to go stock up some food. You, and all of your smart neighbors (in economics, everybody is smart!), all go down and grab the food off the shelves. As Julie noted, we saw this behavior with the recent hurricanes. This surge in food demand raises the price of food, possibly so much, in a poor country, that poor people start starving. Remember that this happens even if the food supply turns out to be fine; because the food that poor people would be eating is now being hoarded by the middle class who, incidentally, now feel justified in having hoarded food because there clearly is a famine!

So now let’s back up a few years and imagine that those middle class denizens had listened to the prophets and slowly, carefully, built up a sizable food storage. When the (false) rumors of a poor crop come out, they are gleeful that they will finally get to use all that food they stored! This means that they do not rush out to buy food, thus there is no mass hoarding and consequently the supply of food turns out to be perfectly adequate to feed the poor. “I guess I didn’t need my food storage after all,” sighs the food storer, blissfully unaware that the unused food helped save the life of some poor person in their country. The story, by the way, needn’t be about a crop failure; all you need is the expectation that food will be in short supply due to transportation malfunctions, weather, disaster, or whatever.

This story could play out several times over a lifetime, until at the end of their life, the faithful food storers wonder why they even even bothered to store food when no disaster ever struck. Perhaps they chalk it up to a test of faith, never realizing that their obedience averted the disaster in the first place.

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The original post, along with many excellent comments, can be found here.

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38 Responses to Shortage and storage

  1. Dan on May 7, 2008 at 9:07 am

    Would that the world be perfect, or that we would be ruled by a pharaoh with a prophet as his number 2 man, eh? :)

  2. Ardis Parshall on May 7, 2008 at 9:13 am

    You have just made me a believer in all that voodoo yoo doo, Frank. Wow.

  3. tracy m on May 7, 2008 at 11:37 am

    Awesome. Really.

  4. dangermom on May 7, 2008 at 2:06 pm

    Great post and very true, I think.

  5. m&m on May 7, 2008 at 2:42 pm

    I love this added perspective of what following prophetic counsel can do. Fantastic.

  6. Frank McIntyre on May 7, 2008 at 2:45 pm

    Thanks for the kind words!

  7. ed42 on May 7, 2008 at 4:27 pm

    Nice, but incorrect analysis.

    Suppose there are 100 people, each consuming 10 units of food per time period. That’s 1000 units of food. Now suppose 10% of the people start to do food storage of 10%. We now have 90(people) x 10(units) = 900 + 10(people) x 11(units) = 110 for a total of 1010 units of food – that’s 1% of the food is taken out of circulation. This does one of two things, either A) Decrease the food supply, thus driving up the cost of food (and so now some of the poorest go hungry some of the time) and/or B) Divert the production of other products (clothing, autos, houses) into producing more food.

    Those that have food storage are decreasing the “frequency of money” and thus reducing the potential overall wealth of society. It is no different than taking money out of the bank and putting it under your mattress. In the bank your money can be loaned to others to start productive businesses, under your mattress it just sits.

    Don’t get me wrong. I am NOT against mattress stuffing, nor food storage, we each should have the right to do such and we each must follow prophetic (and personal) revelation as guided – just don’t ignorantly do so thinking you actions are “good” while the actions of hoarders are “bad”.

  8. Bob on May 7, 2008 at 5:20 pm

    I think there should be a “Reality Show” of five different Mormon families, each living on their year supply of food. Or better, one of the OTHER families supply!, Each family has to have four teenagers in it. And watching it can count as a FHE.

  9. Matt Evans on May 7, 2008 at 6:58 pm

    Ed, isn’t storage simply a form of insurance, and Frank’s argument the same that’s used to justify government oil and food reserves? We divert more resources to oil and food reserves when capacity is healthy (and the consequences minor) to insure against potentially devastating short-term shortages. Present societal wealth is always reduced by insurance costs, no?

    What was novel about Frank’s post (to me) was his recognizing self-fulfilling panic runs as another harm “mattress stuffing” insures against.

  10. jrl on May 7, 2008 at 7:18 pm

    Ed – doesn’t you analysis assume that food production always stays the same? I think the market is way more flexible than that.

  11. Frank McIntyre on May 7, 2008 at 7:40 pm

    Ed, the point is, as Matt and jrl have noted, to take advantage of cyclical food production (and possibly demand). When the marginal value of food is low, you save it into future periods when it’s value will be higher. Alternatively, you produce more food when the marginal cost is low and then use the surplus when the marginal cost is high. It is a pretty standard intertemporal optimization problem.

  12. kristine N on May 7, 2008 at 8:09 pm

    Interesting analysis, Frank. Too bad it doesn’t work for everything (oil, for example).

  13. Raymond Takashi Swenson on May 7, 2008 at 8:36 pm

    #7 (ed): I don’t see how purchasing food for storage against future needs is like stuffing money into mattresses. The MONEY is placed into circulation by the purchaser of the food. The retailers of the food then have resources to buy more goods and to make capital investments and to save their profits and thus loan it out to others. Buying more food than we need right now is no different in its exterior monetary effects than buying a more expensive car or a more expensive TV or a more expensive house, or even making a capital investment such as buying land. We are converting cash assets into other assets with varying amounts of value over time. The value of excess food declines over time, but so does a purchase of an SUV or a computer.

  14. StillConfused on May 7, 2008 at 8:42 pm

    I bought a house from an estate. The dearly departed were huge on being prepared. There was an entire room in the basement that was filled floor to ceiling with food storage (most from the 1970s so I don’t believe it was any good). In addition, there is a large shed filled with coal. (Yes… coal). There is also a water storage device in the heater room (looks like a moonshine stil). In addition, in the back yard was an underground water storage tank. There is also a root cellar. A wood storage area. You name it and these guys stored it. So basically, if there is a catastrophe and you need some coal… look me up. I have plenty. Oh, and for my friends in England… this is a 4000 square foot house that I got for $260,000.

  15. Aaron Brown on May 7, 2008 at 9:30 pm

    Really great post, Frank.

    Now, if LDS churchmembers would make arguments like THIS for how impressive prophetic counsel is, I’d be a happy man. Instead, I usually get to listen to Brother So-and-So tell me how wonderful, prescient, prophetic and amazingly anachronistic Banal Statement X, Obvious Counsel Y, or Utterly Mundane Observation Z are, and how this is supposed to “prove” the Prophet is inspired, the Church is true, God is micromanaging our lives, etc. Sigh.

    AB

  16. Aaron Brown on May 7, 2008 at 9:37 pm

    ‘Oh, and for my friends in England… this is a 4000 square foot house that I got for $260,000.”

    You should share this with your friends in L.A., Seattle, NYC, and a whole lot of other places too. Everyone can be jealous together, not just the Brits.

    AB

  17. Matt Evans on May 7, 2008 at 10:35 pm

    Raymond, the comparison to mattress stuffing is that in both cases the asset sits idle. It would be like buying a computer and leaving it in the box.

  18. m&m on May 8, 2008 at 12:47 am

    stillconfused,
    new studies show that things like rice, wheat, etc. can store for more than 30 years, so you may be able to offer more than coal. :)

    I recently wrote about this topic, btw (food storage as a protection against panic) on my blog…with a new mantra (sort of, since sometimes we have to buy high…but I think this ties in a bit to what is addressed in this post): “Buy low, eat high!” :)

  19. Frank McIntyre on May 8, 2008 at 12:59 am

    Kristine N,

    Does oil go bad when stored or something? Do you mean it doesn’t work because we don’t store it or because there is some reason we couldn’t? I have another post about the oil market, by the way. Look here.

    Aaron, I do what I can :)

  20. Aaron on May 8, 2008 at 2:55 am

    Great post! I actually wrote one about the same subject a couple weeks ago and also linked to a great website to buy food storage.

    Check it out.

    http://www.graceforgrace.com

  21. Julie M. Smith on May 8, 2008 at 9:28 am

    Oh, Bob, you need to talk to someone. That would be hilarious. They’d be knocking the tar out of each other after a mere two days of eating wheat for breakfast.

  22. Mark B. on May 8, 2008 at 10:23 am

    Actually, I suspect that we don’t store oil (or its distillates) because installing an underground storage tank is a lot more expensive than sticking a can of wheat in the cellar. And, there are likely legal restrictions on how many jerry-cans of gasoline you can store in the back of your closet (to say nothing of the stupidity of storing large quantities of flammable liquids inside your home–see Seven World Trade Center).

    Besides, the way to deal with the spike in oil prices is to just shove all the houses and businesses and churches and schools closer together so we don’t have to drive as far. Less driving == lower demand for oil = lower prices, and we all go home (on foot) happy!

  23. Adam Greenwood on May 8, 2008 at 11:53 am

    Besides, the way to deal with the spike in oil prices is to just shove all the houses and businesses and churches and schools closer together so we don’t have to drive as far

    I suspect this might be somewhat expensive also. I tried shoving on my house this morning and it didn’t budge.

  24. Jonathan Green on May 8, 2008 at 11:59 am

    It’s a long-term project, Adam. Shove a little each morning, and in ten years it’s all taken care of.

  25. Adam Greenwood on May 8, 2008 at 12:01 pm

    All right!

  26. John Buffington on May 8, 2008 at 2:38 pm

    I can’t store gasoline, but I can still hedge my exposure.

    I am buying multiple booklets of bus tickets (they don’t have a printed face value–but are good for one ride) in anticipation of impact of rising diesel costs.

    This way I am locking in my largest transporation cost for the forseeable future.

    Of course in a world with perfect information, I would know exactly how many books to buy. I am also anticipating that the storage cost of my booklets (in lost investment opportunities) will be exceeded by the rising fuel costs. I may be off in my forecast and I may end up overhedging.

    I also only have a finite amount of capital to invest (isn’t that always the case, Frank? *sigh*) so I cannot extend my hedge over much more than a one year horizon. Bankruptcy of the bus company, and the fear of technological innovation would also make locking in 30 years of tickets a risky proposition.

    Can’t forget that there is the possibility that fuel costs might tank (pun intended) and I will be experiencing considerable buyers remorse (not that I expect that the bus company would actually pass on their saving to me in this case, good oligopolists that they are!)

    I wonder if someone would simply sell me call options on bus ticket booklets? gotta run, and check e-bay….

  27. Keith on May 8, 2008 at 2:39 pm

    Adam, maybe you should call your Elders’ Quorum to help you move your house.

  28. Mark B. on May 8, 2008 at 2:48 pm

    One of the great things about economics, Adam, is that you don’t have to deal with such messy realities. Try this:

    Assume that all the houses and business and schools and churches were all shoved closer together . . .

    There, now. Doesn’t that help?

  29. Adam Greenwood on May 8, 2008 at 3:03 pm

    I assume that it does help, Mark B.

    John Buffington, I believe you can already or soon will be able to hedge directly buy trading in gasoline futures.

  30. Frank McIntyre on May 8, 2008 at 3:19 pm

    “John Buffington, I believe you can already or soon will be able to hedge directly buy trading in gasoline futures.”

    here are the futures prices, available for your oil hedging needs.

    Keith, that was, for some reason, very funny.

  31. John Buffington on May 9, 2008 at 12:03 am

    Adam and Frank, thanks for the commodities insights. Although given the disconnects, I would hedge directly with RBOB and not the crude futures.

    My fear is that the futures market has already priced in rent-seeking behaviour such as mine, and so I am left with the bus ticket hedge. Since these prices are sticky, I think I can arb this and make a fortune….

    with any luck, I will be able to sell my stockpiled tickets to widows and orphans….

    bwahahahahahahaha (evil laugh, or facsimile thereof)

    seriously though, don’t rational expectations work their way into your introductory scenario, so on average, people do not overreact to negative news (or the expectation)?

    Just wonderin’

    remind me again why they call it the “dismal science”?

  32. Frank McIntyre on May 9, 2008 at 10:59 am

    “seriously though, don’t rational expectations work their way into your introductory scenario, so on average, people do not overreact to negative news (or the expectation)?”

    Good question. So does that mean I can use the empirical evidence to reject rational expectations? RE is a handy analytical tool but a pretty strong modeling assumption.

    Alternatively I would look towards the research on hyperbolic discounting or credit market imperfections for an explanation (speaking of dismal…)

  33. kristine N on May 9, 2008 at 2:23 pm

    Frank–refined oil will go bad if stored for too long, though I’m not sure how long too long is.

  34. John David Payne on May 10, 2008 at 11:35 pm

    Gasoline is even more volatile. It becomes much less useful after a couple of months, so I am told. You can put additives in that will help it to keep longer, but I think you can’t make it last more than a couple of years.

  35. California Condor on May 11, 2008 at 11:20 am

    Frank McIntyre,

    I don’t see how your theory has any value in the United States. We have so many food choices that if the price of rice spikes, then poor people can just go buy noodles instead.

    In the long run food-storers might actually be driving up the price of food by inefficiently storing it in their homes. So maybe they’re actually hurting the poor.

  36. Mark B. on May 12, 2008 at 10:28 am

    Yeah, Condor, and if bread gets too expensive, they can all go eat cake.

  37. Frank McIntyre on May 14, 2008 at 6:41 pm

    CC,

    The food market is more global than perhaps you realize. Thus our behavior affects not just those in the U.S. but, for good or ill, the world. As for storers being the problem, that is possible, but not likely. And they are almost certainly better than having last minute hoarders.

  38. California Condor on May 18, 2008 at 12:02 pm

    Frank,

    Good point about the food market being global. Maybe the relatively few food storers are helping relatively few malnourished people in the third world.

    But as someone said in the comments the first time you post this, it is possibile that in reality storers = hoarders.

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