The NY Times is worried. It reports that the Secretary of Agriculture (a Hamilton graduate) is praying for rain. “I get on my knees every day, and I’m saying an extra prayer now,” Mr. Vilsack told reporters at the White House after his discussions with Mr. Obama. “If I had a rain prayer or rain dance I could do, I would do it.”
As an economist, I don't do "rain dances". The NY Times article hints that our food supply is at risk. Could we starve because of climate change? A couple of points:
1. Storage --- if the likelihood of drought has increased over time, can holding inventories help to protect us against climate shocks?
2. International trade --- is it raining more in any part of the world right now? Can these areas that enjoy a bumper crop export a % of their bounty back to us? In this case, our domestic producers will suffer from the climate shock but consumers won't.
The NY Times implicitly assumes that our producers and consumers are in the "same boat" but international trade breaks the link between what we produce and what we consume.
3. If drought reduces supply, how much do consumer prices increase by? What is the elasticity of demand for specific crops and commodities impacted by drought? If wheat prices go up by 10%, who loses from this? Who can easily substitute to another food staple?
4. I thought that Americans are eating too much and are too obese. Could there be benefits of higher food prices as a commitment device to eat less?
For those looking to read more, I suggest this post at Climate Progress. If the authors are right about the "international threat", then we should see new financial instruments emerge such as futures markets in different commodities for the intermediate term (say 10 years from now). If such markets exist (and they may exist already), this allows nations who import such food commodities to "lock in" and guarantee that they won't face a price spike due to future climate. International law will need to be strengthened to guarantee that if such a contract is signed that the party who is on the hook to supply the scarce commodity in the future actually does so or is severely punished. If purchasers of futures contracts today worry that the seller may not honor the contract's terms in the future, then they will be less willing to pay today for the contract. A type of adverse selection could arise and this key adaptation market (futures contracts in climate affected commodities) could unravel.
This topic merits future research. The same issue arises with financial annuities. Old people are often unwilling to give up a large amount of $ now in return for a promised flow of annual payments because they worry that the seller may renege by going bankrupt or running away. Such fears limit the gains to trade and risk sharing.
