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EmailLet me tell you a story about College Trey. I was a sophomore when the 2008 financial crisis rewrote the textbook of my Principles of Economics class. I knew next to nothing about macroeconomics in August, but by the end of October I was confident that I knew everything. This is reminiscent of the Dunning-Kruger effect, which suggests that those of us with just a bit of experience are far more confident than those with far more experience. That’s even where the word sophomore comes from – its Greek origins are Sophos (educated) Moros (moron). A wise man once said, “Why do you look at the speck of sawdust in your brother’s eye and pay no attention to the plank in your own eye?” Indeed, we all-too-often overlook the scope of our own ignorance.
Figure 1. The Awkward Education of College Trey
The Great Recession made all of us far more interested in financial markets – and made us amateurs more confident that we understood what happened. After another nine years of economics classes, earning a Bachelor’s, Master’s and PhD, interning for the Federal Reserve Bank, publishing 22 peer-reviewed articles in academic journals, and giving almost 100 lectures, I can promise you College Trey had no idea what he was talking about.
I think many of us are experiencing the Dunning-Kruger effect right now. Two weeks ago, nobody was talking about how pandemics work – now you can’t open your cell phone, laptop, or television and see anything else. We are all reaching this point where we think we know – but the reality is that we have no idea.
In this blog, I plan to stick to what I think I know – food and agricultural markets. Specifically, I hope to describe my evolving thoughts regarding how the agricultural and food economy will respond to this pandemic. I will pay special attention to Michigan, however in a globalized world, implications will reach far outside the Mitten State. In such a fluid, historic moment, I claim no authority on economic responses to pandemics. Instead I hope that putting my thoughts down will encourage you to frame your own questions and answers alongside me.
First Thoughts on the Michigan Food and Agricultural Supply Chain
There are a lot of moving parts to this crisis and an incredible amount of uncertainty, making the way our minds process new information of critical importance. Before I say anything else, I want to make clear that I’m very confident in our food supply chain to keep items on the shelf. Michigan’s 753 independently owned grocery stores will rise to the occasion for their communities.
Michigan’s food supply chain, with approximately 47,000 farms in the state, reaches globally. Most agricultural producers live in rural places, surrounded by an aging population and with extremely limited hospital capacity. We buy and sell with trade partners across the world, and further restrictions in international trade are likely to have critical consequences for those producers.
The problem with talking about agriculture in Michigan is that we are so wildly diverse in what we produce. This is also such a rapidly changing situation and there is such limited data on what we are up against. Nor do we really know how long this disruption will last. Are we talking planting disruptions? Something further? You only have to look at the stock market right now to see how incredibly volatile the markets are in response to such dramatic uncertainty. In an agricultural economy where we are witnessing a nerve-wracking number of bankruptcies, further selloffs in the stock market are likely to challenge the balance sheets of firms already likely to be significantly leveraged.
There are critical concerns surrounding how this challenges seasonal labor supply, which is the cornerstone of so many agricultural supply chains. This is especially important for specialty crop producers – many of which are already in dire straits due to ongoing trade issues (see tart cherries, asparagus, blueberries, etc.) On the beef cattle side – which we aren’t a massive beef cattle state, but we do have producers – reported box beef prices jumped dramatically today. As I mentioned regarding dairy, this massive purchase surge doesn’t really reveal anything about longer term changes in demand. My intuition says that consumers are simply buying in the present what they would have bought in the future.
Michigan is home to over 16,000 eating and drinking establishments, employing tens of thousands of people. It doesn’t take an economist to know that these firms operate on razor thin margins. I can promise you none of them planned for a global pandemic to disrupt their businesses for an extended period. I am very concerned about what this means for restaurants and restaurant employees across the United States.
On a final note, it’s beginning to look like we are moving into recession – if we aren’t there already. It’s probably not worth getting too deep into it for this post. I would imagine you are more interested in the short-term implications of the current pandemic, but this longer term macroeconomic trend is likely to have implications that are worth their own post.
