Sunday, May 04, 2008

The just-in-time economy crumbles

Almost two years ago I wrote a piece called "Is just-in-time nearly out of time?" laying out how completely the just-in-time inventory management idea had infected businesses, governments and even nonprofit organizations. I catalogued concerns that the practice of holding razor-thin inventories of many critical items such as food, fuel and medical supplies could potentially imperil our ability to provide them in circumstances where 1) supplies grow unexpectedly tight, 2) logistical lines are impaired or cut, or 3) a large humanitarian catastrophe requires surge capacity for food aid and medical treatment.

Fast forward to 2008. Food riots are spreading across the world as soybean prices have more than doubled, corn and wheat prices have tripled, and rice prices have risen to more than five times their low of $4 in 2003. As a result of two decades of low agricultural prices, many governments became complacent and paid scant attention to food issues. They drew down grain stockpiles, neglected agricultural research and rural assistance, and generally took the attitude that market forces should increasingly dictate food production and prices. Food was becoming just another input into the world industrial system.

All that has changed as swiftly as grain prices have risen. India, which has always maintained a government stockpile of wheat, purchased several million tons in the international markets last year after six years with no imports. Malaysia announced a plan to "develop stockpiles of essential foodstuffs like rice and cooking oil." Guatemala announced plans to address food prices that include increasing food stockpiles within the country. Several countries announced bans or restrictions on rice and wheat exports.

Farm inputs, especially fertilizer, are also suffering from low inventories. The New York Times quotes one fertilizer dealer as follows: "If you want 10,000 tons, they'll sell you 5,000 today, maybe 3,000," said W. Scott Tinsman Jr., a fertilizer dealer in Davenport, Iowa. "The rubber band is stretched really far."

As much attention as food is rightly getting, other key commodities are becoming increasingly scarce for the usual reasons: strong demand from India and China and years of underinvestment in supply. Copper inventories at major exchange warehouses have dropped to just two days of global consumption. In China, coal supplies have dwindled to just 12 days, a very thin margin for power plants and other industrial users. So strained are supplies of steel that the Indian government banned steel exports recently. And, then it banned cement exports.

The realization that just-in-time methods have ceased to serve us well comes at a time when it is exceedingly difficult and expensive to build a stockpile of anything. Moreover, if every market participant decides to build a stockpile at once under tight supply conditions--as is apparently happening in the rice market--this only creates parabolic spikes in prices which encourage further hoarding.

To alleviate food shortages, several solutions are on offer. It's important, however, to see what is motivating those behind the so-called solutions. This libertarian writer complains that the market is not being allowed to work. Libertarians in general believe that government intervention is bad because it often produces perverse results and because it reduces the scope of action for the individual. When the state is involved in setting agricultural policy by, for instance, subsidizing basic grains and the production of biofuels and encouraging meat and dairy production (which require enormous amounts of grain for feed), this can have profound effects on the availability of food.

Certainly, government policy can distort food production. And, it is just such policies in North America and Europe that many advocates for farmers in poor countries decry as making it impossible for such farmers to compete. Cheap grain imports into poor countries destroy the market for grain grown locally devastating the livelihood of local farmers and leaving these countries vulnerable to shortages and price increases. But these advocates should be careful what they wish for. Do they really want to expose small, non-mechanized farmers in poor countries to all the vagaries of the world market with absolutely no protections for farmers in poor and rich countries alike?

France's agriculture minister thinks he has a better idea. Other regions in the world should create self-sufficient blocs like the European Union to administer something similar to Europe's Common Agricultural Policy. EU agricultural programs protect farmers by guaranteeing minimum prices, imposing import tariffs on certain foods, and providing direct payments for farming the land. France, as one might guess, is a significant beneficiary of such protections.

The free market advocates are in retreat for now as the European and North American models, however flawed, demonstrate that they can achieve one very important objective: excess supply of affordable food, in other words, a cushion designed to prevent shortages. It is only the interlinking of European and North American markets with the world markets that is pushing up domestic prices and draining food reserves. Of course, without those excess supplies being available for export, poor countries would be in much worse shape than they are.

But, the long-term damage to agriculture in poor countries that results from those models is a product of International Monetary Fund policy. That policy forced many poor countries to open their agricultural markets to the subsidized produce of Europe and North America in exchange for financial and development assistance. Things might not be so bad right now if these poor countries had been allowed to protect their farmers and insure adequate domestic production of basic foodstuffs as we in Europe and North America do.

In other areas such as minerals and energy, there are no alternatives in the short run except to use both of them more parsimoniously and look for suitable substitutes over time. (Ironically, many of the currently touted energy substitutes depend on the very fossil fuels they seek to replace.) Any fix will not come quickly or easily since it can take years to find and bring into production new mines and oil and gas fields. And, the lead time for building a renewable energy economy to replace the fossil fuel economy--which will recede as oil, gas and coal peak in production and then decline--is decades.

Of course, the question of where we go from here is not as simple as many experts and policymakers (who are often shilling for their corporate paymasters) suggest. First, we have to focus on immediate challenges such as food shortages, a huge task in itself. Then, we will have to focus on longer-term challenges with the urgency that such issues as peak oil now clearly deserve.

When I wrote "Is just-in-time nearly out of time?", I pondered whether just-in-time inventory management was an idea for all time or merely suited to a unique moment in history. I think we can answer now with confidence that it is the latter. It is clear that the just-in-time inventory model is increasingly responsible for much of the personal hardship and economic disruption we are now witnessing and that it ought to be discarded as an organizing principle as we build new systems for a sustainable future.


Rice Farmer said...

Indeed, "just in time" assumes we will never need a cushion, and in that respect I have always believed it to be a very risky practice. Stupid, in fact. I think your criticism is spot-on.

To the causes of the critical global food shortage now staring us in the face I would add something that gets too little attention: the destruction of farmland by "development." Countries around the world are destroying their farmland to build suburbs, factories, malls, and the like. The problem is so acute that now China is looking to lease farmland in other countries.

Anonymous said...

i agree with all of the above. i would like to add that inventories should not be taxed. this may encourage businesses to stock pile again. why inventories were ever taxed is beyond me.