7.2 Behaviour of commodity systems
7.2.1 Commodity growth drivers
Commodity systems and economic growth are complex processes, which are composed of a long series of small actions that accumulate to apply pressure which favours further economic growth. The systemic structure of agricultural commodity systems is described by three reinforcing feedback loops, at a highly aggregated level, each of which causes growth in commodity production (Figure 7.1) (Sawin et al., 2003). A discussion of feedback and causal loop construction can be found in Chapter 5. The three reinforcing feedback loops involved in total commodity production growth are the Capital Growth Loop of total industrial expansion (R1), the Efficiency Boosting Loop of the individual producer (R2) and the Demand Growth Loop of total global demand (R3).
Reinforcing feedback loops are responsible for exponential growth and exponential decline, before the effects of a balancing loop cause the system to approach a plateau or endogenous system goal; for example, the behaviour described by the s-shaped curve in the exploitation phase (r) to the conserva- tion phase (K) in the frontloop of the adaptive cycle. The three commodity growth loops are expanded in Figure 7.2 to show greater detail of the structure.
Total commodity production Demand
Price
Efficiency and scale Capacity Profits
Reinvestment
+ + –
–++
+
+ + Capital Growth Loop
Demand Growth Loop
Efficiency Boosting Loop R1
R2 R3
Fig. 7.1. The three positive feedback loops that cause commodity growth: R1, the Reinvestment of Capital Growth Loop; R2, the Efficiency Boosting Loop;
and R3, the Demand Growth Loop.Source:Sawinet al. (2003)
Total commodity production
Capacity
Size and technology level per producer
Profits per producer
Pressure to boost production per unit cost
Commodity supply Average
price
Pressure to expand markets Demand for
commodity
++
–
+ +
– ++ –
+
+
+ + Total profit
Reinvestment
+ + +
Demand Growth Loop
Capital Growth Loop
Efficiency Boosting Loop B1
R1
R2 R3
R4
Fig. 7.2. The three positive feedback loops that cause commodity growth shown in Figure 7.1 are expanded to show greater detail of the structure of the feed- back loops, the reinvestment of Capital Growth Loop (R1), the Efficiency Boosting Loops (R2 and B1) and the Demand Growth Loops (R3 and R4).
Source:Sawinet al. (2003)
Capital Growth Loop
The Capital Growth Loop (R1) (Figure 7.2) is the process by which global productive capacity leads to the creation of more productive capacity. In these diagrams the capacity is defined only in terms of the capacity of the system to produce the commodity of interest and does not include the ecological capacity and the social capacity. The Capital Growth Loop is considered to be the core driving force of industrial expansion. The description of the loop can be read as: the production creates profit ‘Profits’, some of which is reinvested ‘Reinvestment’, which increases global capacity ‘Capacity’, which is used to increase total production ‘Total commodity production’.
In this growth process production leads to more capacity for production.
Reinvestment may be in the form of capital equipment, for example new harvesting equipment, or collectively in the form of innovation in science and technology. Developments in science and technology, which are components of this loop, were responsible for growth in agriculture in the WA agricultural region just as they were in the growth of long-wave Kondratiev Cycles as described in Chapter 6.
Increasingly the form of reinvestment that is producing growth in agri- cultural production is biotechnology (Tengerdy and Szakács, 1998; Braun, 2002) in such products as ‘Roundup-ready’ varieties of wheat. During the seven-year period 1996 to 2002, the global area of genetically modified (GM) crops increased 35-fold, from 1.7 million hectares in 1996 to 58.7 million hectares in 2002. To put this global area of GM crops into context, 58.7 million hectares is equivalent to more than 5% of the total land area of China (956 million hectares) or the USA (981 million hectares), almost 2.5 times the land area of the United Kingdom (24.4 million hectares) (ISAAA), and about 3 times the area of the WA agricultural region. The latest figures show the global area of biotechnology crops is now 81 million hectares, which is a 20% increase over the area in 2003. Australia grew 200 000 hectares of GM crops in 2000, mostly GM cotton in eastern Australia. Field trials in Australia continue to be carried out using cotton, corn, potato and canola (ISAAA). After suffering two years of severe drought, Australia increased its biotechnology cotton hectares 100% to 250 000 hectares in 2004 over the area planted in 2003 (Jones, 2004).
Efficiency Boosting Loop
The Efficiency Boosting Loop comprises two reinforcing loops (R2 and R3) and a balancing loop (B1) (Figure 7.2). This loop can be read as: rising global production means that the ‘Commodity supply’ available on the market can exceed demand and push the ‘Average price’ down (R3) through its action on the Demand Growth Loop (R3+R4). A lower price means lower ‘Profits per producer’ all else being equal. In times of falling profits the two options available to individual producers trying to maintain profits are to reduce costs and to expand production volume (B1) that is ‘Pressure to boost production per unit cost’. Often the route to cutting costs is to expand the ‘Size and technology level per producer’. While expanding the operation does reduce costs to the individual operator, thus compensating for falling prices, it also increases the overall production via the reinforcing loop (R2). In agriculture the pressure to keep in business is responded to in three ways:
1. the need to clear more land to put into production;
2. the acquisition of neighbouring farms, for increased economies of scale; and
3. the intensification of production described in Chapter 2.
In combination these processes create a cycle of increasing production and falling prices.
Demand Growth Loop
The Demand Growth Loop can be described in this way: as ‘Commodity supply’ rises the ‘Average price’ falls, therefore the demand for the commodity tends to rise as more people can afford the product. Climbing demand gives producers the confidence to invest in increasing production, pushing up supply and pushing down prices, further boosting demand and creating the third reinforcing loop, the Demand Growth Loop (Figure 7.2). The pressure to increase production and decrease costs has been a feature of commodity systems for as long as they have existed and the same pressures exist all over the world wherever commodity systems develop. The consequence of the three reinforcing loops is exponential growth unless one or more balancing loops come into play by applying a strong enough signal (from informa- tion flow or material flow) to counteract the reinforcing loops. The case of coffee production has been a recent well-publicised example (Gresser, 2002).