I was a little puzzled when I read this article saying that Japan is giving 10 billion US dollars in aid to African nations to tackle climate change. The article gives very little details, but I wonder if this is the best use of funds. If the objective is reducing climate change, wouldn’t spending 10 billion dollars domestically in Japan give a bigger bang for buck, since emissions in Japan are much higher than in Africa and probably easier to reduce? And if the objective is African welfare, wouldn’t 10 billion dollars of food-related aid improve welfare more than reducing climate change? Obviously I am basing this opinion on very few facts, but it seems to me that mixing two policy objectives together like this is a suboptimal way to achieve either of them.

News from the Beijing auto show:

“If you look at the fastest-growing market segments in China, there are two — SUVs and luxury cars,” said Joseph Y.H. Liu, GM China’s vice president for sales and marketing.

Auto sales in China are booming, with analysts and automakers forecasting growth at 15-20 percent this year. But demand for the biggest vehicles is even stronger, with sales of luxury cars and SUVs expected to surge by 40-45 percent.

…

Buyers of land yachts have also been unintended beneficiaries of a government policy meant to help the poor. Beijing has tried to shield farmers and the urban poor from high oil prices by freezing pump prices for gasoline and diesel, keeping them among the world’s lowest. That takes the sting out of filling up a gas guzzler.

Dairy farming is a huge industry in New Zealand and getting ever huger in response to a massive spike in world dairy prices:

(graph from Brian Gould’s site)

Via my Dad who talked to a local farmer, I learned the following about cow economics:

One cow produces about 1.3 kg of milk solids per day at current price of NZ$7.90/kg. So about $10 per cow per day (about US$7.87/cow/day at current exchange rates). Small farms have about 300 cows, middle size about 500 cows, big size 1000 cows. Cows are milked about 300 days per year with 2 months off for everyone. So a middle size diary farm generates $5,000/day and a big farm $10,000 per day. Times 300 days, equals big money. So a lot of farmers are converting sheep farms to dairy and putting other marginal land into production, attracted by the high profits.

The interesting questions to me are how to explain the increase in dairy prices, and whether the price will stay high. The usual explanations for the price increase are an increase in demand due to economic growth China and India, and a decrease in US supply due to the biofuels policy (most US dairy cows eat corn). Looking at the graph above, what we see is that prices were pretty stable for a long time, and then more than doubled over the past year. This doesn’t seem to be completely consistent with the China/India story, since those countries have been growing rapidly for quite a long time. Biofuels could explain some of it though.

So here’s my completely uninformed hypothesis. Growth in China and India has been driving demand, but supply was keeping up with that, more or less. Then recently there were two one-off shocks. One was the US biofuels policy changes, which have lead to a one-time reduction in supply. Another was (I am really speculating here) a change in consumer preferences in Asian countries. As people in these countries got richer, demand for dairy products went up, but recently perhaps this was fuelled by something like a “keeping up with the Wangs” effect where everyone has suddenly started wanting a lot more dairy.

In addition to these one-time shocks, dairy supply is very inelastic in the short run. More milk requires more cows, which cannot be produced instantly. In fact I think it takes about 1-2 years to breed new cows and grow them to the point where they are productive. According to New Zealand trade statistics, over the past year the value of dairy exports has increased almost 70%, but the volume increased only 1.5%. This is consistent with the short-run inelastic supply.

This hypothesis is consistent with the facts — stable prices for a long time, then a sudden increase followed by a levelling off.

The other question is what happens next. As I said, in New Zealand many farmers are increasing dairy production, attracted by the high profits. Supply is a lot more elastic in the long run. So I predict that as supply expands, prices will come down. Perhaps not back to their original levels, but a good part of the way, I think. In fact I’d be willing to bet that prices will be $3500 per ton or less within two years. Where can I buy a futures contract for that?

PS: Another interesting issue is the environmental cost of dairy farming. A cow produces the effluent of 6 or 7 people, apparently.

A blog called MeatyREADS responded to my critical post about EcoLibris in this way:

This is why people dislike economists. You take what seems to be a perfectly nice company and then point out how the incentives are all wrong.

But … by pointing out that the incentives are wrong, I’m trying to make the world a better place. Increase efficiency and all that. Why would you dislike me for that? I’m trying to give you a free lunch!

This made me think a bit about why the public often has a negative perception of economists. I blame the media.

I don’t know much about things environmental, but Eco-Libris has me confused:

Every book you read was once a tree. Now you can plant a tree for every book you read.

The idea is, you make a donation that goes towards planting trees to ‘replace’ the trees that were cut down to produce your book.

But the trees your book is made out of were planted to make paper in the first place, right? So it’s not like reading a book causes fewer trees. In fact, reading more books should cause more trees. As demand for paper goes up, more trees need to be planted to produce that paper. We don’t need to feel guilty about reading books if all we care about is the number of trees. If everybody read 10,000 books per year every year, the planet would probably have to be covered with trees to produce the paper required.*

In fact, couldn’t Eco-Libris result in fewer trees? Since it is imposing a voluntary ‘tax’ on books, those who choose to pay the tax will face a higher price per book and so will consume fewer books. In the long run, this will mean fewer trees planted to make books. Although the tax revenue will be spent on trees, but if demand is elastic enough, couldn’t the quantity reduction more than offset this?

So I may be wrong, but it seems to me that Eco-Libris is complete nonsense, and it’s things like this that make me wary of environmental movements in general.

* I understand things could be more complex, if trees planted for paper displace other species and result in lower biodiversity, which could be harmful. But Eco-Libris doesn’t seem to address this issue.